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The decline of Venezuela’s oil production for the foreseeable future has been assumed, and to a large extent, already priced into the market. However, an acceleration in the rate of decline is possible, and a few recent developments raise the odds that such a disaster will become a reality.

Reuters reported that state-owned PDVSA is completely falling apart, with workers walking off the job at a frightening pace. The conditions for oil workers has deteriorated for years, with shortages of food, unsafe working conditions, and hyperinflation utterly hollowing out the value of paychecks.

Since last year, however, things have grown worse. Venezuela President Nicolas Maduro sacked the head of PDVSA and handed over control to the military in order to keep the armed forces on his side. But Major General Manuel Quevedo has only accelerated the decline of PDVSA, which once held a reputation as one of the better managed state-owned oil companies in the world.

Reuters reports that about 25,000 workers have quit PDVSA between January 2017 and January 2018, a staggering sum. PDVSA employs roughly 146,000 people. Thousands of workers are walking off of job sites, fed up with going to work hungry, putting their lives at risk at rickety refineries, all for a paycheck that fails to cover even the most basic expenses.

The worker exodus has grown so bad that the company has in some cases refused to process resignations. Those higher up are no less unhappy. Reuters says that General Quevedo “quickly alienated the firm’s embattled upper echelon and its rank-and-file.”

The loss of both top level engineers and managers as well as workers on the ground ensure the oil production losses will continue. Reuters reports that some rigs in the Orinoco Belt, where PDVSA produces heavy oil, are only operating “intermittently for lack of crews.”

…click on the above link to read the rest of the article…

$100 Oil Is Back On The Table

April 19, 2018

$100 Oil Is Back On The Table

Oil prices will rise to $100 per barrel if Saudi Arabia gets its way.

Only a week ago, news surfaced that Saudi officials were quietly hoping to push oil prices up to $80 per barrel, which would help boost the valuation of Saudi Aramco IPO. But why not $100 per barrel?

Reuters reports that Riyadh would be fine with prices rising that far, which lends weight to the notion that OPEC will keep the production cuts in place even as its mission to drain surplus oil inventories around the world appears to be largely “accomplished.”

OPEC and its non-OPEC partners are even considering yet another extension that would push the cuts into the middle of 2019. But with inventories back to average levels and expected to fall for the foreseeable future, the production limits would surely push the market into a deficit. The over-tightening, presumably, would lead to higher oil prices…just in time for the Aramco IPO.

OPEC just posted its fifth consecutive month in which it recorded a new record high compliance rate with the production limits. In March, according to Bloomberg, the compliance rate surged to 164 percent, a new high, up from 148 percent in February. Unsurprisingly, output fell in Venezuela, but Saudi Arabia also chipped in further reductions.

Two industry sources told Reuters that behind closed doors, Saudi officials have considered $80 per barrel, or even $100 per barrel, as sort of unofficial price targets. “We have come full circle,” a third high-level industry source told Reuters. “I would not be surprised if Saudi Arabia wanted oil at $100 until this IPO is out of the way.”

“Saudi Arabia wants higher oil prices and yes, probably for the IPO, but it isn’t just that,” an OPEC source told Reuters. After the IPO, Saudi Arabia would still want prices to remain high, which would increase the revenues needed to fund the long-term transformation of the Saudi economy pushed by Crown Prince Mohammed bin Salman.

…click on the above link to read the rest of the article…

The Bullish And Bearish Case For Oil

April 17, 2018

The Bullish And Bearish Case For Oil

Oil prices could rise due to the “perfect storm of stagnant supply, geopolitical risk, and a harsh winter,” according to an April 12 note from Barclays.

Geopolitical events specifically could help keep Brent above $70 through April and May, which comes on the back of a substantial decline in oil inventories.

The investment bank significantly tightened its forecast for Venezuelan production, lowering it to 1.1-1.2 million barrels per day (mb/d), down sharply from its previous forecast of 1.4 mb/d. That helped guide the bank’s upward revision for its price forecast for both WTI and Brent in 2018 and 2019, a boost of $3 per barrel.

