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The OPEC+ group has decided to increase output by aiming to return compliance back to 100 percent, rather than the “over compliance” the group has posted to date. Although it remains to be seen how that translates into tangible production increases, because the number most kicked around was about 600,000 bpd, which is a rough figure that the markets will be assuming.

The decision will still leave the oil market rather tight on supply, and could require further action in the not-so-distant future.

Still, there are several reasons why OPEC+ feels compelled to increase production. First, the oil market is already in a supply deficit, and in fact, it may have been experiencing a deficit for four straight quarters, according to Bank of America Merrill Lynch. In 2017, the supply gap averaged 340,000 bpd, evidence that the original OPEC+ agreement succeeded in draining inventories last year.

The inventory drawdown led to total stocks dropping below the five-year average, a development that likely occurred several months ago, although data is published on a lag.

A second reason OPEC+ needed to increase supply is because demand continues to grow at a strong pace. The IEA pegs demand growth at 1.4 million barrels per day (mb/d) this year compared to 2017; more bullish analysts like Goldman Sachs estimated demand growth at 1.7 mb/d. The forecasts may vary, but either way, demand looks robust, which would likely exacerbate the supply gap as the year wears on.

On top of that, demand rises seasonally in the summer months. According to Rystad Energy, demand could jump by 1.1 mb/d in the third quarter from the second quarter. Read that again. That is 1.1 mb/d quarter-on-quarter growth, not compared to 2017 levels. Of course, that seasonal demand will ease after the summer, but the strain on the market cannot be ignored.

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IEA: Oil Prices Could Rise Further As Shale Can’t Fill The Gap

June 14, 2018

IEA: Oil Prices Could Rise Further As Shale Can’t Fill The Gap

U.S. shale will continue its breakneck growth rate into 2019, despite bottlenecks, but the oil market still faces serious supply risks from the potential losses from Venezuela and Iran, the International Energy Agency (IEA) said in a new report.

The IEA said that the run up in oil prices in the last few months dampened oil demand growth, although the agency left its forecast for oil demand growth unchanged at 1.4 million barrels per day, after downgrading that estimate last month. Subsidies and price regulation in a growing number of countries, intended to blunt the impact of rising fuel prices, could keep demand growth on track, despite oil prices trading significantly higher than, say, a year ago.

Looking ahead to 2019, the IEA thinks that oil demand growth will expand by yet another 1.4 mb/d, this time with the help of the petrochemical sector. A number of projects are coming online earlier than expected, adding more consumption to the mix. The demand estimate is a rather strong one, given substantial expansion in demand over the past few years.

There are risks to that forecast, including “a weakening of economic confidence, trade protectionism and a potential further strengthening of the US dollar,” the IEA said. Those factors should not be overlooked. Indeed, strong demand does not stand independent of the price variable, for instance. How this plays out is unclear, but with the oil market now much tighter than at any point in the last few years, strong demand going forward will start to drive up prices much more than it did in the past.

The supply side of the equation is much more interesting. On the positive side of the ledger, the IEA sees non-OPEC supply growing by 2 mb/d in 2018, followed by another jump of 1.7 mb/d in 2019. The U.S. makes up three quarters of both of those figures.

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Geopolitical Tensions Reach Boiling Point Ahead Of OPEC Meeting

June 11, 2018

Geopolitical Tensions Reach Boiling Point Ahead Of OPEC Meeting

The upcoming OPEC meeting on June 22 is shaping up to be a contentious one, after news broke that the U.S. government asked Saudi Arabia to increase oil production before Washington pulled out of the Iran nuclear deal.

Earlier last week, news surfaced that the U.S. government asked Saudi Arabia to boost output to relieve pressure on prices. But Reuters followed up with a report on June 7, adding more context to that story. According to Reuters, a high level Trump administration official called Saudi Arabia a day before Trump was set to announce the U.S. withdrawal from the Iran nuclear deal, asking for more oil supply to cover for disruptions from Iran.

