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IEA Sees $90 Crude Ahead Of Oil’s Downfall

IEA Sees $90 Crude Ahead Of Oil’s Downfall

Petchem

Global oil demand will plateau around 2030, according to a major new report, but the decline in demand is way too slow to head off the worsening effects of climate change.

Oil demand begins to flatten out in the 2030s “under pressure from rising fuel efficiency and the electrification of mobility,” The International Energy Agency (IEA) said in its widely-anticipated annual World Energy Outlook.

However, the agency does not see a peak in CO2 emissions through 2040, even in a scenario that incorporates some intended policy targets. The IEA says that an expanding economy and growing global population outweigh efforts to cut emissions. Reducing emissions will require “significantly more ambitious policy.”

“The dissonance between the rising trend for CO2 and the commitment of countries to reach an early peak in emissions was especially striking in the light of the latest scientific findings from the Intergovernmental Panel on Climate Change,” the IEA said, referring to the rather dire conclusions from the IPCC report in 2018, which found that the world is running out of time to make deep and far-reaching cuts to emissions.

As Reuters reports, some groups criticize the IEA for consistently predicting strong oil demand growth. “The IEA is effectively creating its own reality. They project ever-increasing demand for fossil fuels, which in turn justifies greater investments in supply, making it harder for the energy system to change,” Andrew Logan, senior director of oil and gas at Ceres, told Reuters.

With that said, renewable energy is growing fast and taking a growing slice of all new investment. The IEA sees solar becoming the single largest source of installed electricity capacity by 2040, surpassing coal in the 2030s.

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

The Drilling Frenzy Is Over For U.S. Shale

The Drilling Frenzy Is Over For U.S. Shale

Shale Boom

A few high-profile shale executives say the glory days of shale drilling are over.

In a round of earnings calls, the financial results were mixed. A few companies beat earnings estimates, while others fell dramatically short.

But aside from the individual performances, there were some more newsworthy comments from executives on the state of the industry. A common theme emerged from several notable shale executives: the growth frenzy is coming to an end.

The chief executive of Pioneer Natural Resources, Scott Sheffield, said that the Permian basin is “going to slow down significantly over the next several years,” and he noted on the company’s latest earnings call that the company is also acting with more restraint because of pressure from shareholders not to pursue unprofitable growth. “I’ve lowered my targets and my annual targets, a lot of it has to do with…to start with the free cash flow model that public independents are adopting,” Sheffield said.

But there are also operational problems that have become impossible to ignore for the industry. He listed several factors that explain the Permian slowdown: “the strained balance sheets lot of the companies have, the parent-child relationships that companies are having, people drilling a lot of Tier 2 acreage,” Sheffield said. “So I’m probably getting much more optimistic about 2021 to 2025 now in regard to oil price.” In other words, U.S. shale is slamming on the brakes, which may yet engineer a rebound in global oil prices.

He said that this would be good news for OPEC. “I don’t think OPEC has to worry that much more about U.S. shale growth long-term,” Sheffield said. “And all that is very beneficial. So we are probably going to be more careful in the years 2021 to 2025 because there’s not much coming on after the three big countries that are bringing on discoveries over the next 12 months Norway, Brazil and Guyana.”

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

OPEC Braces For Drastic Drop In Oil Demand

OPEC Braces For Drastic Drop In Oil Demand

OPEC Climate Demand

OPEC admitted that demand for its oil over the next few years could be drastically weaker than it previously thought, due to a combination of a weakening economy, rising supply elsewhere, and pressure from climate activists.

In its World Oil Outlook, OPEC said that demand for its oil may only reach 32.8 million barrels per day (mb/d) by 2024, a figure that is substantially lower than the 35 mb/d from last year’s estimate. Demand is still expected to grow in non-OECD countries going forward, but OPEC admitted that demand may peak in the OECD in 2020.

