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For a few months now, OPEC has been boosting production to ease concerns about high oil prices amid expected supply losses from Venezuela and Iran.

The cartel’s largest producer and exporter, Saudi Arabia, has been specifically targeting an increase in crude oil exports to the most transparent market, the United States, which reports crude oil imports and inventory levels every week.

On the one hand, the Saudis are looking to regain their foothold in the American market after having cut shipments to the United States to a 30-year-low at the end of last year, when OPEC’s efforts to erase the global oil glut were in full swing.

On the other hand, the Saudis are responding to the demands of their staunch ally U.S. President Donald Trump, who has repeatedly slammed OPEC for the high gasoline prices, urging the cartel in early July to “REDUCE PRICING NOW!”

In the week to August 31, the four-week average of U.S. crude oil imports from Saudi Arabia exceeded 1 million bpd for the first time since June 2017, data by the EIA showed.

At that time last year, Saudi Arabia started to purposefully reduce its exports to the United States, where inventory data and refinery runs are reported every week. Those reports influence the price of oil and investor sentiment.

In the last week of October 2017, the four-week average of U.S. imports from Saudi Arabia was just 506,000 bpd—almost half of the four-week average of 1.009 million bpd for the last week of August this year.

In October 2017, U.S. imports from Saudi Arabia stood at 582,000 bpd—the lowest level since November 1987, as OPEC’s leader, its fellow OPEC members, and Russia-led non-OPEC allies part of the production cut pact were working to drain the global oil glut that weighed on oil prices and on the incomes of oil producing countries.

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Emerging Market Contagion Threatens Oil Market

September 4, 2018

Emerging Market Contagion Threatens Oil Market

The emerging market currency crisis is not over yet, and could yet morph into a broader contagion that threatens to drag down oil demand.

Last week, Argentina’s peso fell by around 20 percent in just a few days, taking year-to-date losses over 50 percent. The central bank frantically hiked interest rates from 45 to 60 percent in an effort to stem the losses, hoping to halt the peso’s spiraling descent. The peso regained a bit of ground, but now trades at over 37 pesos to the dollar, compared to 27 pesos per dollar in early August and 18 pesos at the start of the year.

This may seem like a problem for Argentines, but the currency turmoil is indicative of a broader malaise sweeping over emerging markets. A whole range of currencies have lost ground this year, rattling financial markets and forcing central banks to hike interest rates.

Another way of saying the same thing is that the dollar has strengthened on the back of rate tightening from the U.S. Federal Reserve, which has battered currencies across the globe. This underscores a deeper problem with the global economy: After a decade of near-zero interest rates, how does the U.S. central bank withdraw extraordinary monetary stimulus without wreaking havoc on the global economy?

The stronger dollar hits emerging markets in several ways. First, it directly knocks down emerging market currencies in terms of their value against the dollar. But, from there, the problem gets worse. A weaker currency makes dollar-denominated debt in these countries much more expensive and much harder to pay off. That can slow down the economy because businesses have to cut back, consumers have trouble paying off debt, the risk of default rises and everything slows down.

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Why The Saudis Are Still Dominating Oil Markets

August 23, 2018

Why The Saudis Are Still Dominating Oil Markets

Saudi Arabia is still clearly in control of the oil market.

The narrative that decisively took hold over the oil market in August was one of cracks in emerging market demand, concerns over the health of the global economy and fears over the fallout from the U.S.-China trade war. Turkey’s currency crisis set off a slide in emerging market currencies, which will likely undercut demand this year. The IMF warned earlier this summer that the downside risks to the economy were growing, a rather prescient prediction. On the supply side of the equation, outages from Iran loom large.

But when it comes to physical barrels on the market, Saudi Arabia is still in the driver’s seat. “While fears of trade wars will continue to influence sentiment and shape price outcomes, it is the recent shifts in OPEC, and particularly its dominant player Saudi Arabia’s, output policy which has had the biggest impact on physical balances, prices and the term structure to date,” The Oxford Institute for Energy Studies (OIES) wrote in a new report.

For the first few months of this year, Saudi Arabia maintained that the oil market was moving towards “rebalancing” with inventories in steady decline, but that there was more work to do. Saudi officials repeatedly stuck with the line that the OPEC+ agreement would not be altered before the end of the year and that they would continue to focus on bringing down inventories.