The flip side is that the explosive growth of U.S. shale keeps the market well supplied, and ultimately forces a downward price correction in the second half of the year, Barclays says. In fact, the investment bank said there are several factors that could conspire to kill off the recent rally. One of the looming supply risks is the potential confrontation between the U.S. and Iran. The re-implementation of sanctions threatens to cut off some 400,000 to 500,000 bpd of Iranian supply.

But Barclays says these concerns are “misguided,” with the risk overblown. “Yes, it should kill the prospects for medium-term oil investment, and yes it could destabilize the region further, but we struggle to accept a narrative that the market had been expecting big gains in Iranian output over the next several years anyway.” Moreover, the ongoing losses from Venezuela are also broadly accepted by most analysts. “Therefore, it is worth suggesting that in both of these countries, a dire scenario may already be priced in,” Barclays wrote.

…click on the above link to read the rest of the article…

Disaster Hits Canada’s Oil Sands

April 10, 2018

Disaster Hits Canada’s Oil Sands

Kinder Morgan said it would halt nearly all work on a pipeline project that is crucial to the entire Canadian oil sands industry, representing a huge blow to Alberta’s efforts to move oil to market.

Kinder Morgan’s Trans Mountain Expansion is the largest, and one of the very few, pipeline projects that has a chance of reaching completion. Alberta’s oil sands producers have been desperate for new outlets to take their oil out of the country, and the decade-plus Keystone XL saga is the perfect illustration of the industry’s woes.

Keystone XL is still facing an uncertain future, and with several other major oil pipeline projects already shelved, there has been extra emphasis on the successful outcome of the Trans Mountain Expansion. That is exactly why Canada’s federal government, including Prime Minister Justin Trudeau, has gone to bat for the project.

But, despite federal approval, Trans Mountain still faces a variety of obstacles that have bedeviled the project for some time. It appears that opposition from First Nations, environmental groups, local communities affected by the route, and the provincial government in British Columbia have forced Kinder Morgan to throw in the towel, at least for now.

Kinder Morgan said on Sunday that it suspended most work on the $5.8 billion Trans Mountain Expansion.

Environmental groups hailed the announcement. “The writing is on the wall, and even Kinder Morgan can read it. Investors should note that the opposition to this project is strong, deep and gets bigger by the day,” said Mike Hudema, climate campaigner with Greenpeace Canada, according to Reuters.

…click on the above link to read the rest of the article…

Trade War Looms Over Oil Markets

April 4, 2018

Trade War Looms Over Oil Markets

Oil prices, along with equities across the board, were dragged down on Monday over fears of a brewing trade war.

China announced $3 billion of tariffs on U.S. goods, including pork and recycled aluminum. The move came as a retaliation to the Trump administration’s 25 percent tariff on steel and aluminum imports. China’s tariff announcement on Monday sent global financial equities careening downwards, and the losses were likely magnified by President Trump’s Twitter attacks on Amazon, which sparked a selloff in tech stocks.

Fears of a global trade war are again on the rise. The worrying thing is that China’s tariff measures on Monday were somewhat narrow, and only came as retaliation to the steel/aluminum tariffs, not the $60 billion in tariffs the Trump administration announced more recently, which specifically targeted China.

Chinese officials reiterated a desire to avoid a trade war, but China might not hold its fire forever, and the government could be preparing a larger set of trade tariffs in response. In other words, there is a decent chance that the trade dispute continues to escalate.

That is bad news for oil prices. The case for oil going higher largely hinges on exceptionally strong demand scenarios for 2018. “Our latest forecast suggests that demand will grow by 1.7 million b/d in 2018, the fifth-highest this century,” WoodMac said in a recent note. A trade war would seriously upend that forecast.

“The retaliation from China is concerning for energy markets,” said Michael Loewen, a commodities strategist at Scotiabank in Toronto, according to Bloomberg. “If a trade war occurs between these countries and it affects demand growth from emerging markets, that could be a big problem.”

…click on the above link to read the rest of the article…

Building The World’s Largest Solar Project

March 29, 2018

Building The World’s Largest Solar Project

Saudi Arabia wants to pour $200 billion into solar to build the world’s largest solar project.

The Saudi sovereign wealth fund and SoftBank Group Corp. of Japan jointly announced plans to build a solar project that is staggering in size – 200 gigawatts (GW) by 2030. That would be about 100 times larger than some of the largest projects in the world right now. “It’s by far the biggest solar project ever,” Masayoshi Son, CEO of SoftBank said at a news conference Tuesday in New York after signing a nonbinding agreement with Saudi Crown Prince Mohammed bin Salman (MbS).