Slower economic growth also factored into the lower medium- and long-term estimates. “Given recent signs of stress in the global economy, and the outlook for global growth, at least in the short- and medium-term, the outlook for global oil demand has been lowered slightly this year to 110.6 mb/d by 2040,” OPEC’s Secretary-General Mohammad Barkindo said in the report.

OPEC said that non-OPEC production continues to rise, particularly from U.S. shale, although not exclusively. The cartel has had to restrain production for several years to keep prices from crashing, even in the face of relentless shale growth. U.S. shale is growing, but is now slowing dramatically. At the same time, countries such as Norway, Brazil, Canada and Guyana are expected to continue to add supplies in the next few years. Steady supply increases puts OPEC in a bind.

Meanwhile, the attention paid to the risks of demand destruction in the OPEC report is notable. The phrase “climate change” appears nearly 50 times in the report and the cartel acknowledged that electric vehicles are “gaining momentum.”

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

The Warning Signs Are Flashing for U.S. Shale

rig

The Warning Signs Are Flashing for U.S. Shale

U.S. oil production growth has slammed on the breaks, as low prices and the loss of access to capital markets has forced a slowdown in drilling.

Third quarter earnings reports will soon start to trickle in. Three months ago, the shale industry saw improvement in some of the headline cash flow figures, but the second quarter results also revealed some deeper concerns about drilling operations and raised questions about the longevity of an unprofitable oil boom.

The problem for the shale industry is that, if anything, the outlook has only become gloomier since. Oil prices have languished and investors have grown more skeptical.

Ahead of third quarter earnings, some analysts downgraded several prominent shale drillers.

Imperial Capital analyst Irene Haas issued a double downgrade this week to Extraction Oil & Gas, a Colorado shale driller. Imperial Capital cut the company’s outlook to Underperform from Outperform, and lowered its price target to just $2 per share from $7. Extraction saw its share price plunge by 9 percent at one point during trading on Thursday before recovering some losses.

Irene Haas says that Extraction’s production is likely to be flat during the third quarter due to unplanned outages on the Western Gas system. More importantly, Haas says that Extraction’s business model is “fundamentally more risky, compared to other DJ Basin peers.” Haas also raised concerns about Extraction’s near-term fortunes, noting that the company “might not be equipped to weather additional commodity prices downdraft or operational upsets, planned or unplanned.” 

Meanwhile, SunTrust cut Concho Resources to Hold from Buy, pointing to the company’s efforts to rein in “inflated well costs.” The move also comes in the wake of Concho’s high-profile announcement over the summer, in which it admitted that its densely-packed 23-well “Dominator” project produced poor results.

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

Capital Flight Is Killing The US Shale Boom

Capital Flight Is Killing The US Shale Boom

Capital Flight

The growth in U.S. shale production is grinding to a halt as low prices put drillers in a financial vice.

The slowdown has been unfolding for much of 2019, but the latest slide in oil prices is another blow to cash-strapped companies. Share prices for many E&Ps are down sharply. For instance, Devon Energy’s stock is down 20 percent since mid-September; EOG Resources is off by 17 percent and Pioneer Natural Resources is down by more than 13 percent. Many other companies have seen similar declines.

Rig counts have fallen by 20 percent since last year, drilling is down, hotel rates are down, and employment is in decline. “If you can’t wring out any costs savings then you’ve got to buy less stuff if you want to get your costs down, and that’s the phase we’re entering into,” Jesse Thompson, senior business economist at the Houston branch of the Federal Reserve Bank of Dallas, told Bloomberg.

As Bloomberg noted, annualized employment grew only 0.7 percent through August, compared to 11.4 percent for the same period in 2018. The unemployment rate has ticked up from 2 to 2.3 percent. The number of fracking crews has fallen to its lowest level in 30 months.

For embattled shale drillers, there is another imminent hurdle that they must clear. For the first time since 2016, Permian shale drillers could see their access to borrowing slashed. Lenders periodically reassess the borrowing base that they offer to oil and gas producers, a so-called “credit redetermination” period.