But the Trump administration’s withdrawal from the Iran nuclear deal and the return of sanctions raised fears of a huge disruption in Iranian supply. Suddenly, the market looked very tight. Coming just a few weeks before the June OPEC+ meeting, the U.S.’ policy change was decisive.

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Oil Markets Are In For A Bumpy Ride

August 21, 2018

Oil Markets Are In For A Bumpy Ride

The always-volatile oil market is set for even more volatility over the next two years as investors and speculators try to make sense of the conflicting market forces determining the pace of demand growth and global oil supply.

Over the past month, the two key themes have been how much Iranian oil will come off the oil market from U.S. sanctions in November, and how much demand growth could suffer with the trade wars. More recently, another theme is the emerging markets turmoil following Turkey’s crisis. Throw in all the new and much stricter International Maritime Organization (IMO) regulations on sulfur fuel oil requirements from 2020 that are expected to upend the refining and shipping markets, and oil prices are set for wild swings, industry executives and analysts say.

The severe IMO restrictions on fuel oil’s sulfur content—aimed at reducing emissions—will drive increased demand for middle distillates such as diesel and marine gasoil, which in turn will push up demand for crude oil, Morgan Stanley analysts say. This would boost crude oil demand by additional 1.5 million bpd, potentially sending oil prices to $90 a barrel in 2020, according to Morgan Stanley.

But before the 2020 regulation, analysts and investors are closely watching two currently unfolding developments—the sanctions on Iran’s oil and possibly weakening global oil demand growth—the main bullish and bearish factors, respectively, in the market right now.

“With new sanctions coming into play and also the IMO 2020, we see there is more volatility and therefore more opportunities to trade. So, we see our customers taking, slowly but surely, positions for that to happen,” Eelco Hoekstra, chief executive at independent tank storage company Vopak, told CNBC on Friday.

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The “Weakest” EIA Report In Years

August 20, 2018

The “Weakest” EIA Report In Years

The EIA just published one of the “weakest” weekly oil reports in years, which suggests troubled waters ahead for the global oil market.

The timing of the report is not ideal, coming amidst a currency crisis in Turkey, which has raised fears of financial contagion in other emerging markets. The strength of the dollar is putting a long list of currencies under pressure, vexing policymakers around the world. Some countries, such as Argentina, are aggressively hiking interest rates to defend their currencies (although the peso continues to fall). Others, such as Turkey, are resisting any rate hikes at all, which is clearly not a solution to capital flight and a sharp devaluation.

It is too early to tell whether or not the sudden crisis will be confined to Turkey or if it will mushroom into an emerging market conflagration that sends emerging markets – and perhaps even the global economy as a whole – into a tailspin.

These currency troubles could severely undercut global oil demand. Not only are crude oil prices close to multi-year highs, but the strength of the dollar and the relative weakness of a variety of currencies in the developing world, combine for a toxic brew to demand. Oil prices are up some 6 or 7 percent on the year, but in Turkey, imported oil is now 60 percent more expensive – the result of the meltdown in the lira.

While the specific percentages might vary from country to country, much of the world is experiencing painful increases in fuel because so many currencies are being trampled by the strength of the dollar.

The early signs of trouble to the oil market are starting to materialize. The EIA’s weekly report showed a massive 6.8-million-barrel increase in crude oil inventories.

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

All-Time Low Spare Capacity Could Send Oil To $150

August 16, 2018

All-Time Low Spare Capacity Could Send Oil To $150

While the oil market and analysts are trying to guesstimate how much Iranian oil the U.S. sanctions will stifle later this year, they all agree that the return of the sanctions is the market’s key bullish driver as well as the largest ‘known unknown’ for oil prices later this year and into 2019.

Some ultra-bullish hedge funds think that the U.S. sanctions will remove much more than 1 million bpd of Iranian oil from the market. Considering the low spare capacity for a quick ramp-up of production elsewhere, some hedge fund managers expect oil prices to jump to as high as $150 a barrel in 18 to 24 months.

“Our view is that by November 4, we will have lost between 1.3 and 1.4 million barrels [of output] a day. It is a very big number. That’s based on the view that the U.S. will allow a few temporary exception waivers,” Jean-Louis Le Mee, CEO at London-based Westbeck hedge fund told Reuters. “Ultimately, we could see losses from Iran exceed 2 million barrels a day,” Le Mee said.

According to Pierre Andurand, who manages the US$1.2-billion Andurand Commodities Fund, the world’s spare capacity is at its lowest ever, and this will be a real issue with global oil supply.

