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Oil prices will be much higher over the next few years than previously thought, according to a new report from Barclays.

The investment bank significantly raised its pricing forecast for 2020 and 2025 in its annual medium-term oil report. Barclays expects Brent to average $75 per barrel in 2020, up from a previous estimate of $55, while prices may average $80 in 2025, up from $70 previously.

The bank noted that the market is dramatically different than it was at this point last year when it issued its previous medium-term report. U.S. shale drillers are maintaining capital discipline, which could lead to lower than expected production levels. OPEC and Russia have demonstrated resolve and laid the groundwork for long-term market management, which could keep supply off the market for years to come.

Also, the U.S. has deployed an aggressive sanctions campaign against Iran and even Venezuela, measures that should translate into more than a million barrels of per day of supply losses. And finally, “several key OPEC producers are at risk of being failed states,” Barclays concluded.

But that does not mean that the world is set to suffer from supply shortages. “Prices could reach $80 and higher in the short term, but these price levels have reawakened the industry’s animal spirits,” Barclays said. “In our view we are not on the cusp of another boom cycle in oil prices because of an impending ‘supply gap.’”

Any near-term price spike will be driven by sentiment and temporary rallies, rather than a fundamental gap in supply. “Though we expect that a price range above $80 will become the new norm next decade, our market balances do not justify those price levels in the next one to two years,” Barclays argued. “There are many other possible reasons to be bullish during that time frame, but the ‘supply gap’ is not one of them.”

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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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The Biggest Threat To The Oil And Gas Indust

September 3, 2018

The Biggest Threat To The Oil And Gas Industry

Trump’s trade war is taking a toll on the oil and gas industry.

There has been some eleventh-hour drama over the renegotiation of NAFTA, but the energy industry is likely going to dodge a bullet on that front, with the most contentious issues revolving around agriculture and automobiles.

But even if the NAFTA renegotiation succeeds, the oil and gas industry has already taken a hit from Trump’s broader trade war.

The most obvious impact comes from the 25 percent steel and 10 percent aluminum tariffs that the Trump administration has placed on a variety of countries, which have pushed up the cost of steel in the U.S., leading to cost inflation for oil and gas projects. Worse, the application system for waivers is cumbersome and time-consuming, and some companies are angry because precisely who obtains an exemption from the federal government seems to be arbitrary.

For instance, as Reuters reported, Chevron received a waiver for importing a 4.5-inch steel pipe used for oil exploration while a small company called Borusan Mannesmann Pipe saw its application rejected by the U.S. Commerce Department for a similar steel pipe used in well casing. The Commerce Department has been accused of not providing adequate information on why it rejects certain cases, offering only vague language such as the availability of domestic steel. A common thread in the rejections seems to be opposition submitted from steel producers.

Reuters says that Commerce has received over 37,000 applications for waivers from U.S. companies, but the agency has only issued decisions on 2,871 of those requests as of August 20. Roughly two-thirds of the applications were approved, but nearly 1,100 were rejected.

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Canadian Court Deals Blow To Trans Mountain Expansion

August 31, 2018

Canadian Court Deals Blow To Trans Mountain Expansion

In a devastating blow to the prospects of the Trans Mountain expansion pipeline – and thus, to the entire Canadian oil sands industry – a Canadian court ruled that the federal government failed to adequately consult with First Nations affected by the project. The ruling throws the entire project into doubt.

It’s the latest setback to Canada’s oil sands industry, which ahs been struggling for a decade to build a single large-scale pipeline to move oil from Alberta to the international market. Keystone XL still sits in limbo, ten years after its original proposal, despite support from both the U.S. and Canadian governments. The graveyard of abandoned pipeline proposals has grown over the years, and could yet claim another victim.

“The Trudeau government failed in its rhetoric about reconciliation with First Nations’ and this court decision shows that,” a spokesperson for Squamish Nation said in a statement. “This decision reinforces our belief that the Trans Mountain Expansion Project must not proceed, and we tell the Prime Minister to start listening and put an end to this type of relationship. It is time for Prime Minister Trudeau to do the right thing.”

While the saga of Keystone XL has made international headlines and dragged on for years, the Trans Mountain expansion was supposed to be an easier lift. The project would be built as a twin line along the existing pipeline, reducing the environmental impact.

