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The IEA’s forecast that U.S. shale will dominate the oil market over the next three years because of skyrocketing shale production made global headlines on Monday, but the conclusions should not be taken as gospel. The industry could run into a series of headwinds that could slow production growth, starting with demands from investors to see higher returns.

“Last year, it was drill, baby, drill,” John Hess, CEO Hess Corp., told the audience at the CERAWeek Conference in Houston on Monday. “This year, it’s show me the money.” He argued that shale drillers are feeling pressure from investors to post profits, which could slow the pace of development.

Yet, so far, while the newfound and highly-touted capital discipline mantra is being talked about quite a lot, it has not translated into a slower pace of drilling. The U.S. is breaking production records every week, and output is growing at a blistering rate.

However, that doesn’t mean that the growth rate will continue, or that U.S. shale will add nearly 4 million barrels per day over the next five years, as the IEA predicts.

There are a variety of bottlenecks that could constrain output and slow growth. For instance, with so much drilling concentrated in a relatively small area in West Texas, there are shortages of oilfield services, fracking crews, labor, and frac sand.

Last year, the backlog of drilled but uncompleted wells (DUCs) mushroomed as shale E&Ps drilled more wells than they could complete. The completion rate is now on the upswing, up 79 percent from a year ago, according to Reuters. But the number of DUCs is also rising, illustrating a persistent bottleneck in completion services. There are other holdups, including takeaway capacity for natural gas and limits on gas flaring, which could hamper oil production.

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Oil Market Fears: War, Default And Nuclear Weapons

March 1, 2018

Oil Market Fears: War, Default And Nuclear Weapons

The U.S. is one of the few areas of the world in which there is an energy investment boom underway, a development that could smooth out the uncertainties of geopolitical events around the world. At the same time, outside of the U.S., there is a deterioration of stability in many oil-producing regions, aggravating risks for both oil companies and the oil market, according to a new report.

Financial risk firm Verisk Maplecroft explores these two trends as they play out simultaneously. The U.S. shale sector has emerged from years of low oil prices, damaged but still intact. Importantly, the shale industry “can ride out price dips and respond quickly to upticks, weakening OPEC in the process,” James Lockhart-Smith, director of financial sector risk at Verisk Maplecroft, wrote in the report. Combined with deregulation at the federal level, the oil industry is in the midst of an investment boom in the U.S.

Meanwhile, things are not so rosy elsewhere. Verisk Maplecroft surveyed a long list of countries, and produced its Government Stability Index (GSI), which uses some predictive data and analysts forecasts to take stock of geopolitical risk in various countries over the next few years.

The results are not encouraging. The number of countries expected to see a deterioration of stability “significantly outnumber those we see becoming more stable,” the firm said. The reasons are multiple, including low oil prices, but also the erosion of democratic institutions. Related: Something Unexpected Just Happened In LNG Markets

“We don’t see increasing instability necessarily ending in coups or significant political upheaval, but a less predictable above-ground-risk environment is likely to emerge,” Verisk Maplecroft’s Lockhart-Smith said. “Arbitrary decision making, possible measures to buy off key stakeholders or an inability to pass regulatory reforms will be the main risks to projects in these countries, as their governments seek to stabilise and maintain their influence.”

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Geopolitical Risk Is On The Rise In Oil Markets

February 27, 2018

Geopolitical Risk Is On The Rise In Oil Markets

In the long-term, many oil analysts expect the world to become increasingly dependent on oil production from the Middle East, as U.S. shale fades in importance. However, geopolitical turmoil is already causing disruptions in major oil-producing countries in the Middle East, raising questions about the region’s ability to supply the global market in the long run.

The IEA has repeatedly warned that while U.S. shale has led to oversupply in the short run, shale output cannot meet future demand by itself. By the mid-2020s, especially because there are questions about the longevity of U.S. shale, there could be a much greater reliance on the Middle East, just as there was in the past.

However, according to the Oxford Institute for Energy Studies (OIES), the deteriorating geopolitical landscape in the Middle East could leave longstanding scars on the region’s energy sector.