Replying to one of President Trump’s tweets blaming OPEC for the “too high” oil prices, Andurand said in mid-June that “OPEC has the lowest spare capacity ever right now. There is going to be a real issue. Prices will be above $150 in less than 2 years. Eventually higher prices will bring more supply. But right now too little supply coming over the next few years despite US supply growth.”

Generalist investors don’t have such bullish views, but “this is going to catch everybody by surprise,” Westbeck’s chief investment officer Will Smith told Reuters.

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Is A Supply Crunch In Oil Markets Inevitable?

August 1, 2018

Is A Supply Crunch In Oil Markets Inevitable?

The oil industry is more profitable than at any time in years, yet the industry could fail to supply enough oil to meet global demand in just a few years’ time.

A series of second quarter earnings reports over the past two weeks has revealed surging profits across the oil industry, with some companies posting earnings that are double or triple from a year earlier. But even though they are flush with cash, the industry has not returned to the profligate spending levels that were common prior to the 2014 market downturn.

Depending on one’s perspective, that could be a good thing or a bad thing. According to Carbon Tracker, the oil industry has trillions of dollars of projects in the pipeline that will become financial risks as governments around the world seek to address climate change. In essence, lots of oil and gas reserves will remain in the ground due to forthcoming taxes, regulation or simply demand destruction as alternatives take hold. Against this backdrop, a shortfall in spending is not such a bad thing.

On the other hand, energy agencies and forecasters, such as the International Energy Agency, have warned that the current pace of spending by the global oil industry is insufficient.

The downturn that began in 2014 led to a severe cutback in spending on exploration and development. Spending plunged by 25 percent in 2015, followed by another 26 percent decline in 2016. Since then upstream expenditures have bottomed out, rebounding 4 percent last year. The industry is only track to increase spending by another modest 5 percent in 2018. But there is little sign that the industry will return to spending at the same rate that it did prior to the downturn.

(Click to enlarge)

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Saudi oil shipment halt: A potential watershed in the Yemen war

July 26, 2018

Saudi oil shipment halt: A potential watershed in the Yemen war

A spike in oil prices as a result of a temporary halt in shipments through the strategic Bab el Mandeb strait may be short-lived, but the impact on Yemen’s three-year-old forgotten war is likely to put the devastating conflict on the front burner.

The halt following a Saudi assertion that Iran-backed Houthi rebels in Yemen had attacked two Saudi oil tankers traversing the waterway drives home the threat the conflict poses to a chokepoint in international trade and the flow of Gulf oil to world markets. The Houthis said they had attacked a Saudi warship rather than oil tankers.

An estimated 4.8 million barrels of oil are shipped daily through Bab al Mandeb that connects the Red Sea with the Arabian Sea off the coast of Yemen, Djibouti, and Eritrea.

The halt of oil shipments could provoke an escalation of the conflict with external powers intervening in a bid to assist Saudi Arabia and the UAE in defeating the Houthis and dealing a blow to Iran’s regional presence.

By the same token, the halt potentially offers Saudi Arabia and the United Arab Emirates an opportunity to focus international attention on resolving a civil war aggravated and turned into a regional conflict by the two Gulf states’ military intervention in March 2015.

Rather than proving to be a swift campaign that would have subdued the Houthis, the intervention has turned into a quagmire and a public relations fiasco for Saudi Arabia and the UAE.

International criticism of their conduct of the war is mounting as a result of its devastating human cost. Voices in the US Congress, the British parliament and other Western legislatures as well as human rights groups calling for a halt of arms sales to Saudi Arabiaare growing ever louder.

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Oil Jumps As Trump Asks Allies To Cut Off Iranian Oil

June 27, 2018

Oil Jumps As Trump Asks Allies To Cut Off Iranian Oil

The Trump administration is going to extreme lengths to disrupt as much oil from Iran as possible, and the implications for the oil market could be severe.

When the Obama administration sought to isolate Iran, it built an international coalition, put in place tight sanctions, and tried to curtail Iran’s oil exports. It worked, knocking around 1 million barrels per day offline. Still, the Obama administration granted leeway to an array of countries that depended on Iranian oil, including India, Japan and much of the EU, by granting them exemptions from sanctions as long as they did their best to reduce purchases.

The Trump administration has no compunction about making harsh demands to various countries, including U.S. allies, to cut off Iranian oil.

