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Shale Under Pressure As Oil Falls Below $50

Shale Under Pressure As Oil Falls Below $50

fracking operation

The OPEC+ cuts still are not doing very much to boost oil prices, dashing hopes for many U.S. shale producers. With companies in the process of formulating their budgets for 2019, the prospect of $50 oil sticking around raises questions about the heady production figures expected from the shale patch.

The IEA expects U.S. oil production to grow by 1.3 million barrels per day (mb/d) in 2019. But oil prices could significantly impact those projections. “Total U.S. shale oil growth is highly sensitive to WTI prices in the $40-60 range,” Morgan Stanley wrote in a December 13 note. The investment bank said that shale producers are growing more sensitive to prices below $60 but less sensitive to price spikes above $60. “If WTI remains around current levels (~$50/bbl), US growth should start to slow.”

The investment bank said that larger companies, such as ConocoPhillips or Occidental Petroleum, are less sensitive to price swings than smaller E&Ps. On the other hand, some companies could begin to slow production if prices linger at low levels. Morgan Stanley pointed to Apache Corp., Murphy Oil, Newfield Exploration, Oasis Petroleum, Whiting Petroleum and Chesapeake Energy. “With low oil prices, we see these companies slowing production growth in 2019 to spend within cash flow (or minimize outspend), [free cash flow] levels fall or turn negative, and leverage metrics move higher.”

Other analysts also see price sensitivity from the shale sector. “We expect 5-10% capex growth on average at $59 WTI, which should yield production growth of nearly 1.3mn b/d,” Bank of America Merrill Lynch wrote in a note. “However producers may budget for lower oil prices given the recent decline in prices and increase in uncertainty.”

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OPEC Cuts Deep to Save Cartel

OPEC Cuts Deep to Save Cartel

With oil prices in free fall and the dawning realization that Great Reflation trade of 2017 is over, OPEC needed to do something drastic to remind everyone how important they are.

Moreover, with Qatar quitting the cartel last week it was then doubly necessary for OPEC to make the markets stand up and remember them.

So, after a few days of wrangling, a 1.2 million barrel per day cut was announced by OPEC, far larger than the market was expecting.

The Trump administration is fuming today over this result.

Predictably, oil prices jumped on the news.  All is right with their world, yes?

Well, yes and no.  The Saudis need $80 per barrel oil.  Russia doesn’t get its hair mussed below around $50 and even then it simply scales back government spending in line with oil prices — auto-budgeting based on oil tariffs.

The free-floating ruble insulates Russia domestically from a sharp drop in oil prices far better than Saudi Arabia since the Riyal is pegged to the U.S. dollar.

But for Saudi Arabia, the stakes are far higher.  And its chief rival, Iran, understands this very well.  The reason the OPEC meeting was so touch and go was Iran exerting its leverage over the Saudis in response to U.S. sanctions.

Because while Russia agreed to a 200,000 barrel cut, which is nothing to them in the grand scheme of things, Iran was exempted from making any cuts.

Iran, Libya and Venezuela will be effectively exempt from the cuts, though the text of the deal will say they received “special considerations,” Iraqi oil minister Thamir Ghadhban said.

Saudi Loss Leader

Saudi leadership is weakening.  Qatar left to pursue its own ambitions without OPEC getting in the way.  That’s a nice way of saying they want to do business with Iran developing the shared North Pars gas field.

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Iran: Oil To Fall To $40 If OPEC Fails To Reach Deal

Iran: Oil To Fall To $40 If OPEC Fails To Reach Deal

oil tanker hurricane

A fractured OPEC is meeting later this week to discuss a deal to cut oil production—yet again—to rebalance the market and lift oil prices that have recently slipped to below most of the cartel members’ budget-balance points.

OPEC needs a unanimous vote to pass decisions such as curtailing production. Yet, Iran—one of OPEC’s biggest producers but also one of the most sidelined members in recent months—warns that the group is unlikely to reach an agreement on a sizeable cut of around 1.4 million bpd as some are suggesting. Such a failure to act decisively would send oil prices plunging to $40 a barrel, Iran’s OPEC Governor Hossein Kazempour Ardebili told Bloomberg in an interview.

The cartel and its Russia-led non-OPEC allies may not extend their cooperation pact either, according to Iran’s representative at OPEC—a position typically held by the second most powerful oilman in a cartel member after the oil minister.

Iran has repeatedly expressed frustration with the Saudi/Russia-led increase in oil production since June to offset what was expected to be a steep decline in Iranian oil supply with the U.S. sanctions on Tehran’s petroleum and shipping industries.

Iran’s oil exports indeed dropped by some 1 million bpd, but they are likely still holding onto above 1 million bpd, while U.S. waivers to eight Iranian customers allow buyers to continue purchasing oil at reduced volumes until the end of April next year.

