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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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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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The Real Reason Behind The Next Oil Squeeze

August 14, 2018

The Real Reason Behind The Next Oil Squeeze

The last quarter has seen increased volatility in oil prices, an increase that I attribute to the growing tensions in international markets as fears of a global trade war intensify. The headlines seem to get starker by the day, and markets loathe this type of uncertainty.

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Source

The intent of this article is to provide some guidance as to where oil prices may be headed in the near term. I think there are some key drivers at play here and will discuss them in some detail in the rest of this article.

Supply and Demand

One of the reasons for the big energy depression that hit in mid-2014 was an oversupply caused by Saudi Arabia ramping up production to drive prices down. They had several goals in doing this as has been discussed in countless articles, but chief among them was the desire to take high cost barrels off the market. Their primary targets were the American frac machine in North America, and deepwater production that was grabbing an increasing share of big IOC dollars.

This worked fairly well over the short run, as energy producers outside Saudi were unprepared. For most of 2016, the frackers in America retooled their portfolios and improved practices, cutting average well costs down to where they were economic with $40-50-dollar oil. U.S. shale was back in business.

The deepwater business is still struggling to regain its momentum.

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Figure-1

Demand is likely to increase for the foreseeable future though, with an average annual increase of about 1.6mm BOPD for the years covered in the Global Supply and Demand Chart above (2013-2018). The upward slope continues through 2019 at about the same rate of increase.

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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.

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Tight Oil Markets Are Ignoring Supply Risk

July 27, 2018

Tight Oil Markets Are Ignoring Supply Risk

The global oil market is once again in flux as geopolitics and regional conflicts take an increasingly heavy toll on oil supplies. Since the OPEC meeting in Vienna, warning signs that oil markets are heading for a shortage in supply, due to low spare production capacity and growing security threats in and around the Persian Gulf, have not been taken into account.

The perceived oil production increase from the OPEC and Russia agreement has not materialized in full. Analysts are even reporting that the spare production capacity of Saudi Arabia is less than 500,000 bpd.

This lack of production capacity must now become a major point of focus as, in addition to the ongoing Iran-U.S. confrontation in the Strait of Hormuz, Iranian backed Yemeni Houthi rebels have once again attacked Saudi oil tankers in the Red Sea. In response, Saudi Arabia has suspended oil shipments through the Bab El-Mandeb Strait for an undisclosed period of time.

Aramco stated that “in the interest of the safety of ships and their crews and to avoid the risk of oil spill, Saudi Aramco has temporarily halted all oil shipments through Bab El-Mandeb with immediate effect. The Company is carefully assessing the situation and will take further action as prudence demands”.

Even though no casualties have been reported, the current situation is undeniably dangerous and has been escalating this year.

So far in 2018, the Houthis have threatened to increase their attacks on Saudi or Arab Alliance owned vessels. On April 3, a Saudi tanker was shot at with a projectile from Houthi fighters. Several other Houthi attacks have been reported against commercial vessels in the Red Sea and Bab El Mandeb area lately.

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The 4 Key Chokepoints For Oil

July 27, 2018

The 4 Key Chokepoints For Oil

While everyone has been watching the Strait of Hormuz amid rising tension between the U.S. and Iran, a chokepoint on the other side of the Arabian Peninsula is now at the center of the action.

Saudi Arabia temporarily halted all oil shipments through the Bab al-Mandeb strait after Saudi Aramco reported attacks from Houthi rebels on two oil tankers. The two ships in question were very large crude carriers (VLCCs), each carrying 1 million barrels of oil, and one of them sustained minor damage. The Houthis said that they have the naval capability to hit Saudi ports and other targets in the Red Sea, according to Reuters.

In response, Saudi energy minister suspended oil shipments through the strait. “Saudi Arabia is temporarily halting all oil shipments through Bab al-Mandeb strait immediately until the situation becomes clearer and the maritime transit through Bab al-Mandeb is safe,” Khalid al-Falih said. The Kuwait Oil Tanker Company said that it might also suspend tanker traffic through the narrow chokepoint.

The sudden risk to two of the world’s most critical chokepoints has pushed up oil prices a bit this week, although serious outages have yet to materialize.

Nearly two-thirds of the world’s oil trade travels via maritime routes. Here is a quick rundown of the top global chokepoints for the oil trade.

1. Strait of Hormuz. The most vital chokepoint in the world sees nearly 19 million barrels per day (mb/d) of oil traffic, according to the EIA. At its narrowest point, Hormuz is only 21 miles wide. Through that narrow passage, oil exports from Iraq, Iran, Kuwait, Bahrain, Qatar (including large volumes LNG exports), the UAE and Saudi Arabia must pass. The U.S. Navy patrols the area because of its strategic importance. Iran has threatened to disrupt oil traffic through the Strait, but for now the market is assuming that is all bluster.

