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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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Are Oil Markets Underestimating Iran’s Threats?

July 26, 2018

Are Oil Markets Underestimating Iran’s Threats?

Iranian officials have suggested that they could shut the Strait of Hormuz if the U.S. moved to completely disrupt Iranian oil exports, a dire scenario that would present a supply shock to the oil market.

The prospect of an outage at the Strait of Hormuz repeatedly crops up when tensions between the U.S. and Iran deteriorate, but most analysts dismiss the idea as fanciful.

But the scenario may not be as outlandish as is commonly thought. Bob McNally, founder and president of energy consultancy The Rapidan Group, said that the U.S. is waging economic war against Iran and when a country is backed into a corner like that, “there has to be some risk that the country will lash out, even if it’s against a bigger power.”

“I think the market’s a little complacent,” he told CNBC, referring to the lack of movement in oil prices following the exchange of threats between Rouhani and Donald Trump. He said that Iran has much less leverage compared to 2012 when it was enriching uranium and oil prices were much higher. With oil prices much lower, Iran’s leverage is weaker, which could lead it to take drastic measures, such as shutting the Strait of Hormuz. It’s a “credible threat,” McNally said.

Obviously, that would send oil prices skyrocketing. “When you talk about Iran’s exports, that’s about 2.5 million barrels per day, but if you talk about interrupting the Strait of Hormuz, that’s 19 million barrels a day,” he said. “About 30 percent of…seaborne-traded oil goes through that strait. So that’s a much bigger problem.”

The real pain would depend on the length of the outage. Most analysts argue that the U.S. Navy would beat back Iranian attempts to close the Strait and would manage to reopen the shipping lane in a matter of days.

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

Trump Tariffs Could Delay Permian Relief

July 20, 2018

Trump Tariffs Could Delay Permian Relief

The oil and gas industry hoped they would be spared from Donald Trump’s trade war, but the Permian basin was just hit with some bad news.

The Permian basin has run up against a bottleneck for pipeline capacity. Gushing oil from West Texas will surpass the available space on the region’s pipelines this year, which could force output growth to suddenly plateau after expanding at a blistering pace over the past few years. New pipelines are still a year away.

One of the crucial pipeline projects slated to come online at some point next year is the Plains All American Pipeline LP’s Cactus II project, which will ferry 585,000 bpd crude oil from the Permian basin to the Gulf Coast at Corpus Christi.

Plains All American sent a request to the Trump administration, seeking an exemption from the 25 percent tariffs on imported steel. An industry estimate finds that about three-quarters of all the steel used in oil and gas pipelines comes from abroad, often because projects use a special type of steel that is hard to find domestically.

The Trump administration just shot down the request from Plains All American, the first rejection for a major oil and gas project. The denial could significantly raise the cost of the $1.1 billion Cactus II pipeline. The Commerce Department justified its rejection by arguing that there was sufficient supply of steel found within the United States.

A long line of other companies are also seeking exemptions, and the Commerce Department has to go through one by one. The agency has granted 267 exemptions and denied another 452, according to Reuters. There have been over 25,000 requests. Royal Dutch Shell and Chevron recently received an exemption on steel used in specific types of equipment for their offshore drilling projects in the Gulf of Mexico.

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Oil Prices At Risk Of Economic Downturn

July 19, 2018

Oil Prices At Risk Of Economic Downturn

Oil prices have retreated as disrupted supply from Libya has started to come back online, threatening the recent gains in oil prices. But a bigger threat to crude over the second half of 2018 and into 2019 is a slowdown in the global economy.

The International Monetary Fund warned in its latest World Economic Outlook that a series of threats to economic growth are brewing. The Fund maintained its projection for solid global GDP growth of 3.9 percent for both 2018 and 2019 – rather robust figures – but said that “the expansion is becoming less even, and risks to the outlook are mounting.”

“Growth generally remains strong in advanced economies, but it has slowed in many of them, including countries in the euro area, Japan, and the United Kingdom,” the IMF said.

