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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…

‘High’ Oil Prices Are Already Dampening Demand

‘High’ Oil Prices Are Already Dampening Demand

Fatih Birol

Crude oil prices are affecting demand for the commodity negatively, the International Energy Agency’s head Fatih Birol told S&P Global Platts in an interview.

“The higher oil price environment may, if they stay around this level, also have an impact…put some downward pressure under demand growth,” Birol said. The warning follows the release of IEA’s latest Oil Market Report, in which the authority kept its oil demand growth projections for this year unchanged at 1.4 million bpd.

The agency’s boss noted that Brent over US$70 a barrel is affecting demand the most in the emerging markets that account for the most of demand growth, including China and India, but also the United States.

“So it will not be a surprise if we are to revise our demand numbers in the next edition of the oil market report if the prices remain at these levels,” he told S&P Global Platts.

For those that are watching oil price movements and the reactions of the world’s largest importers, this is not news. After a slump in the fourth quarter of last year, Brent has rebounded by about 40 percent, trading above US$70 at the moment.

Prices were pushed up by the entry into effect of the latest OPEC+ round of production cuts with Saudi Arabia leading the charge and cutting considerably more than it had agreed to, yet again in a bid to raise prices to levels it feels more comfortable with. However, these are levels that India and China do not feel equally comfortable with.

India relies on exports for more than 80 percent of its oil consumption and China is more dependent on imports than it would like to be. So, it is no wonder that the climb in prices “will definitely hurt oil demand if it soared especially in the important demand growth centers such as India,” according to Birol.

Sharp Rise In Rig Count Pressures Oil Prices

Sharp Rise In Rig Count Pressures Oil Prices

Pioneer rig

The the number of active oil and gas rigs rose by 19 after two weeks of big losses in the United States this week according to Baker Hughes, in a sign that US production is still set for increases.

The total number of active oil and gas drilling rigs rose by 20 rigs­ according to the report with the number of active oil rigs gaining 15 to reach 831 and the number of gas rigs gaining 4 to reach 194.

The oil and gas rig count is now just 22 up from this time last year, with oil seeing just a 23-rig increase year on year, gas rigs holding flat, and miscellaneous rigs seeing a 1-rig decrease for the year.

Oil prices were trading up earlier on Friday leading up to the data release as early figures came in for OPEC’s March oil production from S&P Platts, which showed that its oil production had fallen by 570,000 barrels per day from February levels as Venezuela and Saudi Arabia saw steep declines in production levels.

WTI was trading up $0.49 (+0.79%) at $62.59—well above the psychologically important $60 per barrel mark. The Brent benchmark was trading up $0.48 (+0.69%) at $69.88 at 12:18pm EST, after easing off the $70 per barrel mark earlier this week. Prices for both represent a significant gain week on week. Related: Is This The End Of Colorado’s Shale Boom?

Despite the drop off in the number of active rigs, US crude oil production for week ending March 29 was 12.2 million barrels—another new all-time high.

Unlike in the United States, Canada saw a decline in the number of active rigs this week.

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

Shale Is In A Deep State Of Flux

Shale Is In A Deep State Of Flux

Chevron shale

Oil prices are rising to their highest level in months, with WTI having topped $60 per barrel, but the U.S. shale industry is still showing signs of strain.

“This is a cycle in our industry where only the large well-capitalized companies can grow. Small companies without access to capital are stagnant,” one oil executive in Texas said in response to a survey from the Dallas Federal Reserve. “It is a major industry readjustment period.”

The oil majors are scaling up their operations in the Permian basin, with ambitious plans to ratchet up output. ExxonMobil plans on hitting 1 million barrels per day (mb/d) by 2024 from the Permian, and Chevron hopes to reach 900,000 bpd. U.S. shale is more important than ever to their business plans.

But even as the role of shale is critical to the majors, small- and medium-sized E&Ps are struggling. Poor financial returns, loss of interest from investors, pressure to cut spending and return cash to shareholders, and encroachment from the majors are tightening the screws on smaller drillers. The “shrinkage in market capitalization of some companies is breathtaking. These loses translate into a loss of interest in further direct investments in the drilling of new oil and/or natural gas prospects,” another respondent said in the Dallas Fed survey.

A few other concerns seemed to dominate the thinking of Texas oil executives:

  • “Qualified young professionals are avoiding joining the oil and gas industry.”
  • “Pipeline constraints in the Permian Basin continue to cost us up to $20 per barrel and have a significant impact on capital expenditures. This cost changes month by month, making revenue estimation difficult.”
  • “Smaller independents are competing with a different animal that is too expensive to tame. Deep pockets for manufacturing oil and gas have taken over the patch here.”

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

Oil Rises As Saudi Extends Production Cuts Through April

Oil Rises As Saudi Extends Production Cuts Through April 

President Trump isn’t going to like this.