The U.S. government is calling on its allies to zero out imports of oil from Iran by November 4, or else face sanctions, and Washington is leaning towards granting no waivers at all. An official from the U.S. State Department said on Tuesday that it had plans to follow up on the matter with Turkey, India and China, even as the U.S. is trying not to “adversely impact” these countries, Bloomberg reports.

Late last week, Bloomberg also reported that the U.S. has sent a request to Japan to completely halt imported oil from Iran. Japan imported a little less than 180,000 bpd from Iran in 2017.

The fallout from a hard line from Washington could be significant. In the lead up to the U.S. withdrawal from the Iran nuclear deal, many analysts predicted that the Trump administration would struggle to match the impact of international sanctions on Iran from 2012 through 2015, particularly because the U.S. would have to do it without the help of the European Union, Russia or China. As such, the thinking was that the Trump administration might only be able to disrupt a few hundred thousand barrels per day of Iranian supply.

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Canada Bets On Trans Mountain Expansion To Sell Oil In Asia

June 11, 2018

Canada Bets On Trans Mountain Expansion To Sell Oil In Asia

Canada may be the fourth largest producer and third largest exporter of oil in the world, but it has one sole customer of its oil—the United States.

At the end of last month, Canada took a step toward ensuring that its oil would have an export outlet to the world’s fastest-growing energy market, Asia.

Analysts believe that the federal government stepping in to save the Trans Mountain expansion project has boosted the chances that the pipeline will be built and give Canada an export outlet from the Pacific Coast to the Asian markets. The industry is cautiously optimistic, but some companies say that Canada must do more to level the playing field for its oil.

Last year, Canada’s crude oil exports increased by 6.5 percent annually to 3.3 million bpd. Of those, exports to destinations other than the U.S. accounted for just 0.8 percent of all, according to data by the National Energy Board (NEB).

Due to congested takeaway capacity and lack of enough pipelines to either the Pacific or the Atlantic Coasts, Canada’s oil is currently priced at a huge discount to the U.S. benchmark. The discount at which Western Canadian Select (WCS)—the benchmark price of oil from Canada’s oil sands delivered at Hardisty, Alberta—trades relative to West Texas Intermediate (WTI) has been US$20, and at times US$30 a barrel this year.

Fierce opposition in British Columbia has forced Kinder Morgan to reconsider its commitment to expand the Trans Mountain pipeline that would increase the daily capacity of the pipeline to 890,000 bpd from 300,000 bpd. So the Government of Canada reached an agreement with Kinder Morgan last month to buy the Trans Mountain Expansion Project and related pipeline and terminal assets for US$3.5 billion (C$4.5 billion).

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Oil Market Volatility Set To Soar This Month

May 9, 2018

Oil Market Volatility Set To Soar This Month

After two months of an almost uninterrupted increase, crude oil is set for even more volatility on a string of political events that could see it either touch US$80 or even higher by the end of June or, conversely, slump to deep lows again.

President Donald Trump will start unwinding the string today as he announced his decision on the Iran deal. The prevailing analyst opinion is that economic sanctions will be reinstated within the next couple of months.

While this would be naturally bullish for oil prices, some analysts note that the effect of the sanctions has already been factored into prices, so any immediate impact will be limited. What’s more, CNBC reported recently, that the effect of U.S. sanctions against Iran on the country’s international shipments of crude will also be limited: China and India are unlikely to reduce their intake of Iranian crude as are other buyers, who were previously on the U.S.’ side with regard to the sanctions.

All in all, analysts estimate that new sanctions could remove between 300,000 bpd and 500,000 bpd of Iranian crude from international markets, which compares with 1-1.5 million bpd removed from the market under the initial round of U.S. sanctions under President Obama, who had a lot more support from Western Europe.

That said, there will unquestionably be an effect on prices from Trump’s announcement. This effect could be amplified later in May, when Venezuela holds its presidential elections. The vote scheduled for May 20, and there is little doubt that Washington will question the legality of the outcome.

Venezuela’s oil industry—like its economy—is in shambles, with production down by 50 percent since its peak in the early 2000s to 1.55 million bpd, data from Bloomberg suggests.

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

Expect Much Tighter Oil Markets

April 26, 2018

Expect Much Tighter Oil Markets

As oil prices hover close to multi-year highs, Saudi’s Oil Minister has hit the wires saying that OPEC ‘shouldn’t be complacent and listen to some of the noise such as mission accomplished‘ . Just as we learned earlier in this economic cycle via ‘don’t fight the Fed’, we too should take heed: ‘Don’t fight the Falih’.