As John Kemp of Reuters points out, these are signs that the U.S. economy is in a late stage of an economic growth cycle, with growth topping out, inflation picking up, rising interest rates and an inversion in the yield curve for U.S. treasuries, which tends to precede recessions.

As has happened in the past, the last phase of an economic expansion has often coincided with a surge in oil prices, which is then followed by both a dip in oil prices and an economic contraction. The recessions following the price spikes in 1973 and 2008 are the most obvious, but not the only examples.

Others take a different tack, arguing that rising oil prices need not be a drag on the economy. “[T]he rise in oil and commodity prices today is leading to a recovery in pricing power for commodity companies and an improvement in terms of trade for commodity-exporting nations, thus providing support to capex in these segments,” Morgan Stanley’s chief economist and global head of economics Chetan Ahya wrote in May.’

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

Trump’s Ultimate Move To Lower Gasoline Prices

July 17, 2018

Trump’s Ultimate Move To Lower Gasoline Prices

President Trump is reportedly considering tapping the strategic petroleum reserve to lower gasoline prices in an effort to neuter a political threat ahead of key midterm elections in November.

Sources told Bloomberg that options are under consideration by the Trump administration, ranging from a minor 5-million-barrel test sale, a symbolic amount, to a more sizable release of 30 million barrels. A more aggressive option could entail a larger release, combined with coordinated stockpile releases from other countries. No decisions have been made.

“An SPR release would have a psychological impact on the market. It may not translate into lower gasoline prices, but it would immediately bring down crude prices, at least temporarily, until the market adjusts,” Joe McMonigle, senior energy analyst at Hedgeye Risk Management LLC, told Bloomberg.

“It’s unclear whether the U.S. will actually use the emergency inventories, but we can at least tell that they feel a lot of pressure from crude trading above $70,” Ahn Yea Ha, an analyst at Kiwoom Securities Co., said in a Bloomberg interview.

National gasoline prices are hovering just below $3 per gallon, the highest price in more than three years. However, the rally in crude oil prices has stalled and reversed over the past week, with Libya in the process of restoring the 800,000 bpd that had been disrupted. News of Libyan oil trickling back online led to a sharp selloff in crude prices last week.

Monday saw another steep decline in prices, and WTI is back below $70 per barrel. Saudi Arabia said that it would expand its production, offering more volumes to Asian buyers. Russia’s energy minister also said that the OPEC+ coalition could add more than the 1 million barrels per day that they agreed to in June, if needed.

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

Record Oil Production Doesn’t Free U.S. From Global Market

July 16, 2018

Record Oil Production Doesn’t Free U.S. From Global Market

In the first week of July, U.S. net imports of petroleum products fell to just 1.670 million barrels per day (mb/d), the lowest weekly total on record in at least three decades.

The decline of net imports comes as the U.S. has ramped up oil production in the last few years, which affects the net import figure in two ways. Surging oil output cuts out the need for imports. Also, a steady increase in exports also pushes down the net import figure.

Crude oil exports hit a high of 3 mb/d in the third week of June.

However, the net import figure has been falling for years, and a large part of that is the fact that the U.S. has been scaling up exports of refined products, including gasoline, distillate fuel oil and propane, among others. This trend dates back longer than the recent run up in crude exports.

In 2005, weekly net imports peaked, routinely topping 13 mb/d. Now that figure has plunged to less than 2 mb/d.

With a zero net import bill in sight, is the U.S. on the verge of energy “independence,” the long sought-after goal that has been promised by just about every president dating back to Richard Nixon?

Not exactly. While the U.S. may not need oil and refined product imports in the same way that it used to, the U.S. is still completely enmeshed and intertwined with the global market. In fact, as output of oil and refined products dramatically increased over the past few years, the volume of trade also rose sharply. “Far from reducing interaction with the world, higher [light tight oil] output has contributed to increased traffic as U.S. refiners seek to diversify their crude slate and producers look for new markets,” the IEA wrote in its latest Oil Market Report.

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Oil Prices Crash As Libya Resumes Production

July 12, 2018

Oil Prices Crash As Libya Resumes Production

Oil prices fell sharply on Wednesday on news that Libya was suddenly set to restore hundreds of thousands of barrels per day, and the U.S. struck a softer line on Iran sanctions.