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Spare Capacity: The Biggest Mystery In Oil Markets

July 11, 2018

Spare Capacity: The Biggest Mystery In Oil Markets

With around 2.5 million barrels per day (mb/d) of Iranian supply targeted by the Trump administration, how will the oil market cope with the losses? Is there enough supply capacity to make up for the shortfall?

There is a great deal of debate about the true extent of the world’s spare capacity. Or, more precisely, there are a range of guesses over how much surplus is located in Saudi Arabia, the one country that really has the ability to ramp up large volumes of supply on short notice.

Saudi Arabia claims it could produce 12.5 mb/d if it really needed to. However, that claim has not been put to the test. Saudi Arabia’s all-time highest level of production was just over 10.7 mb/d in 2016, just before it helped engineer the OPEC+ production cuts.

Adding around 2 mb/d of extra supply – as President Trump demands – is a tall order. “More recent history shows Saudi has never produced more than 10.6mn b/d on average over a single month. And even in the recent period, we have observed a steep decline in domestic Saudi oil inventories,” Bank of America Merrill Lynch wrote in a note, arguing that there is plenty of reason to question the notion that Saudi Arabia has around 2 mb/d of idled capacity. “Thus, it appears the oil market has little confidence that Iran volumes can be easily replaced.”

The International Energy Agency estimates that there is around 1.1 mb/d of total global spare capacity that can truly be ramped up in a short period of time. A looser definition of spare capacity that encompasses the ability to add supply over several months puts the figure at about 3.4 mb/d, 60 percent of which is located in Saudi Arabia. Smaller additions come from the UAE, Kuwait, Iraq and Russia.

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Permian Bottlenecks Come At The Worst Moment

July 4, 2018

Permian Bottlenecks Come At The Worst Moment

The growing number of supply outages around the world are causing the oil market to become a lot more volatile, putting extra emphasis on every barrel that does or does not make it to market. That makes the infrastructure bottlenecks in West Texas a global concern.

There is quite a bit of debate about what’s going on in the Permian, and whether or not the shale industry will be able to keep up with heady production forecasts. The IEA predicts the U.S. will add 1.7 million barrels per day in 2018, followed by another 1.2 mb/d in 2019.

Obviously, the bulk of that is expected to come from the Permian, and while the IEA acknowledges pipeline bottlenecks in the Permian, it has not significantly altered its supply forecast. “While producers are bumping up against pipeline bottlenecks, supplies will continue to rise through 2019,” the IEA said in its June Oil Market Report.

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But by most accounts, the pipelines from the Permian to the Gulf Coast are either full or will be full in the next few months. That makes projections like the ones from places like the IEA look a bit optimistic, almost as if growth was simply extrapolated forward.

Others are more pessimistic. “We will reach capacity in the next 3 to 4 months,” Scott Sheffield, the chairman of Pioneer Natural Resources Co., told Bloomberg last month. “Some companies will have to shut in production, some companies will move rigs away, and some companies will be able to continue growing because they have firm transportation.”

The Permian has roughly 3.1 mb/d of takeaway capacity, plus local refining capacity. There is theoretically some 300,000 bpd of train capacity, but a lot of that is being used to move frac sand, according to S&P Global Platts.

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The Saudis Won’t Prevent The Next Oil Shock

June 28, 2018

The Saudis Won’t Prevent The Next Oil Shock

Saudi Arabia is starting to panic, and is growing concerned that the growing number of supply disruptions around the world could cause oil prices to spike. Saudi Arabia is moving quickly to head off a supply crunch, aiming to dramatically ramp up production to a record high 11 million barrels per day in July, according to Reuters.

The increase, if it can be pulled off, would be an incredibly rapid ramp up in output, up more than 1 million barrels per day (mb/d) from May levels.

How this plan fits into the latest OPEC+ deal remains to be seen. It was only a few days ago that Saudi Arabia and its coalition partners said that they would add 1 mb/d of supply back onto the market, with many of them acknowledging that, in reality, the figures would be closer to 600,000 bpd because of the inability of so many producers to ratchet up output.

As such, the addition of 1 mb/d from Saudi Arabia alone would lead to the OPEC+ group exceeding the production levels they just committed to, after factoring in additions from Russia and other Gulf States.

However, the surge in output does not need to exported, at least not right away. Saudi Arabia could divert extra barrels into storage. Moreover, higher output is needed during summer months anyway because the country burns oil for electricity, which spikes amid hot summer temperatures. So some of the extra production will be consumed domestically.

Still, an industry source told Reuters that the increase in output “will go to the market,” although the details are unclear. Bloomberg reports that shipments from Saudi Arabia to Aramco’s overseas storage facility in Egypt have already been on the rise this month.