The last time the U.S. government pressured OPEC into adding supply, it was also over Iran. The Obama administration wanted the cartel to offset disrupted Iranian production, after an international coalition put stringent sanctions on Iran in 2012. Roughly 1 million barrels per day were knocked offline.

While the Trump administration’s request might irk OPEC members, with Iran obviously the most aggrieved, the apparent willingness of Saudi Arabia to comply with Washington’s request has ignited furor from within the group.

“It’s crazy and astonishing to see instruction coming from Washington to Saudi to act and replace a shortfall of Iran’s export due to their Illegal sanction on Iran and Venezuela,” Iran’s OPEC governor, Hossein Kazempour Ardebili, said in comments to Reuters. He said that OPEC would not simply comply with Washington’s requests. “No one in OPEC will act against two of its founder members,” he said, referring to Iran and Venezuela. “The U.S. tried it last time against Iran, but oil prices got to $140 a barrel.”

“OPEC will not accept such a humiliation. How arrogant and ignorant one could be (to) underestimate the history of 60 years’ cooperation among competitors,” he said.

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Higher Oil Prices Might Not Destroy Demand Growth

June 8, 2018

Higher Oil Prices Might Not Destroy Demand Growth

The recent jump in oil prices to $80 per barrel raised a lot of questions about whether or not the heady demand growth projections for this year would hold up. In fact, signs of strain quickly popped up in disparate parts of the world. But as governments move to protect their citizens from high fuel prices (and to protect their political positions), demand might not be as price sensitive as analysts tend to think.

The history of oil price cycles show demand is highly sensitive to sharp increases in prices – demand took a hit in 1973, the early 1980s, the extraordinary 2005-2008 price increase, and the 2011-2014 period, when prices routinely topped $100 per barrel.

That record provides some guidance about what we should expect. Brent hit $80 per barrel for the first time in more than three years in May, a price level that would start to test the durability of demand growth. The run up in prices coincided with some early signs that consumers were losing their patience.

For example, U.S. President Donald Trump complained to OPEC in April about “artificially” high prices, and reportedly sent a request to the Saudis for higher output recently. Crippling protestsin Brazil brought the economy to a standstill and led to the ouster of the CEO of Petrobras. The International Energy Agency revised down its forecast for demand growth this year by 100,000 bpd, citing high prices.

Just as prices started to become painful, the OPEC+ coalition felt compelled to change course, and are on the verge of increasing output. Even with the recent price correction, demand threats still loom. The U.S. Federal Reserve continues to hike interest rates, which is strengthening the U.S. dollar and making dollar-denominated debt more painful to service. That is putting a strain on emerging market demand. The currencies of Argentina and Turkey have been slammed in the past few months.

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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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Who’s To Blame For High Gasoline Prices?

May 25, 2018

Who’s To Blame For High Gasoline Prices?

As retail gasoline prices rise to $3 per gallon across the United States, gas prices are a hot political topic in Washington once again, with the Democrats hoping to slam Donald Trump for causing pain at the pump and Republicans trying to shift blame back on their opponents.

High gasoline prices have long presented dangers for politicians, particularly for those in power when prices rise. The debates often make for great political theater, although they typically fall far short on the substance.

The spike in crude oil prices in 2008, during the heat of the presidential election, popularized the “drill, baby, drill” slogan and also led to calls from both Senators John McCain and Hillary Clinton for a “gas tax holiday” – a temporary suspension in federal gas taxes.

During the Arab Spring in 2011, and the outage of oil supply in Libya, prices spiked again. Republicans blamed former President Obama for high prices, charging that his refusal to allow more drilling caused prices to rise. His release of oil from the strategic petroleum reserve also came under criticism. Years later, when prices crashed because of the oil market downturn, Obama took credit for low gasoline prices.

We haven’t heard much about gas prices since 2014, but with WTI over $70 and gasoline back to $3 per gallon, suddenly it is a hot topic again.