Geopolitical threats are cropping up in various ways in the Middle East and North Africa. Formal institutions have been weakened, and in places like Libya, Yemen and Syria there is an absolute lack of legitimacy in government. Non-state actors have stepped into the void, such as Hezbollah, the Houthis, Libya Dawn, and others, according to OIES. These rivaling power centers make it tricky for oil companies and oilfield services to make investments.

As far as the oil market goes, these geopolitical problems are not obvious just yet. The glut of U.S. shale has inoculated the oil market from instability and unrest for the time being. Also, while there are plenty of sources of conflict and no shortage of potential threats, actual oil production outages have remained minimal. In fact, Iran ramped up production after the removal of international sanctions, while Libya, and Nigeria restored quite a bit of output after serious outages.

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BP Sees Peak Oil Demand In 2030s

February 24, 2018

BP Sees Peak Oil Demand In 2030s

BP says oil demand will peak in the 2030s, and that EVs will rise 100-fold to capture about a third of the car market.

BP released its annual Energy Outlook, with forecasts through 2040. Unlike in years past, this version sees more upheaval on the horizon as the energy landscape evolves rapidly. “Indeed, the continuing rapid growth of renewables is leading to the most diversified fuel mix ever seen,” BP CEO Bob Dudley said in a statement. “Abundant and diversified energy supplies will make for a challenging marketplace. Don’t be fooled by the recent firming in oil prices: the focus on efficiency, reliability and capital discipline is here to stay.”

BP believes that just about all of the growth in energy demand will come from fast-growing developing economies, with China and India alone accounting for half of the total growth in global energy demand through 2040.

BP offered several different forecasts, but all predict a peak in oil demand in the 2030s, with varying degrees of decline thereafter. Its central forecast sees peak oil demand in the mid-2030s at about 110 million barrels per day (mb/d), with consumption plateauing and declining through 2040 and beyond. In other words, demand grows for another two decades, rising by 15 mb/d, before consumption tops out.

BP sees the number of EVs on the road surging to 320 million by 2040, capturing about a third of the market in terms of miles traveled. That equates roughly to a 100-fold increase from the 3 million EVs on the road today. It is also sharply up from the 100 million EVs BP expected to be on the road in 2035 in last year’s Energy Outlook.

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

China Is Erasing The Gas Glut

February 23, 2018

China Is Erasing The Gas Glut

China and other countries in Southeast Asia are helping erase the LNG glut, which was thought to last well into the next decade.

China is in the midst of a radical overhaul of how many of its citizens heat their homes. The government has made an aggressive push to scrap coal burning, particularly in smoggy cities, replacing home coal furnaces with natural gas. The effort has been so successful, arguably too successful, that there has been natural gas shortages this winter.

At the global level, China is helping to eliminate the glut of LNG, which many analysts predicted would stretch into the 2020s after a series of high-profile LNG export terminals came online in recent years.

Several of them, including Chevron’s Gorgon LNG facility in Australia, saw tens of billions of dollars’ worth of investment, massive bets on the future of LNG demand in Asia.

At the start of 2017, there was an estimated 340 million tonnes of annual LNG capacity (mtpa) around the world, up by more than a quarter since 2012. But all of the new capacity helped crash prices. At the start of 2014, for instance, spot LNG prices in Asia – the Platts JKM marker – traded at about $20/MMBtu. A year later, spot cargoes were down by two thirds.

The long lead times for LNG export terminals make it hard for the markets to respond nimbly to changes in supply and demand. Sudden large additions of export capacity leave the market drowning in supply, while demand increases at a more gradual pace.

So many new terminals have already come online, but with 114 mtpa of LNG under construction, the LNG markets are thought to be under threat from still more waves of new supply. An estimated 57 mtpa was under construction in Australia, as of last year, with a further 31 mtpa in development in the U.S.

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

Frac Sand Shortage Threatens Shale Boom

February 21, 2018

Frac Sand Shortage Threatens Shale Boom

Higher drilling costs could threaten the recent surge in United States shale production.