According to a survey of financial institutions as well as oil and gas firms by law firm Haynes and Boone, the industry is set to see “a decrease in credit availability for producers and a strong interest in alternative sources of capital.”

In other words, lenders are turning off the spigots.

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

Oil Discoveries Hit 70-Year Low

Oil Discoveries Hit 70-Year Low

Offshore

The last three years has been the worst stretch of time in seventy years for new conventional oil discoveries.

A new report from IHS Markit finds that conventional oil discoveries plunged to a seven-decade low and “a significant rebound is not expected.” Conventional exploration – as opposed to unconventional development, including shale – had already been trending down following the 2008 global financial crisis and its aftermath, which overlapped with the rise of horizontal drilling and hydraulic fracturing in several U.S. shale basins.

But the collapse of oil prices in 2014 really knocked conventional exploration – and thus, discoveries – on its back.

After OPEC refrained from cutting production in the face of a swelling supply surplus in late 2014, prices fell sharply…and continued to fall for much of the next year and a half. WTI bottomed out in early 2016 below $30 per barrel, before a pullback in drilling and production cuts by OPEC+ led to a more durable price rebound beginning in 2017.

But the multi-year downturn hit conventional exploration in multiple ways. Not only were companies slashing spending and cancelling riskier ventures, but the oil majors and investors began to view short-cycle shale drilling as inherently less risky. That was because drilling was quick – companies were able to turn projects around in a matter of weeks or months, not the years that large-scale conventional projects took, particularly those offshore in deepwater. Capital flowed en masse from conventional to unconventional development.

Predictably, that led to a steep rise in U.S. shale output, while simultaneously leading to a sharp contraction in conventional discoveries. “One of the main drivers here is the shift of investment by US independents from international exploration to shale opportunities in the United States—shorter cycle-time projects—with greater flexibility to respond to changing market conditions,” Keith King, senior advisor at IHS Markit and author of the report, said in a statement.

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

Secret Survey: U.S. Shale In A State Of ‘Deep Anxiety’

Secret Survey: U.S. Shale In A State Of ‘Deep Anxiety’

Shale Permian

The financial stress sweeping over the U.S. shale sector has led to a sharp contraction in activity.

Oil and gas activity in Texas and parts of New Mexico declined in the third quarter, with the Dallas Fed’s business activity index reporting a reading of -7.4, down from -0.6 in the second quarter. A negative reading signals contraction while a positive reading indicates expansion. Falling deeper into negative territory indicates that shale drillers in the Permian further cut drilling activity over the last three months.

A slowdown in drilling is an even larger problem for oilfield services companies, who provide the equipment, manpower and drilling services that oil companies need. A producer may be able to do more with less, but that “less” falls on the service providers, who have been hit hard. The Dallas Fed said that the business activity in the oilfield services sector fell to -21.8 in the third quarter, down from 6.6 in the second.

Another reading demonstrated the pain for oilfield services. The Dallas Fed’s “equipment utilization index” plunged to -24 from 3, and the figure for the third quarter was the lowest since the oil market’s nadir in 2016.

Problematic for shale drillers is that costs still grew, although at a much slower rate. The “input cost” index stood at 5.6 in the third quarter, an indication of slowing cost increases compared to the 27.1 reading in the second quarter. But the bad news for the industry is that the reading was still in positive territory.

Employment is also weakening. The employment index fell to -8.0 from -2.5, meaning that the Permian likely saw job losses for the second quarter in a row.

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

Possible Currency War Would Be A Disaster For Oil

Possible Currency War Would Be A Disaster For Oil

Yuan

Oil prices plunged on Friday after the U.S. and China both announced tariff hikes in tit-for-tat fashion. At the same time, markets opened on a positive note early Monday after President Trump struck a more conciliatory tone. But the respite could be brief.

Global financial markets are completely at the mercy of Trump’s twitter account these days. On Friday, stocks and commodities fell sharply after China announced an increase in tariffs on U.S. goods. In response, Trump announced yet another 5 percent increase in the suite of tariffs on Chinese goods, although, notably, he waited until after financial markets had closed for the week.