The Democrats held a press conference on Wednesday in front of an ExxonMobil gas station in Washington to blast the Trump administration for high gasoline prices. “It’s time for this president to stand up to OPEC,” Senate minority leader Chuck Schumer said. That was accompanied by a letter by several top Democratic Senators asking Trump to “pressure” OPEC to “increase world oil supplies in order to lower prices at the pump during the upcoming summer driving season.” They noted that the run up in gas prices could cancel out the benefits of the tax cuts from last year.

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Permian Growth Is Reaching Its Limits

May 24, 2018

Permian Growth Is Reaching Its Limits

The Permian isn’t just suffering from a bottleneck for oil, but also for natural gas.

In 2016, for instance, gas flows leaving the Permian typically clocked in at about 3.6 billion cubic feet per day (Bcf/d), according to S&P Global Platts. That number has ballooned to 6.3 Bcf/d as of May 2018.

Obviously, the surge in gas flows from the Permian is the result of a massive increase in gas production. Gas output has surged more than 135 percent since 2013 and is expected to rise to just shy of 10.5 Bcf/d (including natural gas liquids) in June 2018. The problem is that the region’s ceiling on takeaway capacity stands at about 7.3 Bcf/d.

Skyrocketing natural gas production has unsurprisingly weighed on regional prices. According to S&P Global Platts, natural gas prices at the Waha Hub in West Texas traded at an 8-cent per MMBtu discount to Henry Hub two years ago, but that discount widened to about $1/MMBtu this month.

With so much gas on their hands, Permian drillers have resorted to higher rates of flaring. The Environmental Defense Fund estimates that top Permian producers are flaring as much as 10 percent of their gas. “This flaring is so extreme, it can be seen from space,” EDF says. “In 2015 alone, enough Texas Permian natural gas was flared to serve all of the Texas household needs in the Permian counties for two and a half years.”

S&P Global Platts reported that gas flows to Mexico have increased over the past few weeks, relieving some pressure. But infrastructure within Mexico hasn’t been able to keep up with the supply of gas north of the border, so some of the pipelines are under-utilized. In any event, the gas volumes moving to Mexico will be swamped by new supply coming online in the Permian. At some point, the glut of gas could force curtailments in drilling.

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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.

(Click to enlarge)

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…

Higher Oil Prices Look Likely

May 14, 2018

Higher Oil Prices Look Likely

The path to higher oil prices seems pretty clear, but it isn’t inevitable.

There are plenty of reasons why the oil market is suddenly on edge, and why oil prices are at their highest level since 2014. Venezuela’s oil production is falling off of a cliff, and could fall faster now that creditors are swarming over the country. The upcoming presidential election risks a financial crackdown from the U.S. Treasury, threatening to add to the country’s woes.

The more obvious catalyst over the past week was the U.S. withdrawal from the Iran nuclear deal, putting a sizable chunk of Iranian supply at risk, although exactly how much remains to be seen.

Most importantly, the underlying fundamentals are bullish: the supply/demand balance is tighter than at any moment in recent memory, with demand expected to outpace supply for the rest of the year. Global inventories are back down to the five-year average, and falling. Because data is published on a lag, the market could overtighten before OPEC realizes it.

U.S. shale is the one factor keeping prices in check, having added more than 1 million barrels per day (mb/d) since last September. The EIA sees output growing to 11.9 mb/d in 2019 (ending the year at over 12 mb/d), up from 10.5 mb/d a month ago. In other words, the agency is baking in an additional 1.5 mb/d of extra supply over the next year and a half.

That should keep a lid on prices.

But what if all that fresh supply doesn’t actually make it online? U.S. shale production is exploding, but is also running up against serious pipeline constraints that are pushing down prices in West Texas and threaten to severely slow development. While WTI in Cushing is above $70 per barrel, oil in Midland is selling in the high-$50s per barrel.