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Europe Is Awash With Oil Stored On Ships

June 14, 2018

Europe Is Awash With Oil Stored On Ships

While many analysts and agencies have already called the end of the global oil glut, oil held in floating storage in Europe is at an at least 18-month-high, also due to the booming U.S. oil exports that have displaced some of the traditional crude oil routes in the world.

Oil in ships around European shores was 12.9 million barrels on average in May, accounting for 26 percent of all global floating storage, and more than Asia-Pacific’s 9.7 million barrels of oil stored, according to estimates by oil analytics company Vortexa, as carried by Reuters.

In the two preceding months, March and April, the share of oil in floating storage in Europe accounted for 10 percent of the global storage, compared to 40 percent stored in the Asia-Pacific region. But in May, the volumes of oil held in Europe—including in the Mediterranean—exceeded the oil held off the Asia Pacific coasts for the first time since at least early 2015, according to Vortexa.

Consultant Kpler has estimated that there are some 17 million barrels of oil stored on ships in northwest Europe—the highest since at least the beginning of 2016.

Soaring U.S. exports have upended some traditional buying patterns, as China, India, and Indonesia have purchased more U.S. crude at the expense of African crude grades from OPEC members Nigeria and Angola, and of some Middle Eastern crudes.

On the other hand, U.S. crude oil exports to Europe have also been rising lately, as U.S. oil is increasing in popularity with European refiners, often at the expense of oil cargoes from OPEC nations and Russia.

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It’s The Demand, Stupid! Is China About To Burst The Black Gold Bubble?

June 9, 2018

It’s The Demand, Stupid! Is China About To Burst The Black Gold Bubble?

For months we have heard about how the oil market’s over-supply ‘glut’ has been removed thanks to OPEC/NOPEC’s production cut deal and the narrative of ‘global synchronous recovery’ has buoyed the demand side of the equation – sending crude prices to four year highs (helped considerably by an increasing geopolitical risk premium, that is now evident more in Brent than WTI).

However, the last couple of weeks have turned ugly for the ‘no brainer’ record spec longs in crude oil as prices have tumbled (and President Trump has complained)..

The 50% surge in crude prices – and concurrent rise in gas prices at the pump – has begun to worry some that demand destruction looms. However, as The Wall Street Journal’s Nathaniel Taplin reports, what investors may not appreciate is that demand growth is also poised to slow in the world’s largest net oil importer last year, China.

Chinese petroleum demand still appears fine. Growth bounced back to a healthy 9% on the year in April, twice the rate in March. April’s petroleum burn was flattered, however, by exceptionally weak demand in the same month the year before – and probably by the official end of the government’s winter pollution controls, which had given a temporary shot in the arm to Chinese industry this spring.

Unfortunately the overall trend for the industrial and transport sectors – which together account for about 70% of Chinese oil demand – looks shaky.

Growth rates in freight traffic and electricity production both peaked in the third quarter of 2017, excluding January and February figures distorted by the Lunar New Year holiday.

Freight tonnage growth is now running at barely half the 11%-12% rate it reached in mid-2017.

Weakening global trade, driven partly by the slowdown in Europe, will put further downward pressure on those numbers.

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OPEC’s Dilemma: Demand Destruction Or Production Boost

June 5, 2018

OPEC’s Dilemma: Demand Destruction Or Production Boost

The early signs of discontent and demand destruction could be forcing OPEC’s hand, but increasing production carries its own risks.

OPEC and Russia are considering raising oil production in a few weeks’ time, and while much of the focus has (rightly) been on the supply outages in Venezuela and the potential for disruptions in Iran, the prospect of demand destruction also looms large for the cartel and its partners.

Oil forecasters had been predicting a blistering oil demand growth for 2018. But lately, those bullish forecasts are not looking quite as good, precisely because oil prices had climbed to their highest level in more than three years. For instance, in May the International Energy Agency revised down its forecast for demand growth for 2018 from 1.5 million barrels per day (mb/d) to 1.4 mb/d.

But a growing list of other signs should cause OPEC some concern, and might ultimately push the disparate members of the group into agreeing on higher output.

A nationwide truckers’ strike in Brazil paralyzed the country. Truckers were outraged by the soaring cost of fuel. The expense is made worse by the fact that Brazil’s currency, the real, has declined significantly this year, doubling the pain for motorists in the country. The strike led to enormous damage to the agricultural sector, and led to shortages of a wide array of basic goods. The country’s GDP is expected to take a significant hit.

That strike was followed up by an oil workers’ strike, which forced the temporary shutdown of a series of refineries. The workers, as well as the truckers and a wide swathe of the country, are outraged about the cost of fuel, and they demanded an end to the more market-based pricing for gasoline and diesel that was introduced several years ago.