Offering the first indication that the OPEC+ cartel of major oil exporters intends to extend cuts, Saudi Arabia has reportedly told its clients that they will receive significantly less oil than they had requested in April, extending deeper-than-agreed oil production cuts into a second month, Bloomberg reported.

Saudi

The report, which provoked a spike in oil prices, suggests that “Riyadh is determined to regain control of the oil market as prices remain well below the level that many OPEC members need to cover their government spending.” Oil rose as much as 1% on the news, before fading some gains.

However, the extension isn’t all that surprising: Responding to Trump, who demanded in a tweet that OPEC do something to curb rising oil prices, Saudi Energy Minister Khalid Al-Falih said last month that “we are taking it easy, 25 countries are taking a very slow and measured approach.”

Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike – fragile!

Aramco, Saudi’s state-owned oil producer, has given customers their allocations for the next month, and they’re some 635,000 barrels short of what refiners had asked for.

With Venezuela output falling further due to U.S. sanctions and power blackouts, oil refiners put in requests – or nominations in industry jargon – for Saudi crude of more than 7.6 million barrels a day for April, the person said. However, the kingdom will supply overseas customers with less than 7 million barrels a day, 635,000 barrels less than refiners asked for however, they said.

The second consecutive month of deep production cuts shows the world’s largest oil exporter is determined to re-balance the market more quickly even though events in Venezuela have left some refiners short of crude. The crisis has worsened a deficit of so-called heavy-sour crude that many refiners use to make diesel.

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

A Glimpse At 2019​​

A Glimpse At 2019​​

Markets In Critical Transformation, Chaotic Behaviour Has Just Began.

Our inability as market participants to properly frame market fragility and the inherent vulnerability of the financial system makes a market crash more likely, as it helps Systemic Risk go unattended and build further up. For the first time in a while, elusive economic narratives started to fail at blaming market weakness on secondary-order factors: Trade Wars, the FED, Oil prices. Attempts at dismissing market events as no more than a temporary turbulence miss the bigger picture and cast the fishing net on unaware investors looking for a dip to buy. In contrast, over the last month, conventional market and economic indicators (e.g. breaks of multi-year equity & home price trend-lines, freezing credit markets, softening global PMIs/orders) have all but confirmed what non-traditional measures of system-level fragility signalled all along: that a market crash is incubating, and the cliff is near. Nothing has happened yet.
1.      Early Tremors, Not Market Bottoms
2.      Elusive Narratives Fail, Unveiling a Deeper Malaise
3.      Mainstream Investment Strategies Face a Tougher New Year
4.      Triggers For Market Chaos: A Timeline For 2019
Early Tremors, Not Market Bottoms
After a slow start, the season of market chaos has taken off.
In the last few months, global markets have visibly entered the ‘phase transition zone’, a process of critical transformation that will eventually lead to a new equilibrium at significantly different levels, after severe ruptures and a possible full-cycle market crash.
Rather than ‘a short-term correction in a structural bull market’, or a ‘temporary turmoil in healthy economic conditions’, this is the beginning of a structural adjustment after a decade of liquidity abundance and market manipulation, which reflexively changed the structure itself of the market for private investors in hazardous ways, making it insensitive to fundamentals, passive or quasi-passive, overly-correlated and overly-concentrated. 

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

Oil’s Wild Price Swings Set to Create Global Chaos

Oil’s Wild Price Swings Set to Create Global Chaos

Volatility is here to stay — and the political and economic implications will touch us all.

As the current global oil glut shakes up petro states around the world, oil prices are becoming more volatile than Donald Trump tweets.

Neither Canada, now the dumb owner of a marginal 65-year-old pipeline, nor Alberta, a key exporter of bitumen, a cheap refinery feedstock, has paid much attention to this revolution.

As a consequence Canada has no strategy to deal with the new normal of highly volatile oil prices.

Government incompetence explains the hew and cry in Alberta about its overproduction crisis and the various proposals to solve it, ranging from the purchase of rail cars (a bad idea) to the decision to order companies to cut production of heavy oil by about 325,000 barrels a day (a sensible idea).

Alberta’s panic attack is based on the idea that bitumen from the province’s oilsands producers is selling at a discount because of a lack of pipeline capacity.

The reality is that the dramatic 30-per-cent drop in oil prices since the beginning of October, from more than US$70 to US$50, is upsetting oil exporters, producers and markets around the world.

Different kinds of oil fetch different prices, based on their quality and transportation costs. And all are experiencing dramatic price drops. Alberta’s bitumen, a cheap refinery feedstock, is not the only crude languishing during a global market glut.

Refineries in Japan and Korea, for example, scooped up cheap U.S. oil earlier this year.