But it still has faced stiffed resistance on multiple fronts. The provincial government in British Columbia has aggressively opposed the project, which contributed to the near-decision by its owner, Kinder Morgan, to entirely scrap the project. In May, at the eleventh hour, unable to assuage the concerns of the American pipeline corporation, the desperate government of Prime Minister Justin Trudeau decided to nationalize the project, buying it off of Kinder Morgan’s hands at a hefty price.

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Economic Crisis Looms In Iran As Sanctions Bite

August 30, 2018

Economic Crisis Looms In Iran As Sanctions Bite

In a little over two months, painful U.S. sanctions on Iran’s oil sector will take effect, but the Iranian economy is already showing signs of strain.

Iran’s currency, the rial, has fallen by more than half since the start of the year. There is now a thriving black market for U.S. dollars as the rial continues to plunge.

The turmoil has the government engaging in a bit of a circling firing squad. In July, the head of the central bank was sacked. In early August, the labor minister was ousted and just this past weekend the economy minister was removed.

The reshuffling and purging of top officials suggests that hardliners in Tehran are gaining ground against the government of President Hassan Rouhani, a moderate by comparison. “Rouhani’s failure to respond to the economic crisis with gut and grit has further isolated him,” Ali Vaez, the director of the Iran Project at the International Crisis Group, told the Wall Street Journal. “Even his erstwhile allies in the parliament are deserting what they believe is a sinking ship.”

But even though the economic indicators look poor, Rouhani’s real failure in the eyes of the hardliners has been political. That is, his government made the mistake of trusting the United States when it agreed to the 2015 nuclear deal. The Trump administration’s withdrawal from the pact earlier this year was proof in Tehran that opening up and negotiating with the U.S. on the nuclear program was a miscalculation. Rouhani has been in trouble since then, and the economic pain related to the re-implementation of U.S. sanctions is merely compounding the problem.

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

Rising Supply Will Keep Oil Prices Rangebound

August 29, 2018

Rising Supply Will Keep Oil Prices Rangebound

Rising oil production from various parts of the globe could keep oil prices “range-bound” for the rest of this year.

During the second quarter, fears of supply shortages began to mount, as OPEC disruptions combined with strong demand and shrinking inventories to push prices up significantly.

More recently, concerns have focused on weak demand, driven by a strong dollar, cracks in emerging markets (punctuated by the currency crisis in Turkey), and a weakening macroeconomic picture globally.

But additional bearish concerns could soon come from the supply side, a notable turnaround as the supply picture has been a bullish factor for much of this year. Market analysts grew concerned about a supply crunch a few months ago, but the outlook is now shaping up to be one of, if not abundance, then maybe “adequate” supply.

Supply outages from non-OPEC countries are actually at a 15-month high right now at 730,000 bpd. However, much of that will be resolved soon with Canada’s Syncrude facility bringing production back online. Also, a new agreement between Sudan and South Sudan could see higher output levels there, according to Bank of America Merrill Lynch (BofAML). Meanwhile, production increases are expected in Canada, Brazil and the U.S., the three countries that continue to drive up output outside of OPEC. Altogether, the production increases will add new supply in the second half of 2018, “taming upside pressures on Brent crude oil prices,” BofAML wrote in a note.

The shale industry could face some infrastructure headwinds in the Permian, but so far that has not made a huge dent in production forecasts. In fact, U.S. shale companies are increasing spending this year. According to Rystad Energy, in the second quarter, a selection of 33 shale companies announced spending increases of a combined 8 percent relative to initial spending guidance, an additional $3.7 billion in spending.

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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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Energy Is A Breaking Point In NAFTA Deal

August 23, 2018

Energy Is A Breaking Point In NAFTA Deal

Oil and gas is proving to be a sticking point in the NAFTA renegotiations, with the incoming Mexican president hoping to exclude the chapter on energy from the trade deal.

To be sure there have been a series of issues that have divided the three countries. Many of them have been resolved but even at this late date some outstanding issues remain. The U.S. and Mexico are close to hammering out their differences on cars, which would allow Canada to rejoin the talks. The three countries have not agreed on dispute resolution mechanisms, and the U.S. wants the deal to sunset every five years, which would require them to periodically renew the trade pact, a provision that Canada and Mexico oppose because it would create uncertainty.