Over the weekend at the G-7 Conference in France, Trump sent mixed messages on the trade war, suggesting he had “second thoughts,” with his team subsequently clarifying that his second thoughts regarded his regret he hadn’t hiked tariffs by an even greater amount. Nevertheless, traders took comfort in his comments about wanting to make a deal with China, in addition to his assertion that China had called him up asking for a return to negotiations.

Stocks opened up on a positive note on that news. However, it should be noted that Chinese officials said that they were “not aware of” the phone call that Trump alluded to. When pressed by reporters about the nature of the phone call, Trump said: “I don’t want to talk about calls. We’ve had calls. We’ve had calls at the highest levels.”

If we’ve learned anything over the past few months, it is that these events turn on a dime. The incoherent strategy from the White House, and the complete lack of an official policymaking process, makes it impossible to predict how events will unfold. It is odd then that financial markets were so sanguine at the start of the week.

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

U.S. Shale Is Doomed No Matter What They Do

U.S. Shale Is Doomed No Matter What They Do

Shale drillers

With financial stress setting in for U.S. shale companies, some are trying to drill their way out of the problem, while others are hoping to boost profitability by cutting costs and implementing spending restraint. Both approaches are riddled with risk.

“Turbulence and desperation are roiling the struggling fracking industry,” Kathy Hipple and Tom Sanzillo wrote in a note for the Institute for Energy Economics and Financial Analysis (IEEFA).

They point to the example of EQT, the largest natural gas producer in the United States. A corporate struggle over control of the company reached a conclusion recently, with the Toby and Derek Rice seizing power. The Rice brothers sold their company, Rice Energy, to EQT in 2017. But they launched a bid to take over EQT last year, arguing that the company’s leadership had failed investors. The Rice brothers convinced shareholders that they could steer the company in a better direction promising $500 million in free cash flow within two years.

Their bet hinged on more aggressive drilling while simultaneously reducing costs. Their strategy also depends on “new, unproven, expensive technology, electric frack fleets,” IEEFA argued. “This seems like more of the same – big risky capital expenditures.”

EQT’s former CEO Steve Schlotterbeck recently made headlines when he called fracking an “unmitigated disaster” because it helped crash prices and produce mountains of red ink. “In fact, I’m not aware of another case of a disruptive technological change that has done so much harm to the industry that created the change,” Schlotterbeck said at an industry conference in June. Related: Will The U.S Gas Glut Cap Oil Production?

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

Is US Shale Cannibalizing Itself?

Is US Shale Cannibalizing Itself?

Shale

U.S. oil production continues to grow, but the shale industry is in the midst of a deceleration as low oil prices and a financial squeeze slow the pace of drilling.

The U.S. added 246,000 bpd of fresh supply in April, the latest month for which data solid is available. That put to rest concerns that the industry was in the midst of contraction, after production fell in January and February (some of which was due to offshore maintenance). Even as the rig count continues to fall, production grinds higher.

The EIA expects output to grow by another 70,000 bpd in July, with the Permian alone adding 55,000 bpd.

But the rate of growth is slowing. In April, production was up 1.6 million barrels per day (mb/d) compared to the same month a year earlier. By any measure, that is a massive increase. But it is down sharply from the nearly 2.1 mb/d year-on-year increase seen in August 2018, which looks set to be the peak in terms of the pace of growth.

U.S. oil production is not in danger of outright decline, not for the foreseeable future. But growth is clearly slowing. The U.S. could add 1.3 mb/d of new supply this year, according to an average of forecasts from multiple analysts, compiled by Reuters. That figure would be down from 1.5 mb/d of additional supply that came online in 2018. Related: Another Beneficiary Of The OPEC Deal Emerges

Financial stress is spreading, and top industry executives in Texas are arguably at their gloomiest in years. Consolidation and bankruptcies could pick up pace in the next few months, a bankruptcy attorney told Reuters.