Halliburton said last week that its earnings could be negatively impacted because of bottlenecks related to the supply of frac sand used in shale drilling. The Wall Street Journal reported that Halliburton’s shares were briefly halted on February 15 after Halliburton’s CFO Chris Weber told an audience at the Credit Suisse Energy Summit that the company’s first quarter earnings could take a hit by a whopping 10 cents per share.

The reason, he said, was because of delays by Canadian rail companies that would slow the delivery of frac sand. Halliburton saw its shares drop by more than 2 percent on a day that saw broader gains to the S&P 500.

Frac sand is integral to growing shale production, increasingly so these days with more and more sand pumped down into a well. Shale drillers have credited the heavy doses of sand with squeezing out more oil and gas from the average well. Demand for frac sand surged from 34 million tons in 2012 to 61.5 million tons in 2014. Consumption fell in the ensuing years as drilling dried up when oil prices collapsed, but frac sand consumption surpassed previous highs in 2017 as drilling resoundingly came back.

In 2018, frac sand demand is expected to top 100 million tons, according to Rystad Energy. “Right now, the market is really stretched thin,” says Thomas Jacob, a senior analyst at IHS Markit, told the FT in December. “Everyone is running at full capacity.”

Much of the frac sand has come from places like Wisconsin, which produces “northern white sand” that is hard and round, helping to create porous fractures in shale wells. It is high quality, but expensive, particularly because it has to be shipped by rail to Texas shale fields.

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Is History Repeating Itself In Oil Markets?

February 14, 2018

Is History Repeating Itself In Oil Markets?

Back in 2014, U.S. shale production was growing so fast that it ended up crashing the market. Now, history could be repeating itself.

That was the warning from the International Energy Agency, which said in its latest Oil Market Report that a “second wave” of shale supply threatens another downturn.

Total global oil supply is expected to grow faster than demand this year, which could lead to another downturn. It’s a conclusion that the IEA tried to emphasize in previous reports, but the message finally seems to be sinking in.

The extraordinary run up in benchmark prices in December and January came to a startling end two weeks ago. Part of the reason was because of the broader market turmoil in equities, and part of it was because hedge funds and other money managers had overbought oil futures, exposing the market to a price correction.

But as the IEA notes, the real worry is rising oil supply, which means that “the underlying oil market fundamentals in the early part of 2018 look less supportive for prices.”

It isn’t all bad news for benchmark prices. The IEA noted that due to the OPEC production cuts and strong demand, inventories fell at a remarkable rate last year. The oil inventory surplus currently stands at about 52 million barrels above the five-year average, down sharply from 264 million barrels a year ago. Importantly, while crude oil inventories are closing in on the five-year average, total stocks of gasoline and other refined products have already fallen well below that threshold. “With the surplus having shrunk so dramatically, the success of the output agreement might be close to hand,” the IEA wrote.

(Click to enlarge)

But even as the elusive “balance” in the oil market is within reach, the IEA says things might quickly reverse.

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Oil Prices: Collapse Now, Spike Later

February 12, 2018

Oil Prices: Collapse Now, Spike Later

Oil prices closed out the week sharply down, wiping out all the gains posted since the start of the year.

Surging U.S. shale production, along with broader financial turmoil, has clearly put an end to the bullish mood in the oil market. U.S. shale struck several blows against oil prices this week.

First, the EIA dramatically overhauled its forecasts, predicting U.S. oil production would hit 11 million barrels per day (mb/d) this year, rather than late next year. Then, on Wednesday, it revealed estimates that put U.S. oil production at 10.25 mb/d for the week ending on February 2, a staggering 330,000 bpd increase from a week earlier. Those weekly estimates are subject to revision when more data becomes available, but if those figures hold, it would point to a significant ramp up in drilling activity and new supply coming online.

As a result, it seems that, in the short run at least, U.S. shale has killed off the oil price rally, which saw WTI move from $50 per barrel in October to the mid-$60s per barrel by January. Brent saw a similar jump from the mid-$50s to $70.