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

Evidence Mounts For Shale Slowdown

Evidence Mounts For Shale Slowdown

frack crew

There is a growing pile of evidence pointing to a slowdown in the U.S. shale industry, as low prices take their toll.

The rate of hydraulic fracturing began to decline in the last four months of 2018, a sign that U.S. shale activity began to slow even before the plunge in oil prices. According to Rystad Energy, the average number of fracking jobs declined to 44 per day in November 2018, down from an average of between 48 and 50 for the five-month period between April and August 2018.

“After reaching a peak in May/June, fracking activity in the Permian Basin has gradually decelerated throughout the second half of 2018,” Rystad Energy senior analyst Lai Lou said in a statement.

“Looking at preliminary data for November, we see evidence that seasonal activity deceleration has likely started in all major plays except Eagle Ford,” Lou added. “There has been a considerable slowdown in Bakken and Niobrara in November, our analysis shows.” Rystad said that much of the slowdown can be attributed to smaller companies.

The drilling data echoes that of the Dallas Fed, which reported last week that drilling activity began to slow in the Permian in the fourth quarter. Whether measuring by production, employment, business activity, equipment usage rates – a wide variety of data from the shale industry points to an unfolding slowdown.

Moreover, independent data also suggests that a lot of shale drillers are not profitable with oil prices below $50 per barrel. Breakeven prices on the very best wells can run in the $30s or $40s per barrel, but industry-wide all-in costs translate into much higher breakeven thresholds. The rig count has also already plateaued after growing sharply in the first half of 2018.

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

New Data Suggests Shocking Shale Slowdown

New Data Suggests Shocking Shale Slowdown

Shale rig

U.S. shale executives often boast of low breakeven prices, reassuring investors of their ability to operate at a high level even when oil prices fall. But new data suggests that the industry slowed dramatically in the fourth quarter of 2018 in response to the plunge in oil prices.

A survey from the Federal Reserve Bank of Dallas finds that shale activity slammed on the brakes in the fourth quarter. “The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—remained positive, but barely so, plunging from 43.3 in the third quarter to 2.3 in the fourth,” the Dallas Fed reported on January 3.

The 2.3 reading is only slightly positive – zero would mean that business activity from Texas energy firms was flat compared to the prior quarter. A negative reading would mean a contraction in activity.

The deceleration was true for multiple segments within oil and gas. For instance, the oil production index fell from 34.8 in the third quarter to 29.1 in the fourth. The natural gas production index to 24.8 in the fourth quarter, down from 35.5 in the prior quarter.

But even as production held up, drilling activity indicated a sharper slowdown was underway. The index for utilization of equipment by oilfield services firms dropped sharply in the fourth quarter, down from 43 points in the third quarter to just 1.6 in the fourth – falling to the point where there was almost no growth at all quarter-on-quarter.

Meanwhile, employment has also taken a hit. The employment index fell from 31.7 to 17.5, suggesting a “moderating in both employment and work hours growth in the fourth quarter,” the Dallas Fed wrote. Labor conditions in oilfield services were particularly hit hard.

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

Global Economic Slump Imminent As Korean Exports ‘Canary’ Crashes

In the latest sign that the slowdown in China and the global trade war is weighing on global commerce, South Korea’s exports fell  in December. The 1.2% YoY decline was dramatically below the +2.5% YoY expected and missed even the most pessimistic forecast (which was still a rise).

Korean exports were hit by falling memory-chip and oil prices and cooling demand from China and imports also disappointed, rising 0.9% YoY.

“The (annual) decline came about a month earlier than I thought, but I expect Korean exports to be weak throughout the first half of this year, posting low single-digit growth at best,” said Lee Seung-hoon, an economist at Meritz Securities.

South Korea is the first major exporter to report trade data each month, so provides an early reading of global trade; and as the world’s leading exporter of computer chips, ships, cars and petroleum products, December’s data is a major red flag for the global economy.

As the chart below shows, Global equity market earnings growth (and contraction) is extremely tightly correlated to Korean export growth (or contraction)…

So maybe global stocks are on to something with their recent collapse as they increasingly price in an earnings recession.

Why Oil Prices Rose And Crashed In 2018

Why Oil Prices Rose And Crashed In 2018

Bubble

Last week the price of West Texas Intermediate (WTI) crude oil, the primary U.S. benchmark, fell to a 17-month low. The price, $45.88/bbl, marks a stunning fall from a price that closed at $76.40/bbl on October 3rd.

So, what has caused this roller coaster ride, and where are prices headed as we head into 2019?

Let’s first review how to we got to sub-$50 oil as we near the end of 2018. That’s important, because I think it strongly influences what is likely to happen in 2019.

Why Oil Prices Rose in 2018

In my 2018 predictions, which I will grade in a couple of weeks, I projected that oil prices would reach $70/bbl in 2018. The price of WTI, the U.S. benchmark, rose to that level in May and remained there for most of the summer.