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The Double-Edged Sword Of High Oil Prices

May 20, 2018

The Double-Edged Sword Of High Oil Prices

Rising oil prices were seen last year as a positive result of growing global growth and recovery, but a combination of factors is turning this benign view into a more sinister scenario.

On the supply side, the combined efforts of OPEC and Russia, leaky as the agreement has been, have managed to reduce the global oil surplus in just 18 months to bring the market largely into balance. As a result, oil prices have gradually risen during the period. It’s a trend most observers have been sanguine about, believing the U.S.’s tight oil producers, encouraged by rising prices, will increase output to ensure ample supply and keep a lid on oil prices getting ahead of themselves.

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But that benign view had not taken account of President Trump’s decision to rip up the Iran nuclear deal and, as a result, to reinstate sanctions, a move that will take place in two phases to give firms time to adjust.

According to The Telegraph, this will be done in two stages, on Aug. 6 and Nov. 4, allowing 90- and 180-day wind-down periods. In addition, the Treasury is to re-list Iranian individuals and entities in the Specially Designated Nationals (SDN) list, thus revoking special licenses and exceptions previously granted to individuals and companies to deal with Iran, making it all but impossible for firms with a U.S. presence or needing dollar clearing to deal with them.

Lastly, Iran’s crude oil sales will be limited under the National Defense Authorization Act of 2012, as the U.S. departments of State, Energy and Treasury will allow ongoing but reduced purchases of oil from Iran, termed “significant reduction exceptions” on a country-by-country basis if they demonstrate a commitment to substantially decrease oil purchases (usually at least a 20 percent reduction).

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OPEC: The Oil Glut Is Gone

May 15, 2018

OPEC: The Oil Glut Is Gone

OPEC said that the global oil supply surplus has nearly been eliminated, although the group is shifting its sights on lack of investment in upstream supply.

In OPEC’s May Oil Market Report, the group noted that non-OPEC supply continues to grow at a rapid rate, adding 0.87 million barrels per day (mb/d) in 2017, with expectations of another 1.7 mb/d in 2018, 89 percent of which will come from the U.S. In fact, non-OPEC supply is expected to outpace demand growth, even though demand will expand by a robust 1.65 mb/d this year.

But OPEC also warned that “non-OPEC capital expenditure (CAPEX), including exploration, increased by only 2% y-o-y. Moreover, it has seen a decline of around 42% compared to the 2014 level.” While that seems like a bit of a throw-away line given the enormous production increases from U.S. shale, the focus on upstream investment has been a growing point of emphasis for OPEC as it grapples with how to respond to a tightening oil market.

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Commercial stocks were only 9 million barrels above the five-year average in March, which is to say, stocks are probably already below the five-year average at this point. That means that OPEC has achieved its goal of shrinking the supply surplus.

That would suggest that the group begins to unwind the production cuts at its upcoming meeting in June, but there has been a reluctance to do so. Saudi Arabia is aiming for higher oil prices ahead of the IPO of Saudi Aramco, expected at some point in 2019. Related: Iran Sanctions Threaten The Petrodollar

Keeping the cuts in place for the remainder of 2018 (OPEC’s initial preference) would seem to require another justification now that inventories are back to the five-year average. Raising alarms about lack of upstream investment could offer such a pretext.

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

Could Oil Hit $100?

May 12, 2018

Could Oil Hit $100?

Oil prices have continued their climb following a week of bullish news, and with geopolitical tensions reaching a boiling point, prices are poised to head even higher.

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Friday, May 11, 2018

Iran continues to dominate the headlines, keeping WTI above $71 per barrel and Brent at $77 per barrel as of early trading on Friday. The exchange of airstrikes between Iran and Israel is also adding to the tension. Meanwhile, aside from the huge increase in U.S. oil production, the EIA reported some bullish figures this week – a decline in both crude oil and gasoline inventories by more than expected.

OPEC sees Iranian outage as not immediate. Any loss of supply from Iran due to U.S. sanctions will take time, and OPEC won’t rush to increase output in the interim, sources told Reuters. The steep losses from Venezuela combined with the potential disruption in Iran could force OPEC to adjust production levels earlier than it had expected. But because U.S. sanctions don’t really take effect until November, OPEC is not scrambling just yet. “I think we have 180 days before any supply impact,” an OPEC source said. They will meet in Vienna in a month to evaluate the current status of the oil market and the production limits.

Short-term supply glut eases Iran fears. Although supply outages from Iran could severely tighten the oil market, Bloomberg reports that there is currently a bit of a supply glut, which should prevent a sudden price spike. Oil traders have reported unsold cargoes in north-west Europe, the Mediterranean, China and West Africa. The sudden emergence of a temporary glut is reflected in the Brent timespreads, with the July-August spread falling from 63 cents per barrel last month to just 24 cents per barrel this week, a five-month low. The narrowing of the spread is a “sure sign of an oversupplied market,” Bloomberg reports.

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