But oil and gas are also shaping up to be a point of tension, which is an unexpected development. Incoming President Andres Manuel Lopez Obrador (often referred to as AMLO), who takes office in December, opposes the energy chapter in NAFTA, even as the current administration supports it, according to the Wall Street Journal. Energy was not included in the original NAFTA deal ratified in the 1990s because Mexico’s energy sector was under state control. That changed in 2013-2014 when President Enrique Pena Nieto succeeded in ending seven decades of government monopoly. Related: The Next Major Challenge For Norway’s Oil Industry

AMLO was opposed to those energy reforms when they passed, and while he has since softened his stance on the partial-privatization of oil, gas and electricity, his team is holding up the NAFTA negotiations over energy. “The energy sector was on the table, but it wasn’t a matter of concern. It was rather a technical issue on how to reflect Mexico’s overhaul in the treaty,” Carlos Véjar, a trade attorney at law firm Holland & Knight in Mexico City, told the Wall Street Journal.

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Spending Boost Fails To Raise Production In The Permian

August 22, 2018

Spending Boost Fails To Raise Production In The Permian

The U.S. shale industry is gearing up to spend more this year, despite assurances to maintain capital discipline.

In the second quarter, shale companies signaled their intention to lift capex. Part of the reason is that costs are on the rise, so some drillers have to spend more to produce the same amount of oil and gas. That was an unexpected development, and one that shareholders are not happy about.

A survey of 33 shale companies by Rystad Energy found that while the group revised up spending by about 8 percent, they only increased their expected production levels for this year by 1.4 percent. “This disconnect might suggest that the shale industry requires more capital than before to achieve healthy production growth,” Rystad said in a new report.

There are some signs that the Permian, for instance, is running into some productivity problems, raising the possibility that the highly touted “efficiency gains” over the past few years are reaching their limit.

On the other hand, the industry is also spending more because they have plans to increase drilling activity, which could lead to higher output next year. “[W]hile a part of increased spending is due to service cost inflation, a significant part of the incremental budget is also planned to be used for additional drilling throughout 2H 2018 to support more intensive completion activity and production growth in 2019,” Rystad Energy said in its report.

The largest spending increase came from companies focused on the Permian basin, which is not surprising given both the frenzied pace of drilling in West Texas as well as the reports that the basin is suffering from bouts of cost inflation. Occidental Petroleum stood out from the bunch, with an announced increase in spending by $900 million.

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

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…

The Productivity Problem In The Permian

August 16, 2018

The Productivity Problem In The Permian

The multi-year campaign to boost efficiency and productivity in the U.S. shale patch could be nearing its limits.

Output in the Permian basin is already starting to slowdown, largely due to pipeline constraints. However, there is also a series of other data points that suggests that shale drillers are bumping up against a ceiling in terms of productivity and efficiency.

New data from the EIA shows a rather startling slowdown in the amount of oil that the average rig can produce from a new well in the Permian. In September, the EIA expects new-well production per rig to fall by 10,000 barrels per day (bpd) in the Permian, compared to August levels. That means that when a company deploys a rig to drill a new well, that rig will produce a little less oil than it did compared to the average rig did a month earlier.

(Click to enlarge)

New-well productivity has seesawed a bit over the years, spiking in 2016 when the industry scrapped inefficient rigs during the market downturn. Indeed, some of the recent decline in new-well productivity can be chalked up to the industry rushing to drill more. In this sense, it isn’t that the rigs are necessarily less productive, just that there are so many of them out there in the Permian, that the productivity figures fall because the denominator is larger.

But it’s also a reflection of the fact that drillers are being forced into less desirable locations with the field so crowded.

“We believe that the short-cycle nature of shale exploitation and the intensity of activity in the Permian means that production from Tier 1 geological locations (e.g., those with the best pay, the optimum pressure) is starting to move to Tier 2, which is unable to achieve the same rates of productivity,” Standard Chartered wrote in a note.

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EIA: U.S. Oil Production Growth Is Slowing

August 9, 2018

EIA: U.S. Oil Production Growth Is Slowing

The EIA just revised down its forecast for U.S. oil production growth for 2018, an acknowledgement that pipeline constraints are slowing output gains in the Permian basin.