Brent sank more than 6 percent during midday trading on Wednesday, as Libya’s National Oil Corp. (NOC) said that it would lift the force majeure on several major export terminals and resume shipments of oil.

The standoff with General Khalid Haftar appeared to be on its way to some sort of resolution, with the militia handing the ports back over to the internationally-recognized NOC in Tripoli. As is always the case with Libya, the situation is fluid, and any return of production does not come with a guarantee that it will be sustained.

But for now, some 700,000 bpd could swiftly come back online. The outage in Libya had helped drive up oil prices over the past few weeks, fueling speculation that Saudi Arabia would need to burn through much of its spare capacity in order to keep the market well-supplied. The timing was also crucial: Libya’s outage was unexpected, and it came just as Canada temporarily lost 350,000 bpd and the expected interruptions from Iran were revised higher due to a hardline from the U.S. on sanctions.

“The lifting of force majeure at all the Libyan ports will certainly come as relief from a supply perspective, but it remains to be seen how quickly exports can return to normal,” Harry Tchilinguirian, head of oil strategy at BNP Paribas, told Reuters Global Oil Forum.

Another factor pushing down oil prices midweek were the comments from U.S. Secretary of State Mike Pompeo, who seemed to soften America’s position as it relates to how severely it would treat countries buying Iranian oil.

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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.

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

How Bad Is Iran’s Oil Situation?

July 9, 2018

How Bad Is Iran’s Oil Situation?

The U.S. government has continued its attempts to shut down Iran’s oil exports, and in recent days Iranian officials responded by threatening to block the Strait of Hormuz. Such an outcome is highly unlikely, but the war of words demonstrates how quickly the confrontation is escalating.

Oil prices spiked in late June when a U.S. State Department official said that countries would be expected to cut their imports of oil from Iran down to “zero.” The official also suggested that it would be unlikely that the Trump administration would grant any waivers.

This hard line stance fueled a rally in oil prices as the oil market was quickly forced to recalibrate expected losses from Iran, with a general consensus changing from a loss of around 500,000 bpd by the end of the year, to something more like 1 million barrels per day (mb/d), or even as high as 2.0 to 2.5 mb/d in a worst-case scenario in which all countries comply.

A loss of that magnitude would be hard to offset, even if Saudi Arabia decides to burn throughall of its spare capacity.

That led to a dialing back of the rhetoric from the Trump administration, or so it seemed. A follow-up statement from the State Department suggested that the U.S. government would work with countries on a “case-by-case basis” to lower Iranian oil imports. High oil prices seemed to put pressure on Washington.

But for now, there is no policy shift. “I think there’s going to be very few waivers. That’s what we’re hearing all the time from officials across the administration. I think it’s a very strong policy decision,” Brenda Shaffer, an adjunct professor at Georgetown’s School of Foreign Service, told Oilprice.com.

Time will tell, but early evidence suggests that the Trump administration is having success convincing top buyers of Iranian crude to curtail their purchases.

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

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.

(Click to enlarge)

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.

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

Saudi Arabia Won’t Bring 2 Million Bpd Online

July 3, 2018

Saudi Arabia Won’t Bring 2 Million Bpd Online

President Trump said in a tweet on Saturday that Saudi Arabia agreed to boost oil production by 2 million barrels per day (mb/d), a claim that surely came as news to the Saudis.

✔

Just spoke to King Salman of Saudi Arabia and explained to him that, because of the turmoil & disfunction in Iran and Venezuela, I am asking that Saudi Arabia increase oil production, maybe up to 2,000,000 barrels, to make up the difference…Prices to high! He has agreed!

7:37 AM – Jun 30, 2018

The tightening of the oil market has pushed up prices, which is always a concern for U.S. politicians wary of catching heat from their constituents.

The decision by OPEC+ in June to hike production by 1 mb/d looks increasingly inadequate in dealing with the growing number of supply outages around the world. It’s no surprise that Trump wants more Saudi oil on the market, but he likely misunderstood what the Saudis told him.