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How Much Iranian Oil Can Trump Disrupt?

May 11, 2018

How Much Iranian Oil Can Trump Disrupt?

Oil prices surged following President Trump’s withdrawal from the Iran nuclear deal. So, what happens next?

Trump did not offer any new justification for how Iran was violating the nuclear accord – the IAEA confirmed on May 9 that Iran is in compliance with its nuclear commitments – and offered no Plan B or even a coherent strategy on what comes next. For now, Washington is pursuing confrontation with Iran, and hoping that “maximum pressure” will force Iran to not only abandon any hint of a nuclear weapons program, but also agree to concessions on a range of non-nuclear issues. If history is any guide, there is little chance of this happening, so we are now on a course of escalating confrontation.

The U.S. will re-impose all nuclear related sanctions on Iran, which could begin to disrupt oil flows from the country. There will be a 90-day and 180-day wind down period before sanctions really start to bite, which puts the deadline at early November. However, there is a great deal of disagreement and uncertainty over how quickly and how severely the impact of U.S. confrontation will be.

The U.S. will not have the coalition that shut in 1 million barrels per day (mb/d) of Iranian oil exports prior to the 2015 agreement. The EU, China and Russia have said they are sticking with the deal. Still, U.S. sanctions will loom over private companies from those nations, which could keep them from doing business with Iran. The EU has vowed to protect its companies, and could even pursue trade retaliation if the U.S. Treasury moves to penalize European companies. However, U.S. sanctions will almost certainly deter large-scale investment in Iran’s oil and gas sector for years to come.

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

The Future Of U.S. Oil Relies On A Single Play

May 8, 2018

The Future Of U.S. Oil Relies On A Single Play

U.S. oil production recently broke another record, jumping to 10.619 million barrels per day (mb/d) in the last week in April, and the sky seems to be the limit for U.S. shale drillers. However, the fate of U.S. oil, and ultimately a large slice of total additional output for the entire world, is all predicated on aggressive forecasts from one place: the Permian Basin.

Total global oil production is expected to rise by 6.4 mb/d by 2023, according to the International Energy Agency.

Offshore Mexico and Brazil are set to see higher levels of spending and development, and the IEA sees higher output from Iraq, the UAE and Kuwait over the next few years. Still, the U.S. accounts for 3.7 of the 6.4 mb/d of new supply through 2023.

In other words, more than half of all new production over the next five years will come from the U.S., and almost all of that will come from the Permian. The Bakken edges up a bit but declines again, as does the Eagle Ford. For all intents and purposes, U.S. shale has basically peaked outside of the Permian.

In that context, it is not an exaggeration to say the Permian is the most important place on the planet in terms of new oil supply.

Image source: artberman.com

Permian production is expected to double between 2018 and 2023, rising to 4.1 mb/d. That means that West Texas will be producing nearly as much oil as Iraq, OPEC’s second largest producer.

The oil market – and thus, the global economy – appears to be highly vulnerable with so much of the world’s supply growth dependent on one location.

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

Will Higher Oil Prices Destroy Demand?

May 4, 2018

Will Higher Oil Prices Destroy Demand?

Oil prices have dipped a bit this week, but still remain at their highest levels in nearly three and a half years. The reasons are by now familiar to most readers who pay attention to the daily whims of the oil market: OPEC cuts, falling inventories, geopolitical unrest and strong demand growth, to name a few.

But at what point do higher prices start to destroy some of that demand, erasing one of the most significant bullish factors influencing the market right now? As John Kemp over at Reuters points out, there isn’t a magical threshold in which demand is humming along swimmingly and then suddenly drops off a cliff. There isn’t a binary response in that way.

Consumers respond in different ways to different prices, and the duration of high prices also matters quite a bit. Auto fleet turnover takes time, and people don’t rush out and buy a more fuel efficient car immediately when prices spike. And as John Kemp rightly argues, demand will likely take a hit before we can detect it in the data.