But we’re now potentially moving into the next phase of this cycle, an all-too-familiar correction after prices have seemingly climbed too far.

This time around the downward swing could be aided by a rebound in the strength of the dollar. Typically, a weakening dollar pushes up oil prices, and the rapid run up in prices over the last few months occurred not coincidentally at a time when the dollar posted a steep decline. But the greenback has clawed back gains, particularly over the last week, with expectations of rising interest rates.

“The dollar index got down to 86 [cents], crude got to $66,” John Kilduff, founding partner of Again Capital, told CNBC.

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

Venezuela Is Moving From Crisis To Collapse

February 9, 2018

Venezuela Is Moving From Crisis To Collapse

Venezuela’s slumping oil production is a “clear and present danger” to the oil market, RBC Capital Markets said this week.

Venezuela’s production continues to fall at a frightening clip, falling to about 1.6-1.7 million barrels per day (mb/d) in December. On an annual basis, Barclays predicts that Venezuela’s output will fall sharply from 2.18 mb/d in 2017 to just 1.43 mb/d this year, a decline of roughly 700,000 bpd.

The steep declines will increasingly be felt worldwide given that oil demand is growing briskly and the OPEC/non-OPEC coalition continues to keep 1.8 mb/d of supply off of the market. Global inventories have declined so steeply that unexpected geopolitical surprises carry more influence than they used to.

“We continue to contend that, given 2018’s tightening oil market, any potential geopolitically driven supply disruption would have an outsized impact versus recent years when the market was awash in crude,” Helima Croft, head of global commodity strategy at RBC Capital Markets, wrote in a research note. “The clear and present danger to watch is Venezuela, which arguably has progressed past the risk stage given that production is in freefall.

RBC Capital Markets echoed Barclays, predicting output declines on the order of 700,000 to 800,000 bpd.

While that scenario is really bad, the uncertainty for the country’s output is probably skewed to the downside. The economic, political and humanitarian crisis is only getting worse. The government is in a debt vice, and it is hard to see how it will meet payments this year. The IMF predicts that inflation is running at a 13,000 percent annual rate. GDP is expected to shrink by 15 percent this year.

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

U.S. Oil Production Is Rising Much Faster Than Expected

February 8, 2018

U.S. Oil Production Is Rising Much Faster Than Expected

Shale executives have gone to great lengths to convince investors that they will not drill aggressively now that oil prices have rallied into the $60s. But in a new report released on Tuesday, the EIA essentially said that those assurances are just a lot of hot air.

The EIA’s Short-Term Energy Outlook predicted that U.S. oil production would top 11 million barrels per day (mb/d) this year. Last month, the agency said that the U.S. wouldn’t hit that threshold until November 2019.

The revision from just a few weeks ago is dramatic. In January the EIA estimated that the U.S. would surpass 10 mb/d at some point in February. But recently published data shows that the U.S. actually hit that milestone last November, and now, the agency says the U.S. actually averaged 10.2 mb/d in January.

On an annual basis, the U.S. produced 9.3 mb/d last year, a figure that is set to jump to 10.6 mb/d for 2018. Things slow down a bit in 2019, with an average of 11.2 mb/d.

What do we make of all of this? Well, the shale industry is clearly drilling at a frenzied pace, with an increasing concentration in the Permian basin. The rig count continues to rise in the Permian, while remaining mostly flat elsewhere. So far, the Permian has shown no signs of slowing down, despite some evidence of bottlenecking and cost inflation. Production continues to rise at a scorching rate.

The big question at this point is how rapidly expanding shale production will interact with the pace of inventory builds/declines and the OPEC production limits. Some analysts, including Goldman Sachs and S&P Global Platts, recently raised the prospect of OPEC tightening the oil market too much, allowing inventories to drain well below the five-year average.