Saudi Arabia was producing 10 mb/d in May and recent reports suggest they might add as much as 800,000 bpd to 1 mb/d in July, a massive increase in such a short period of time.

But it’s a far cry from the 2 mb/d that Trump thinks Saudi Arabia will add. That would translate into overall production of around 12 mb/d, which is probably unrealistic for a few reasons.

First, there are technical questions about how far and how fast Saudi Arabia can push its oil fields. Can they ramp up to 12 mb/d? Probably, but there is not a lot of historical evidence to go on. Also, they probably can’t do it immediately, it would take time, perhaps more than a year.

The second – and more important – reason why Saudi Arabia won’t comply with Trump’s wishes to add another 2 mb/d onto the market is that they don’t want to.

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

Mexico’s New President Has The Energy Sector On Edge

July 3, 2018

Mexico’s New President Has The Energy Sector On Edge

Mexico’s historic energy reforms are now in focus with a change in administrations on the way.

Andrés Manuel López Obrador (AMLO) won a landslide victory in Mexico’s presidential election on Sunday, and appears poised to win majorities in both houses of Congress, granting him sweeping power to remake the country. His party, Morena, also won a large number of governor’s races and AMLO’s former environment minister from when he was mayor of Mexico City followed in his footsteps and won the election for mayor in the capital city.

The Mexican people, fed up with widespread corruption, poverty and violence, have handed AMLO a stronger mandate than any Mexican president in decades.

AMLO has long supported a nationalistic outlook on energy, and spent years criticizing the liberalization of Mexico’s energy reform. He repeatedly said that he would halt future auctions of Mexico’s offshore oil and gas reserves, while also promising to investigate already-awarded contracts for cases of fraud.

AMLO’s election has the oil and gas industry on edge, which fears that a swing to the left imperils its investments in the country. The majorities in Congress for AMLO’s Morena party could also neuter the strongest checks on his power.

However, the energy reforms passed under President Enrique Pena Nieto were codified with constitutional changes, which throws up a very high bar for to clear for any changes, meaning that AMLO, despite his landslide victory, still faces a steep uphill battle to roll back the partial-privatization of the oil and gas sector, if he were to go down that road.

AMLO has also suggested he would curtail or even end crude oil exports, diverting supplies for domestic refining. Mexico’s aging refineries are operating way below capacity, and Mexico has become increasingly dependent on imported fuel from the United States.

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

Can Trump Counter Soaring Gasoline Prices?

June 29, 2018

Can Trump Counter Soaring Gasoline Prices?

Oil prices surged to their highest level in more than three years on Thursday, as the number and volume of supply outages continues to rise. The odds of a significant shortfall in supply are also growing by the day. With U.S. midterm elections nearing, the more oil prices continue to rise, the more likely it is that President Trump decides to tap the strategic petroleum reserve (SPR) to tamp down oil prices just ahead of the November vote.

The 180-degree turnaround in the oil market from May is pretty staggering, even for an oil market steeped in volatility and uncertainty. In late May, rumors of higher output from Saudi Arabia and Russia led to a crash in prices, and led to speculation of another lengthy downturn. By late June, however, it isn’t clear that even a massive 1-million-barrel-per-day increase from OPEC+ will be enough to fill the worsening supply gap.

That means higher oil prices are likely. WTI has spiked by about $8 per barrel since last week, and continues to climb higher. “We are in a very attractive oil price environment and our house view is that oil will hit $90 by the end of the second quarter of next year,” Hootan Yazhari, head of frontier markets equity research at Bank of America Merrill Lynch, said. “We are moving into an environment where supply disruptions are visible all over the world… and of course President Trump has been pretty active in trying to isolate Iran and getting U.S. allies not to purchase oil from Iran,” he added.

As has been widely reported, the Trump administration has aggressively pressed Saudi Arabia to boost output to offset declines from Iran. Saudi Arabia has complied, promising to ramp up output to about 11 mb/d in July, up from less than 10 mb/d in May. It’s an astounding increase, both in terms of volume and the speed of the increase.

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

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.

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

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.

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

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