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

Shale Pioneer: Fracking Is An “Unmitigated Disaster”

Shale Pioneer: Fracking Is An “Unmitigated Disaster”

Pioneer drilling rig

Fracking has been an “unmitigated disaster” for shale companies themselves, according to a prominent former shale executive.

“The shale gas revolution has frankly been an unmitigated disaster for any buy-and-hold investor in the shale gas industry with very few limited exceptions,” Steve Schlotterbeck, former chief executive of EQT, a shale gas giant, said at a petrochemicals conference in Pittsburgh. “In fact, I’m not aware of another case of a disruptive technological change that has done so much harm to the industry that created the change.”

He did not pull any punches. “While hundreds of billions of dollars of benefits have accrued to hundreds of millions of people, the amount of shareholder value destruction registers in the hundreds of billions of dollars,” he said. “The industry is self-destructive.”

The message is not a new one. The shale industry has been burning through capital for years, posting mountains of red ink. One estimate from the Wall Street Journal found that over the past decade, the top 40 independent U.S. shale companies burned through $200 billion more than they earned. A 2017 estimate from the WSJ found $280 billion in negative cash flow between 2010 and 2017. It’s incredible when you think about it – despite the record levels of oil and gas production, the industry is in the hole by roughly a quarter of a trillion dollars.

The red ink has continued right up to the present, and the most recent downturn in oil prices could lead to more losses in the second quarter.

So, questionable economics is not exactly breaking news when it comes to shale. But the fact that a prominent former shale executive – who presided over one of the largest shale gas companies in the country – called out the industry face-to-face, raised some eyebrows, to say the least.

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

Two Events That Will Determine Oil Prices

Two Events That Will Determine Oil Prices

offshore rig

Two big events over the next two weeks will determine the trajectory for oil prices in the second half of the year. One of those events will take place in Japan, the other in Austria.

U.S. President Donald Trump will meet Chinese President Xi Jingping on the sidelines of the G-20 conference next week in Osaka, Japan. Nothing less than the health of the global economy hangs in the balance.

Both leaders have powerful forces pulling them in opposite directions. On the one hand, both have a domestic political constituency invested in confrontation, or, at least, in not backing down from a trade fight. Neither wants to lose face. Trump campaigned on taking on China, and at least part of his political base may be disappointed if he comes home short of victory. In Beijing, Xi is also under tremendous pressure. The protests in Hong Kong leave him little room for error, and being seen as backing down to Trump would be highly damaging.

However, both leaders are also under pressure to end the trade war. Trump has a presidential election right around the corner, and farm country has been hit hard by sinking agricultural prices related to tariffs. China’s economy has also been hit hard by American tariffs, so Xi would likely be relieved to reach a compromise.

The stakes are high. The global economy is slowing down. Manufacturing data is weak, the auto market has slumped badly, trade volumes are sharply down globally. If the talks fail and the U.S. and China decide to escalate the pressure – Trump has threatened to hike tariffs on $300 billion of Chinese goods – a full-blown recession is possible.

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

Climate Change Could Trigger Global Financial Crisis

Climate Change Could Trigger Global Financial Crisis

NYSE

A top U.S. financial regulator is worried that climate change could threaten global financial markets.

Rostin Behnam, a commissioner at the Commodity Futures Trading Commission (CFTC), said that the financial system was at risk from the growing frequency and severity of storms. “The impacts of climate change affect every aspect of the American economy – from production agriculture to commercial manufacturing and the financing of every step in each process,” Behnam said at the meeting of the CFTC’s market risk advisory committee on Wednesday. “As most of the world’s markets and market regulators are taking steps towards assessing and mitigating the current and potential threats of climate change, we in the U.S. must also demand action from all segments of the public and private sectors, including this agency.”

He added: “Our commodity markets and the financial markets that support them will suffer if we do not take action to mitigate the risk of contagion.”