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

Exxon To Produce All Of Its Oil Despite Peak Demand Fears

February 7, 2018

Exxon To Produce All Of Its Oil Despite Peak Demand Fears

ExxonMobil was forced to finally acknowledge the possibility that future climate change policy could lead to peak oil demand, a serious threat to the company’s operations over the long-term.

In response to a shareholder resolution passed last year, the oil major just released a reportthat recognizes the danger of peak oil demand. By 2040, climate change policies and regulations could cut into oil demand, leading to a drop in consumption by 20 percent.

Under this scenario, oil demand would decline by an average of 0.4 percent per year, with the lower end of the range seeing declines of 1.7 percent per year.

This would mean that global oil demand would decline to 78 million barrels per day (mb/d) by 2040, down from 95 mb/d in 2016. In the most pessimistic scenario (from the oil industry’s perspective), demand drops to 53 mb/d.

It’s a rather bleak picture for oil, and one echoed by a long list of analysts, environmental groups, and increasingly, the oil industry itself. A few weeks ago, a report coauthored by a top BP official, lays out a case in which oil demand peaks and declines, ushering in an era of permanently lower oil prices.

Still, Exxon was clearly issuing the report under duress. The tone of Exxon’s “2°C pathway” scenario suggests that the company doesn’t really see it playing out. While the report suggests that oil demand could fall, Exxon goes to great lengths to downplay the significance, arguing that “[o]il demand is projected to decline modestly on average, and much more slowly than its natural rate of decline from existing producing fields,” and “[e]ven under a 2°C pathway, significant investment will be required in oil and natural gas capacity,” and “[p]roduction from our proved reserves and investment in our resources continue to be needed to meet global requirements,” and the like.

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

Cold Snap Heats Up Natural Gas Prices

January 28, 2018

Cold Snap Heats Up Natural Gas Prices

Natural gas inventories plunged by 288 billion cubic feet (Bcf) for the week ending January 19, another massive decline that has tightened supplies and pushed up prices.

Total gas inventories now stand at 2,296 Bcf, which is 519 Bcf lower than at this point last year, and 486 Bcf below the five-year average. In fact, inventories are below even the lower end of the five-year range.

(Click to enlarge)

The declines took the market by surprise, helping to push Nymex prices up to $3.50/MMBtu. Only a few weeks ago, prices traded below $3/MMBtu. The “bomb cyclone” that hit the eastern half of the U.S. in the beginning of January led to record levels of consumption. On January 1, total gas consumption in the U.S. hit an all-time single-day high. Still, prices only climbed modestly.

But another round of cold weather is in store, and the consistent declines in inventories for several consecutive weeks has drained U.S. gas storage. New forecasts show cold weather sweeping the country from the Midwest down to Texas and eastward. “The concern is in February, deliverability gets even more constrained versus the January event,” Joel Stier, a trader at StierBull Trading LLC, told The Wall Street Journal.

With inventories already drained from earlier this month, the buffer is getting rather thin. “Storage is low — precariously low,” Bill Perkins, who runs Skylar Capital Management LP, told the WSJ.

Gas inventories rise and fall according to the season, with inventories filling up between March and October, then drawing down in winter months. The last few weeks of sharp declines in storage put the U.S. on track to exit the winter season at about 1,320 Bcf, according to the median estimate of eight analysts and traders surveyed by Bloomberg. That figure would be 23 percent below the five-year average.

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

Why Oil Prices Could Dive

January 25, 2018

Why Oil Prices Could Dive

WTI briefly touched $65 per barrel after the EIA reported a surprise drawdown in inventories — the highest price since late 2014. Although the rally hit some stumbling blocks in recent days, prices remain at multi-year highs. However, absent further bullish news, the downside risk looms large.

One of the most acute threats to prices is the exorbitant positioning by hedge funds and other money managers, who have staked out record net longs in the oil futures market. With everyone piling into one side of the bet, there’s little room left on the upside. This kind of lopsided positioning has consistently ended with a rush for the exits, setting off a sudden — and often sharp — price correction.