Oil prices have plunged by around 30 percent from early October as the market started to fear an oversupply is building up again, due to record high production in Saudi Arabia and Russia, and an all-time high oil output in the United States, coupled with fears of slowing economic and oil demand growth.

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Alberta Intervenes To Halt Canada’s Oil Crisis

Alberta Intervenes To Halt Canada’s Oil Crisis

oil sands

Oil prices rose on Monday, buoyed by coordinated production cuts – cuts that did not come from Vienna (although that too could occur later this week).

Instead, the mandatory reductions were handed down by the provincial government of Alberta. “Perhaps OPEC should therefore consider inviting Canada to its meeting on Friday,” Commerzbank said in a note.

Alberta Premier Rachel Notley announced the production cuts “in response to the historically high oil price differential that is costing the national economy more than $80 million per day,” her office said in a statement. Western Canada Select (WCS) has plunged below $15 per barrel, representing a discount to WTI that has hovered at around $40 per barrel.

“The price gap is caused by the federal government’s decades-long inability to build pipelines. Ottawa’s failure in this area has left Alberta’s energy producers with few options to move their products, resulting in serious risks for the energy industry and Alberta jobs,” the Alberta Premier’s office said.

Alberta’s oil industry is producing roughly 190,000 bpd in excess of available takeaway capacity. The surplus is filling storage up quickly. Oil producers will be required to make cuts on the order of 8.7 percent, or 325,000 bpd, beginning in January. Once the storage glut is reduced, the cuts will narrow to just 95,000 bpd, which will stay in place through the duration of 2019.

The first 10,000 bpd for each producer will be excluded from the mandatory cuts, intended to avoid negatively impacting small producers. The baseline used to calculate the cuts will be the highest level of production for each producer over the past six months.

Notley expects the production cuts to boost prices for WCS by roughly $4 per barrel, adding $1.1 billion to government revenue between 2019 and 2020.

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How Much Oil Production Will The Saudis Cut?

How Much Oil Production Will The Saudis Cut?

Saudis Trump

Donald Trump continues to take credit for lowering oil prices.

Donald J. Trump

So great that oil prices are falling (thank you President T). Add that, which is like a big Tax Cut, to our other good Economic news. Inflation down (are you listening Fed)!

Trump’s tweetstorm complicates the OPEC+ meeting in Vienna next week. Trump is very much leaning on Saudi Arabia, pressuring them not to cut output. And he has gone out of his way to protect the Saudis even though the CIA has concluded that crown prince Mohammed bin Salman likely ordered the murder of journalist Jamal Khashoggi. He clearly expects the Saudis to return the favor by not cutting production.

This puts Riyadh in a bind. Saudi Arabia needs to patch up its relationship with the West, but it also can ill-afford oil prices at current levels. Saudi Arabia needs Brent to trade north of $80 per barrel for its budget to breakeven. Massive budget deficits during the 2014-2016 downturn help explain Riyadh’s about-face in late 2016 – they had tried to force high-cost drillers out of the market by crashing oil prices, but ultimately caved and engineered an OPEC+ production cut to push prices back up.

Little has changed since then. Saudi Arabia’s spending commitments are still large, and that is before we even take into account MbS’ overly-hyped economic reform proposals. Saudi Aramco is also trying to figure out how to transform itself for the long haul. There was the much-ballyhooed Aramco IPO that has since been shelved. There were the plans for Aramco to issue one of the largest corporate bond offerings ever in order to finance a major stake in Sabic, the state-owned Saudi chemical firm. That initiative was also recently abandoned.

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Canadian Oil Producers Divided On Output Cuts

Canadian Oil Producers Divided On Output Cuts

crude pipelines

Crude oil producers in Alberta appear to be split on a proposed cut in production amid record-low prices, Canadian media report.

One of the large Canadian oil producers, Cenovus Energy, is calling upon the government of Alberta to mandate temporary production cuts at all drillers in a bid to ease Canadian bottlenecks that have resulted in Canada’s heavy oil prices tumbling to a record-low discount of US$50 to WTI.

The province of Alberta, the heart of Canada’s oil sands production, has the necessary legislation to have all producers agree to production cuts and it needs to use it now, Cenovus said in an emailed statement to Bloomberg yesterday.

“We’re probably producing about 200,000 or 300,000 barrels per day of oil in excess of our ability to get that oil out of the province, either by pipelines or by rail,” Cenovus’ CEO Alex Pourbaix told Global News.

However, other big players disagree that the industry needs to produce less. “Our position is that government intervention in the market would send the wrong signals to the investment community regarding doing business in Alberta and Canada. And we really do need to take a long-term view and allow the market to operate as it should,” Global News quoted a spokeswoman for Suncor as saying.