The project would begin with a $5 billion investment, initiated this year, which would translate into about 7.2 GW, slated to come online in 2019.

The logic of massive and aggressive development of solar in Saudi Arabia is obvious. Sunshine is not a scarce resource. The country burns oil for about a third of its electricity, a costly way of generating power both environmentally and in terms of lost oil exports. SoftBank’s Son said the 200 GW of solar would cut electricity costs by $40 billion while creating some 100,000 jobs.

The scale of the construction would alone help develop a domestic solar manufacturing industry in Saudi Arabia, SoftBank’s Son said. The project will eventually integrate energy storage, although not right away.

Moreover, the project would be a cornerstone of MbS’ long-term economic strategy, with clear spin off benefits in terms of economic diversification, employment, and a strategy for a post-oil economy.

…click on the above link to read the rest of the article…

Why Natural Gas Prices Will Rise This Summer

March 28, 2018

Why Natural Gas Prices Will Rise This Summer

Record production of natural gas is snuffing out any price rally that might have occurred from the bout of cold weather this winter.

The gas market saw a jolt at the end of December and in early January due to extremely cold temperatures across much of the U.S. This winter was about 13 percent colder than last year, which pushed up residential and commercial gas demand by 3.5 billion cubic feet per day (Bcf/d), according to Barclays.

At the same time, demand continues to grind higher on a structural basis, with more LNG exports leaving U.S. shores and more utilities burning gas for electricity. That led to a sharp drawdown in gas inventories, pushing them 16 percent below the five-year average in the first quarter.

Nevertheless, the price impact was muted. In the past, sever cold snaps have led to sharp price spikes. While that happened in regional spot markets, the price increases were very short-term and nothing like the price increases during the 2014 Polar Vortex. After the cold subsided, Henry Hub spot prices fell back below $3/MMBtu.

Gas traders are so sanguine because the U.S. is producing more natural gas than ever. And 2018 is shaping up to be a record year for new gas output. A mild streak during February eased some pressure on inventories as well.

As a result, the U.S. will likely see “heavy” gas injections during the second quarter, according to Barclays. The bank expects gas inventories to rise at a pace that is 1 Bcf/d higher than last year.

…click on the above link to read the rest of the article…

OPEC Scrambles To Justify Output Cuts

March 27, 2018

OPEC Scrambles To Justify Output Cuts

Oil inventories are approaching the five-year average level in OECD countries, the all-important threshold for “re-balancing” the oil market.

A year and a half on from OPEC’s original deal to limit output, the surplus oil stashed in storage tanks around the world are nearly back to average levels. However, by all indications, OPEC is not ready to ease up on the production caps, with top officials signaling a desire to keep the cuts in place into 2019.

But that might require changing of the definition of a “balanced” oil market. OPEC has consistently held up OECD inventories as the metric upon which it was basing its calculations. The goal was to drain inventories back down to the five-year average. With OECD inventories about 44 million barrels above that threshold in February – down from a roughly 300-million-barrel surplus at the start of 2017 – the goal will likely be achieved at some point this year, perhaps in the second or third quarter.

For a variety of reasons, reaching this milestone is not satisfactory for OPEC. For one, the measurement is clouded by the fact that it’s a running calculation, meaning that the past five-years is now made up of more than three years of bloated inventories. In other words, the current five-year average is significantly higher than the five-year average in early 2014 when inventories were not suffering from a supply glut.

The flip side of that argument is that the oil market is way bigger than it was in 2014. Both supply and demand are higher, meaning that the global market probably needs a much higher level of oil sitting in storage. As such, it isn’t necessarily a bad thing that inventories are above the five-year average.

Another reason why OPEC is suddenly not satisfied with OECD inventories as the sole metric around which it bases its decisions is that OECD inventories do not capture the entire global oil market. What is happening in the non-OECD, where at this point, much of global demand growth is occurring? A more comprehensive measurement that included non-OECD inventory data would paint a more accurate picture of the global oil market. However, the problem with this is that non-OECD data is notoriously opaque, which is exactly why OECD inventories is a widely-cited data point.