There were several reasons I expected oil prices to rise. The threat of sanctions on Iran, global demand that continues to rise (despite increasing predictions of the demise of demand growth), and the deteriorating situation in Venezuela were just three of the reasons I predicted higher oil prices.

But if you had asked me in mid-summer what I expected for the rest of 2018, I would not have anticipated an oil price collapse. I largely attribute this decline to an unexpected variable in the oil markets that I call “The Trump Effect”.

The Trump Effect

President Trump has done some good things for the oil industry, but he has a blind spot when it comes to oil prices. He has been vocal about the need to keep oil prices low, even as the U.S. becomes an increasingly important global oil producer.

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

WTI Extends Losses After Production Rebounds To Record

WTI has slid lower overnight following API’s surprise large crude build (and no equity pump) and was unable to hold gains after a bigger than expected gasoline build (and tiny crude draw) along with a production rebound to record highs.

If U.S. crude output rises, it’s likely to see more inventory builds, according to Stewart Glickman, an energy equity analyst at CFRA Research. “The Permian has surprised to the upside over the last couple of months,” he says.

API

  • Crude +6.92mm
  • Cushing +1.76mm
  • Gasoline +3.67mm
  • Distillates -598k

DOE

  • Crude _46k (+3.4mm exp)
  • Cushing +799k
  • Gasoline +3.003mm (+1.0mm exp)
  • Distillates +2k

Tiny crude draw (4th week in a row) but another Cushing build along with a rise in gasoline stocks took the edge off for the bulls.

US Crude production had stalled from its never ending surge higher in recent weeks as the rig count stabailized but rebounded to record highs last week…

 

WTI hovered around $44.50 into the DOE print and was very modestly lower after….

Falling Oil Prices May Spark New Debt Crisis

Falling Oil Prices May Spark New Debt Crisis

benj

U.S. oil prices at below $50 and now even below $45 a barrel could cause concerns about the debt levels of some energy companies, Nasdaq energy analyst Tamar Essner told CNBC on Wednesday.

“Credit markets have held up a lot better than the energy equity markets right now, so that tells you that credit investors out there believe in the oil story much more so than energy equity investors do right now,” Essner said.

Consumers in the U.S. like the low gasoline prices that come with lower oil prices, but a slide in the price of oil has a broader impact on the economy, Essner said.

Some of the newer U.S. shale producers are probably deep into cash-flow negative at the current oil prices of $43 a barrel WTI Crude, although the energy industry as a whole is “in a lot stronger position” today than it was in the price crash of 2014, according to the energy analyst.

“A lot of the debt has been put in a much more consolidated position. We’ve just had a round of credit redetermination in the fall when prices were higher, so that should buy us some time in the market as well,” Essner said, referring to the banks’ twice-yearly borrowing base redetermination of energy companies.

Over the past few weeks, when oil prices were falling due to fears that the OPEC+ production cuts won’t be enough to rebalance the oil market, some companies announced their 2019 capital budget plans.

Many of those companies said they would be cutting spending and the number of rigs, Essner said, noting that lower spending levels will ultimately result in a lower pace of oil production growth, but it will take time.

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

Shale Growth Could Slow On Oil Price Meltdown

Shale Growth Could Slow On Oil Price Meltdown

Oil

Can the U.S. shale boom continue if WTI stays mired below $50 per barrel?

Much has been made about the dramatic cost reductions that shale drillers have implemented over the past few years, with impressive breakeven prices that should ensure the drilling frenzy continues no matter where oil prices go. On earnings calls with investors and analysts, shale executives repeatedly trumpeted extremely low breakeven prices.

However, those figures are at times cherry-picked or otherwise misleading. They fail to include the cost of land acquisition and other costs, or they simply reflect cost structures in only the very best acreage.

The sudden meltdown in prices – oil fell nearly 8 percent on Tuesday – could put renewed scrutiny on the point at which many shale wells breakeven.

The problem for a lot of companies is that they are not necessarily earning the full WTI price. Oil in West Texas in the Permian Basin continues to trade at a steep discount relative to WTI, even as the differential has narrowed in recent months. With WTI at roughly $47 or $48 per barrel, oil based in Midland is trading below $40 per barrel, the lowest point in more than two years, according to Bloomberg.

Bloomberg NEF data provides more clues into the complex “breakeven” debate. Wells located in the Spraberry (within the Permian basin) can breakeven when prices trade between $32 and $47 per barrel. Digging deeper, Bloomberg NEF notes that some of the best wells can break even in the low $30s, but the worst quartile of wells breakeven at an average of $65.54 per barrel.

In other words, a large portion of wells in the Permian – which, to be clear, is often held up as the best shale basin in the world – is currently unprofitable, given WTI priced in the high-$40s per barrel.

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

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