The message is not necessarily a new one, but it is significant since it comes from the CFTC, which is not exactly a hippy enclave. Also of significance is the fact that Behnam was appointed to the CFTC by President Trump, although by law the vacancy that he filled had to be a Democrat.

Behnam will help setup a panel of experts to study the risks to the financial system from climate change.

“If climate change causes more volatile frequent and extreme weather events, you’re going to have a scenario where these large providers of financial products — mortgages, home insurance, pensions — cannot shift risk away from their portfolios,” Benham said in an NYT interview. “It’s abundantly clear that climate change poses financial risk to the stability of the financial system.” Related: OPEC’s Struggle To Avoid $40 Oil

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

Escalating Trade War Signals More Pain For Oil

Escalating Trade War Signals More Pain For Oil

Offshore tanker terminal

Trump backed off his proposed trade war with Mexico in the face of intense pressure from business groups and even his own party, but his faith in tariffs remains unbowed. In fact, Trump may have internalized a lesson that presents further risks to the global economy and to oil markets.

“If we didn’t have tariffs, we wouldn’t have made a deal with Mexico,” Trump said on Monday. “We got everything we wanted.”

The proposed 5 percent tariff on Mexico was suspended because Trump said that the Mexican government agreed to a series of demands to tighten up migration through the country. However, press reports suggest that some of the provisions in the deal, such as Mexico agreeing to buy agricultural goods, are a mirage, while others, such as expanding border security, were agreed to months ago.

Leaving those pesky details aside, Trump was triumphant. Indeed, even though the White House saw pushback from business groups and the Republican-controlled U.S. Senate, in Trump’s mind the whole episode seems to have reaffirmed his strategy.

With the U.S.-China trade war unfinished, the U.S. President feels emboldened to take a hardline on Beijing.

“The China deal’s going to work out,” Trump said in an interview on CNBC. “You know why? Because of tariffs. Because right now China is getting absolutely decimated by companies that are leaving China, going to other countries, including our own, because they don’t want to pay the tariffs.”

Moreover, he says that the tariffs to date have been successful. “We’ve never gotten 10 cents from China. Now we’re getting a lot of money from China, and I think that’s one of the reasons the G.D.P. was so high in the first quarter because of the tariffs that we’re taking in from China,” he told reporters on Monday. 

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

The Biggest Losers In The Shale Slowdown

The Biggest Losers In The Shale Slowdown

shale

Schlumberger saw its debt rating downgraded by S&P due to the unfolding slowdown in drilling by U.S. shale companies.

The largest oilfield service company in the world has seen its earnings hit as the shale industry goes through a soft patch. S&P cut Schlumberger’s debt rating to A+, down from AA-. Meanwhile, Halliburton saw its outlook downgraded from “stable” to “negative.”

“Oilfield services companies will no longer be able to generate the high operating margins they did in 2014,” Carin Dehne-Kiley, an analyst at S&P, wrote in a report. “The oilfield services industry has fundamentally changed due to permanent efficiency and productivity gains realized by E&P companies as well as investor sentiment calling for E&P companies to live within cash flow and limit production growth.”

The sharp fall in oil prices late last year, which stretched into the first quarter of 2019, led to a rapid erosion in the U.S. rig count. The oil rig count fell by 5 to 797 for the week ending on May 24. The rebound in oil prices this year has not led to a corresponding bounce back in the rig count.

Shale companies have pulled back, making modest spending cuts amid the soft patch. Moreover, the U.S-China trade war may have killed off yet another rally, with gloom spreadingacross the industry. Another lengthy downturn would likely deepen the modest austerity measures implemented by shale producers, which would further weigh down the oilfield services sector.

Lower drilling activity translates into less interest in the variety of services that Schlumberger offers. A depressed market for equipment, labor and other services means that companies like Schlumberger have less leverage in pricing negotiations with oil producers. Several years on from the massive oil market bust in 2014, Schlumberger has been trying to claw back the steep discounts it was forced to offer to producers. 

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

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