…click on the above link to read the rest of the article…

Global C02 Emissions Rise For The First Time In 3 Years

March 23, 2018

Global C02 Emissions Rise For The First Time In 3 Years

In a worrying development, global CO2 emissions from energy jumped by 1.4 percent in 2017, the first increase in three years.

The trend indicates that global efforts to reduce emissions are “insufficient,” according to a new report from the International Energy Agency. Total energy-related emissions jumped by 1.4 percent to 32.5 gigatonnes (Gt), the equivalent of 170 million additional cars. The prior three years, energy-related emissions were flat, raising hopes that the curve might bend down.

Still, emissions did not rise everywhere. Notably, the U.S., Mexico, Japan and the UK saw emissions decline. In fact, the U.S. posted the largest single-country decline in emissions in 2017, dropping 25 megatonnes (Mt). It was the third consecutive year of declining emissions, which may surprise some given the Trump administration’s efforts – he withdrew from the Paris Climate Agreement, he has actively promoted coal, oil and gas production, and his EPA has done all it can to roll back Obama-era climate policies.

Despite the trend in federal policy, the transition to cleaner energy is, at this point, driven more so by market forces than by the whims of Washington. Renewable energy outcompetes coal and even natural gas in many places.

Indeed, the IEA noted that in years past, the cut in U.S. CO2 emissions was largely the result of utilities shutting down dirty coal plants and switching over to natural gas. However, in 2017, the 0.5 percent drop in U.S. energy-related emissions was the result of more renewable energy, rather than natural gas. A decline in electricity demand also chipped in. The proportion of electricity coming from renewables jumped to 17 percent in 2017, while nuclear power accounts for 20 percent.

Similar trends played out in the UK and Mexico, where coal also took a hit. In Japan, some nuclear power came back, helping it to displace imported oil, coal and gas.

But strong economic growth (GDP jumped by 3.7 percent) and low prices for oil and gas led to a lot more consumption. Meanwhile, the IEA said that weaker energy efficiency efforts also contributed to the uptick in emissions.

…click on the above link to read the rest of the article…

North Sea Oil Has Escaped Its Death Spiral

March 22, 2018

North Sea Oil Has Escaped Its Death Spiral

The oil industry is expected to increase spending in the North Sea and the number of projects that could receive a greenlight is set to rise this year for the first time in half a decade.

An estimated 12 to 16 green-and brown-field projects are expected to be sanctioned in 2018, according to a report from Oil & Gas UK. To put that in context, only 17 projects moved forward between 2014 and 2017, combined.

That would translate into additional spending of about 5 billion pounds and the production of 450 million barrels of oil equivalent over time. As a result, revenues for oilfield service and supply chain companies will rise for the first time in years, the report predicts.

More spending and drilling will ultimately mean more oil and gas production from the UK North Sea over the next two years, although the level of spending and drilling “still falls short of the level required to sustain long-term production at current levels,” Oil & Gas UK said.

“While the project landscape for 2018 is the healthiest the industry has seen since 2013,” the industry will still need “greater exploration success” and will also need to boost production in existing assets in order to avoid decline. For its part, Standard Chartered says that without more gains in spending and the sanctioning of new projects, output will once again head into decline after 2019.

The lack of investment from the last few years will soon start to bite. “Between 2014 and 2017, 33 new fields came on stream. This year, just four to six new field start-ups are expected,” Standard Chartered wrote in a note. “Drilling remains an ongoing concern; exploration, appraisal and development continue to falter.”

The bank says that only 94 wells were drilled in 2017, the lowest figure since 1973.

…click on the above link to read the rest of the article…

Natural Gas Is Under Attack

March 20, 2018

Natural Gas Is Under Attack

Natural gas has been billed as the key “bridge fuel” that will help the energy transition, replacing coal while buying time for renewable energy to scale up. However, even as gas is triumphing over coal in the U.S., it is increasingly under attack by policymakers.

Gas claims a carbon emissions profile that is half that of coal, and in terms of local pollution – sulfur, mercury and particulates – natural gas is a tremendous upgrade relative to coal. However, even as CO2 emissions are much lower, there are questions over the climate benefits if lower CO2 is offset by higher methane emissions from gas, which typically come from the drilling and extraction of natural gas, and its shipment via pipeline and local distribution lines.