Nevertheless, demand is sensitive to prices, which is to say it will slow or even decline if prices rise high enough. A brief look at recent history bears that out. Crude oil prices saw a historic run up in prices in the years preceding the 2008 record high spike and subsequent meltdown. That rally essentially ended a century-long upward trend in demand, which hit a high above 21 million barrels per day (mb/d) in the U.S. in 2006-2007. The financial crisis, a terrible economy, more efficient cars and a somewhat saturated auto market led to a temporary peak in oil demand, which was followed by several years at lower levels.

(Click to enlarge)

When oil prices rose back to $100 per barrel in 2011 following the Arab Spring, demand dipped even further.

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China’s Oil Futures Are Gaining Momentum

April 30, 2018

China’s Oil Futures Are Gaining Momentum

China’s new oil futures contract is gaining some momentum as a fixture on the global oil market, although hurdles remain before it can become a key benchmark for Asia.

China launched its yuan-denominated oil benchmark in March to much fanfare, after years of planning and delays. The logic of starting up an oil futures contract in China is obvious. China is the largest crude oil importer in the world, and its growing appetite for crude has increased the urgency to establish a contract based on local supply and demand conditions. Importing such heavy volumes at dollar-denominated prices exposes Chinese refiners and consumers to currency risk. A yuan contract mitigates some of that risk.

Beyond those concerns, the yuan contract also augments the global status of the Chinese currency. China is the world’s second largest economy and shifting more global trade into yuan advances Chinese influence.

However, the new contract on the Shanghai International Exchange still has to overcome some hurdles before it can be taken seriously as a premier benchmark in the global oil market. Just because the contract was launched does not mean it will become dominant, or even relevant. Previous contracts have failed to garner sufficient liquidity and ultimately have been discontinued or have wallowed in irrelevance.

The Dubai Mercantile Exchange’s Oman futures contract has been somewhat reflective of conditions in the Asian market, incorporating medium and heavy sour blends. But “its daily traded volume and open interest (number of contracts outstanding) have remained at low levels since its inception in 2007, indicating it is not actively used among market participants,” the EIA wrote last week.

As Reuters noted in early April, there are several ingredients for success. First, the contract must serve a need for hedging. Second, it has to attract enough traders in order to build liquidity. Finally, restrictions on trading, speculation, and capital controls must not be too onerous.

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

Saudi Arabia’s $100 Oil Dilemma

April 23, 2018

Saudi Arabia’s $100 Oil Dilemma

Saudi Arabia is rumored to want oil prices at $100 per barrel, but if prices rise that high, it could sow the seeds of the next downturn.

Saudi officials want more revenues for their budget and a higher oil price to bolster the valuation of the Aramco IPO. But that short-term thinking could spell trouble not just for them, but also for oil prices, and ultimately for longevity of oil demand.

As Liam Denning of Bloomberg Gadfly points out, in the past decade, while oil prices have surpassed $100 per barrel for periods of time, they didn’t stay there for very long. In 2008, when oil nearly hit $150 per barrel, it was quickly followed by the financial crisis and a deep U.S. recession. Then, the period between 2011 and 2014, when oil was north of $100 per barrel, U.S. shale crashed the market with a wave of fresh supply.

If Saudi Arabia aims to drive up prices to triple-digit territory once again – and to be sure, that is only a rumor at this point – there are plenty of ways that could merely create the conditions for another bust.

First, oil prices are rising, in part, because demand is so strong, not just because OPEC is keeping barrels off the market. Oil at $100 would essentially amount to a doubling of the price from the past few years, which would quickly put an end to high demand growth rates.

A corollary to this is that $100 oil would likely impact economic growth. The economic recovery from the financial crisis in 2008 is almost a decade old at this point, much longer than the average upswing. History suggests that we are due for a recession at some point in the not-so-distant future. A spike in fuel prices around the world could help bring that on.

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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…

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