Year-to-date, U.S. crude inventories have risen by 3 million barrels, compared to 53 million barrels for the same period last year. Our seasonal Q1 build has been distinctly errant.

While a number of factors can be assigned for such a lack of upward trajectory (higher exports, stronger refinery runs, lower waterborne imports), the slashing of crude flows to the U.S. from Saudi Arabia has also played a part. Saudi crude deliveries were down over 50 million barrels year-on-year in Q1, a third consecutive quarter of considerably lower year-on-year imports.

The aforementioned combo of higher exports, stronger refinery runs and lower waterborne imports have colluded to leave Q1 U.S. crude inventories 110 million barrels lower than end-March last year. (Granted, this is from a high-water mark indeed – the absolute record of U.S. crude inventories at 535.54 million barrels, but hey).

(Click to enlarge)

In 2017, Saudi crude deliveries to the U.S. dropped by 160,000 bpd versus the prior year. Meanwhile, total OPEC deliveries to U.S. shores in both 2016 and 2017 averaged ~3.2 million barrels per day, with imports last year really strong in the first half of the year, before taking a dive in the second half (hark, below).

In Q1 of this year, OPEC deliveries averaged close to 2.7 million bpd, down nearly 20 percent on year-ago levels and the lowest quarter since Q3 2015. This is both a combination of OPEC reining in supplies, and a lesser need from U.S. refiners for OPEC barrels, as they lean as heavy as they can on soaking up rising domestic production.

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A Crisis At The Heart Of U.S. Shale

April 20, 2018

A Crisis At The Heart Of U.S. Shale

The bottlenecks in the Permian are starting to capture the attention of the oil market, raising the prospect that U.S. shale production does not live up to the hype.

The frenzy in West Texas has predictably led to bottlenecks up and down the supply chain. Oil drillers are facing rising prices for labor, rigs, services and land. The lack of pipeline capacity is starting to force discounts for oil as large as $9 per barrel.

A new report from Rystad Energy points to the bottleneck specifically for pumping horsepower and frac sand. When wells are drilled, companies deploy trucks connected to pressure pumps that inject water, sand and chemicals underground to fracture a well. But the sky-rocketing level of drilling activity is actually straining the market for pressure pumping capacity. There just isn’t enough to go around.

“Capacity is expected to be particularly tight in the Permian in the second quarter before the majority of new equipment comes online in the second half of the year,” Rystad Energy wrote in its report. “More than half of total U.S. pumping capacity will be in the Permian.” Obviously, that means booming business if you are in the market of selling such equipment. “We are comfortably behind at the moment, and we are just fine with that,” a VP at an unnamed equipment manufacturer told Rystad.

To be sure, Rystad Energy predicts that 2 million horsepower of new capacity will come online by the end of the year, a nearly 10-percent increase from 2017. That should help relieve some of the strain.

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

Saudi Officials Worried About Oil’s Future

April 7, 2018

Saudi Officials Worried About Oil’s Future

Saudi government officials like talking to the media about oil. They invariably come across as upbeat, confident that the OPEC deal will achieve its goal of shrinking the global oversupply, and equally confident that U.S. shale will not seriously eat away at their oil revenues, however fast it grows.

The general message seems to be: We can handle everything. Behind the scenes, however, things look differently, Time reports, citing former and current U.S. government officials with experience in the Kingdom.

Following an interview with Crown Prince Mohammed, in which he anticipated a bright future for crude oil thanks to new strong demand, Time talked to several U.S. officials who shared their concern about how realistic this view of the industry actually is.

In fact, these officials believe Saudi Arabia is still overdependent on crude oil, and this could spell trouble for the barely contained powder keg that is the Middle East—a ripple in crude oil would likely set the region all ablaze. What’s more, they say, Saudi Arabia is still unable to make ends meet, even at the current higher oil prices. If prices fall and its deficit deepens further, the Kingdom would be hard pressed for an urgent change in its heavily subsidized economic model. There is even a danger of the economy crashing, one U.S. official said, and should this happen, chaos will ensue.

It is possible that Saudi officials are downplaying some very real threats to all the ambitious economic reform plans initiated by Mohammed bin Salman. However, it seems difficult to gauge the importance of these threats when Saudi sources are often at opposing ends of the opinion spectrum. Some, U.S. officials say, are adamant that everything around the reforms is proceeding smoothly. Others are equally adamant that the Kingdom is running on fumes that will soon evaporate.

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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…

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