With the coal industry a dead man walking, environmental groups have turned their sights on natural gas as an enemy of the climate. Recently, the efforts have logged some impressive achievements, forcing gas on the back foot in several states.

California’s state Public Utilities Commission recently pressed Pacific Gas & Electric to build new renewable energy and energy storage to replace three gas-fired power plants. The state’s largest utility also said it has no plans to build new gas-fired generation and other gas projects have been put on ice as the state tightens the screws on the gas industry.

This stems from the state’s effort at sourcing a greater portion of its electricity from renewable energy. California has mandated that 50 percent of its electricity to come from renewable energy by 2030. California is leading the clean energy shift in many ways, but it still has a ways to go in order to get there – it only generates about a third of its electricity from clean energy right now. “You’re not going to get anywhere if you are just adding more and more gas,” Robert B. Weisenmiller, chairman of the California Energy Commission, told the Wall Street Journal. “At some point soon we’ll be permitting the last gas plant in California.”

The policy backlash against natural gas in green-tinged California may not be surprising, but the hostile reception to gas is popping up in other, less obvious locations. In an incredibly notable development, last week Arizona regulators dismissed the long-term plans from utilities in the state to build gas and ordered them to consider renewable energy. The regulators also issued a surprise 9-month moratorium on new gas plants larger than 150 megawatts.

…click on the above link to read the rest of the article…

The Single Largest Supply Risk In Oil Markets

March 16, 2018

The Single Largest Supply Risk In Oil Markets

Venezuela could be the reason that “tips the market decisively into deficit,” the International Energy Agency said in a new report.

Venezuela lost another 60,000 barrels per day (bpd) in February, according to the Paris-based energy agency, and continues to present the largest supply risk to the global oil market. The IEA noted that even if Venezuela’s production levels hadn’t cratered over the past year, and it produced at the agreed upon level as part of the OPEC deal, the group would still be posting close to a 100 percent compliance level. As it stands, however, Venezuela’s plummeting output put the cartel’s compliance rate closer to 150 percent, the highest figure to date.

Aside from that, the IEA said that not much has materially changed over the past month, but expressed a more bullish outlook towards the market for 2018. Oil inventories happened to climb in January for the first time since July 2017, but only increased by 18 million barrels, or about half of the usual rate for that time of year. In fact, the oil surplus only stood at 50 million barrels, while refined product supplies are actually in a deficit.

The agency slightly revised up its forecast for oil demand for 2018 by 90,000 bpd to 1.5 million barrels per day (mb/d). Demand is particularly strong in China and India. Supply is still expected to grow by 1.3 mb/d in the U.S., a huge figure, but unchanged from previous forecasts. Non-OPEC supply is expected to grow by 1.8 mb/d.

The IEA says that “market re-balancing is clearly moving ahead with key indicators – supply and demand becoming more closely aligned, OECD stocks falling close to average levels, the forward price curve in backwardation at prices that increasingly appear to be sustainable – pointing in that direction.” Inventories are expected to see a “very small stock build” in the first quarter, but then decline for the rest of the year.

…click on the above link to read the rest of the article…

U.S. Shale’s Dirty Secret

March 16, 2018

U.S. Shale’s Dirty Secret

U.S. shale is surging, threatening to take even more market share away from OPEC. But the prospect of U.S. oil edging out barrels from the Middle East is not nearly as simple as it might seem.

Oil coming from the major shale plays in the U.S. is light and sweet, while a lot of oil coming from OPEC is medium or heavy, and often sour. A lot of refining capacity along the U.S. Gulf Coast, built up over years and decades, is equipped to handle heavier forms of oil. Before the shale revolution, refiners made their investments in downstream assets assuming the oil they would be using would come from places like Saudi Arabia and Venezuela.

Lighter shale oil is perfectly fine for making gasoline, but not the best for making diesel and jet fuel. Medium and heavy oil is needed for that.

But refiners have a tidal wave of light sweet oil on their hands, perhaps too much. The U.S. refining industry could max out its ability to swallow up light sweet oil from the shale patch, as the FT reports, particularly as U.S. shale drillers are expected to add upwards of 4 million barrels per day (mb/d) over the next five years.