The EIA believes the U.S. will average 10.68 million barrels per day (mb/d) this year, down 0.11 mb/d from last month’s estimate. It also revised down its forecast for next year’s average output to 11.7 mb/d, down from 11.8 mb/d previously.

The downward revision comes after recently released data from the agency suggested that output growth during this past spring was not as robust as previously thought. The EIA, at the time, thought shale production continued to grow at a blistering rate, with production rising by over 200,000 bpd between the beginning of April and the end of May. But more recent data suggests that production actually dipped a bit over that period.

It may seem like an insignificant revision, but it points to broader problems, particularly in the Permian basin, which could cause the U.S. to undershoot expectations going forward.

Recent movements in the rig count lend a little more weight to this notion. While the number of rigs bounces around from week to week, the overall number is essentially unchanged since May. And in the Permian, where all the drilling action has been concentrated, the rig count stood at 480 at the start of August, no higher than it was in early June.

“The lower forecast for output this year reflects slightly slower than expected growth in middle quarters of this year, possibly related to pipeline constraints out of the Permian basin that have reduced wellhead prices in the region,” Tim Hess, a product manager for the EIA’s Short-Term Energy Outlook said, according to Bloomberg.

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The U.S. Oil Production “Mirage”

August 4, 2018

The U.S. Oil Production “Mirage”

Some of the surge in U.S. oil production this past spring might have been “a mirage.”

On July 31, the EIA released monthly data on U.S. oil production, which revealed a decline in U.S. output of 30,000 bpd in May, compared to a month earlier. The dip is a surprise, given the widespread assumption that U.S. shale production was continuing to grow at a blistering pace.

To be sure, a big reason for the decline in overall output was the 75,000-bpd decline in production from offshore Gulf of Mexico. But Texas production only rose by 20,000 bpd, a disappointing figure that likely came in far below what most analysts had expected.

Moreover, the monthly total of 10.442 million barrels per day (mb/d) for May is sharply lower than what EIA itself thought at the time. Here are the weekly estimates for U.S. oil production that the EIA put out back then:

April 6: 10.525 mb/d
April 13: 10.540 mb/d
April 20: 10.586 mb/d
April 27: 10.619 mb/d
May 4: 10.703 mb/d
May 11: 10.723 mb/d
May 18: 10.725 mb/d
May 25: 10.769 mb/d

The weekly estimates tend to be less accurate than the retrospective monthly numbers. That is not a new dynamic, and estimating on a weekly basis inherently involves a lot of guesswork, so this is not a knock on the EIA.

Yet the discrepancy is rather striking. Not only did the EIA estimate that production in April and May was much higher than it actually was, but the agency also thought production was rising quickly.

If the weekly estimates were to be believed at the time, production would have climbed from 10.525 mb/d in early April to 10.769 mb/d by the end of May, an increase of 244,000 bpd over a roughly eight-week period.

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

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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Oil Prices Unlikely To Breakout Or Collapse

July 31, 2018

Oil Prices Unlikely To Breakout Or Collapse

Oil prices took a breather in the second half of July, but the price correction may have been a temporary reprieve rather than the start of another downturn.

On Monday, WTI breached $70 per barrel for the first time in over two weeks, rising once again on fears of supply outages.

Part of the reason that prices sank so sharply in mid-July was because of a wave of liquidation by hedge funds and other money managers, selling off their bullish positions in crude futures. Two weeks ago, investors slashed their long positions on crude oil by the most in a single-week in more than a year. As Reuters points out, the shift in positioning was concentrated in the cut of long bets, rather than the increase in shorts. That suggests profit-taking rather than a belief that a deep downturn is imminent.

The reduction of net length helped push down oil prices for a few weeks, but it also let some steam out of the futures market. Investors had become overly bullish in their positions, so the reduction in net length leaves the market a bit more balanced. That means that there is now more room on the upside for oil prices.

Last week, money managers began scooping up bullish bets once again, with net length in Brent rising by more than 4 percent. That coincided with a recovery in oil prices and it suggests that oil traders believe the price correction went far enough. “It lines up with our call to buy the dip in July,” Chris Kettenmann, chief energy strategist at Macro Risk Advisors LLC, told Bloomberg. “We’ve been pretty vocal about adding to length through the July sell-off.”

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