Mad Money’s Jim Cramer spoke about the problem on Tuesday on CNBC. “As of last week, large speculators were holding the single largest bullish position in the history of crude oil,” he said. “Being bullish is NOT a good sign … when everyone’s bullish, well, then, you don’t have anyone to convert to be able to start buying … You need to convert bears but there’s no bears.”

Cramer, citing data from Carley Garner, co-founder of DeCarley Trading, said the current makeup in the futures market points to a near-term price correction. “As Garner points out, when one of these massive speculative bets in oil unwinds, you do not want to get caught anywhere near the blast radius,” Cramer said.

Another force working against the current rally is the recent decline of the dollar, which has been weakening for the last several weeks. Since oil is denominated in U.S. dollars, a weaker dollar can put upward pressure on crude prices as crude becomes relatively less expensive to much of the world.

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

Peak Oil Demand Is A Slow-Motion Train Wreck

January 19, 2018

Peak Oil Demand Is A Slow-Motion Train Wreck

Will oil demand peak within five years? 15 years? Or not until 2040 or 2050?

The precise date at which oil demand hits a high point and then enters into decline has been the subject of much debate, and a topic that has attracted a lot of interest just in the last few years. Consumption levels in some parts of the world have already begun to stagnate, and more and more automakers have begun to ratchet up their plans for electric vehicles.

But the exact date the world will hit peak demand kind of misses the whole point, argues a new report, which is notable since it is coauthored by BP’s chief economist Spencer Dale, along with Bassam Fattouh, the director of The Oxford Institute for Energy Studies.

They argue that the focus shouldn’t be on the date at which oil demand peaks, but rather the fact that the peak is coming at all. “The significance of peak oil is that it signals a shift from an age of perceived scarcity to an age of abundance,” they wrote. In other words, oil won’t be on the only game in town when it comes to fueling the global transportation system, which will have far-reaching consequences for oil producers and consumers alike.

The exact date is unknowable, and in any event, the year in which the world does hit peak consumption won’t result in some abrupt “discontinuity of behavior,” the report argues. Demand growth will slow and then decline, but probably won’t fall off a cliff. So, the exact date of peak oil demand is “not particularly interesting.”

Nevertheless, the implications of a looming peak in oil consumption are massive. Without an economic transformation, or at least serious diversification, oil-producing nations that depend on oil revenues for both economic growth and to finance public spending, face an uncertain future.

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

2018: A Breakout Year For Clean Energy

January 17, 2018

2018: A Breakout Year For Clean Energy

The bullish momentum for global clean energy investment, which rose 3 percent to $333.5 billion in 2017, will continue this year.

There was significant progress in the transition to cleaner energy in 2017, and 2018 should see more of the same. New solar installations will top 100 GW this year, with China likely to make up about half of that total, according to a new report from Bloomberg New Energy Finance (BNEF), which lays out some key predictions for 2018.

However, beginning this year, BNEF says that new countries will become relevant in the race for clean energy, including sizable solar installations slated for Latin America, Southeast Asia, the Middle East and Africa.

Falling costs and proliferating installations of wind and solar are underpinning the sector’s growth. At the same time, cheaper inputs mean that developers can get more gigawatts of clean energy per dollar invested, which explains why the headline investment figure appears to not be growing by all that much.

There were some eye-popping figures and notable progress for new renewable energy projects in 2017. For instance, the tariffs for some onshore wind projects in Mexico dropped to a whopping $18.60 per MWh, a price that “would have been unthinkable only two or three years ago,” Angus McCrone, Chief Editor at Bloomberg New Energy Finance, wrote in the report.

Meanwhile, the cost of lithium-ion batteries plunged by an additional 24 percent last year, which raises the odds that by the mid-to-late 2020s, EVs could beat out conventional gasoline and diesel-powered vehicles not just on the life time cost, but even on upfront cost.

Battery costs will continue to decline this year, but at a slower rate than in the past. Soaring prices for cobalt and lithium carbonate will offset some of the declines in cost, to be sure, but BNEF still sees the average cost of battery packs falling by an additional 10 to 15 percent.

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

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