Meanwhile, heavy crude production has waned as of late, with sharp declines in output in Venezuela and Mexico in the past few years. Shipments from Canada face a bottleneck because of fixed pipeline capacity. The result has been a somewhat tighter market for heavy oil, which refiners want to process into jet fuel and diesel.

In the years ahead, demand for gasoline could start to slow down as vehicles become more efficient and EVs start to gain more market share. Meanwhile, diesel demand has grown much faster, and will likely jump in 2020 as new regulations on dirty fuels from the International Maritime Organization take effect. That could force the shipping industry to switch from residual fuels to diesel, perhaps adding as much as 2 mb/d of demand for diesel, the FT reports.

In other words, volumes of lighter oil suited for gasoline production are soaring while production of medium and heavy oil used for diesel is flatter, even as diesel demand is poised to grow quickly. And refining capacity capable of handling light oil might not be up to the task.

…click on the above link to read the rest of the article…

OPEC Deal In Jeopardy As Iran And Saudi Arabia Square Off

March 13, 2018

OPEC Deal In Jeopardy As Iran And Saudi Arabia Square Off

Iran and Saudi Arabia are at odds over what to do next with the OPEC agreement, a conflict that could sow the seeds of the agreement’s demise over the course of the next year.

As the WSJ notes, the dispute centers around exactly what price the cartel should be targeting. Iran’s oil minister has said that the group should not push prices too high because it would likely spark an even greater production response from shale drillers. “If the price jumps [to] around $70…it will motivate more production in shale oil in the United States,” Iranian oil minister Bijan Zanganeh told the WSJ. Zanganeh has suggested $60 is about the right price for now.

Meanwhile, Saudi Arabia, which has much higher budgetary requirements and a desperate need to lift oil prices in order to bolster the valuation of the Saudi Aramco IPO, is unofficially aiming for $70 per barrel. Saudi oil minister Khalid al-Falih has repeatedly dismissed concerns about a shale wave.

Instead, the Saudis are hoping to keep the limits in place regardless of what U.S. shale does, at least for the next year or so. In the meantime, Saudi Arabia is trying to stitch together a more permanent framework with Russia for 2019 and beyond.

With the oil market dipping recently because of surging shale production, inventories are expected to build through mid-2018. That has Brent prices back down at about $65 per barrel, a price that is probably a little too low for the Aramco IPO. As such, Saudi officials have reportedly concluded that the IPO will be pushed off until 2019, after initially preparing a late-2018 offering.

Something like $70 per barrel would be more preferable. But at that price level, the risk is that U.S. gushes oil at even more impressive rates. According to Rystad Energy, U.S. shale would add an additional 600,000 bpd of oil if prices jumped from $60 to $70.

…click on the above link to read the rest of the article…

Glut Or Deficit: Where Are Oil Markets Headed?

March 12, 2018

Glut Or Deficit: Where Are Oil Markets Headed?

A flurry of recent oil market forecasts have sent a lot of mixed messages about what to expect both in the near-term and over the next several years. Is U.S. shale about to flood the market, setting off another bust? Or is demand so strong that with the oil market already rapidly tightening, another price rally is in store?

Obviously, nobody knows how to untangle the long list of variables that will ultimately decide what happens next, but the divergence in opinions is rather striking.

By and large, the discrepancy is over the difference between the short-term and the medium-term. Surging U.S. shale production is keeping the market well supplied right now, but soaring demand and the lack of major conventional projects in the works will lead to a price spike somewhere down the line.

Nevertheless, there is also disagreement over the immediate future. We are currently in the “calm before the storm,” according to Gary Ross, global head of oil analytics and chief energy economist at S&P Global Platts. “Pressure is going to build on crude prices,” he said in an interview with the WSJ. “We’re not feeling it now, but we will.”

Ross argues that oil demand is growing so quickly, that the market will absorb all the extra supply. He says China and India alone will take on an additional 1.1 million barrels per day (mb/d). Meanwhile, oil inventories are sharply down, thanks to the OPEC cuts. After refineries finish up maintenance season, the oil market will wake up to the fact that supplies are incredibly tight, Ross argues. “The world is going to be short come peak season,” he told the WSJ. “When the music stops, someone’s not going to have a seat.”

…click on the above link to read the rest of the article…

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