However, Suncor is in a favorable position: according to the company spokeswoman it has no exposure to the suffocating differential between Western Canadian Select and West Texas Intermediate since it processes as much as 70 percent of its crude at home.

Husky Energy is another of the large Canadian producers who oppose a government-led intervention in production rates. According to Husky, “Market intervention comes with an unacceptably high level of economic and trade risk.”

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Oil Rallies On Report OPEC+ Will Do “Whatever It Takes”, May Cut By 1.4MM Barrels

One day after Saudi Arabia revealed that it had not complied with its production quota in October for the first time since OPEC’s November 2016 meeting in Vienna, Reuters sent oil prices into the green with a report that OPEC and its partners were discussing a proposal to cut oil output by up to 1.4 million barrels per day in 2019 to avoid a surplus that could tank prices.


Unnerved by oil’s record 12-day losing streak, OPEC and OPEC+ are again talking about cutting production just months after Saudi Arabia and Russia agreed to pump more. The group is set to meet on Dec. 6 to agree on its policy for 2019.

West Texas Intermediate futures rose as much as 1.4% to $56.49/bbl on New York Mercantile Exchange, erasing an earlier 1% decline and briefly sending prices into the green – though the rally soon faded and prices slumped back into the red. If oil settles higher on the day, it would break what has been a record losing streak for oil prices.


Still, the gains didn’t hold, as the report noted that least one OPEC member (Iran) still needed to be convinced to support the plan.

A supply cut of up to 1.4 million bpd was one of the options discussed by energy ministers from Saudi Arabia, non-OPEC Russia and other nations at a meeting in Abu Dhabi on Sunday, the sources said.

“I believe a cut of 1.4 million bpd is more reasonable than above it or below it,” one of the sources, who declined to be identified by name as the talks are confidential, said.

OPEC member Iran, as well as Russia, would need to be brought on board for the new plan, the sources added. One source said Iran does not want to have a production target in a new agreement as it is facing lower exports due to U.S. sanctions.

In comments that arrived after the report, OPEC chief Mohammed Barkindo revealed that he now believes the cartel is a central bank.


OPEC Scrambles To Justify Output Cuts

OPEC Scrambles To Justify Output Cuts

Oil tanker

Oil inventories are approaching the five-year average level in OECD countries, the all-important threshold for “re-balancing” the oil market.

A year and a half on from OPEC’s original deal to limit output, the surplus oil stashed in storage tanks around the world are nearly back to average levels. However, by all indications, OPEC is not ready to ease up on the production caps, with top officials signaling a desire to keep the cuts in place into 2019.

But that might require changing of the definition of a “balanced” oil market. OPEC has consistently held up OECD inventories as the metric upon which it was basing its calculations. The goal was to drain inventories back down to the five-year average. With OECD inventories about 44 million barrels above that threshold in February – down from a roughly 300-million-barrel surplus at the start of 2017 – the goal will likely be achieved at some point this year, perhaps in the second or third quarter.

For a variety of reasons, reaching this milestone is not satisfactory for OPEC. For one, the measurement is clouded by the fact that it’s a running calculation, meaning that the past five-years is now made up of more than three years of bloated inventories. In other words, the current five-year average is significantly higher than the five-year average in early 2014 when inventories were not suffering from a supply glut.

The flip side of that argument is that the oil market is way bigger than it was in 2014. Both supply and demand are higher, meaning that the global market probably needs a much higher level of oil sitting in storage. As such, it isn’t necessarily a bad thing that inventories are above the five-year average.

Another reason why OPEC is suddenly not satisfied with OECD inventories as the sole metric around which it bases its decisions is that OECD inventories do not capture the entire global oil market. What is happening in the non-OECD, where at this point, much of global demand growth is occurring? A more comprehensive measurement that included non-OECD inventory data would paint a more accurate picture of the global oil market. However, the problem with this is that non-OECD data is notoriously opaque, which is exactly why OECD inventories is a widely-cited data point.

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OPEC Looks To Dial Back Production Cuts

OPEC Looks To Dial Back Production Cuts


Last week’s surprise drawdown in crude inventories may be the last for a while, as analysts are expecting a reversal in stocks this week.

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– China became the second largest LNG importer in 2017, surpassing South Korea.

– China’s LNG imports of 5 billion cubic feet per day (Bcf/d) was second only to Japan’s 11 Bcf/d.

– The surge in LNG imports is helping China fuel its rapid switchover from coal to gas. China has run into gas shortages amid its aggressive push to clean up air pollution by shutting down coal.

Market Movers

Sanchez Energy (NYSE: SN) saw its stock jump more than 3 percent after it announced it would pay dividends on series A and B convertible perpetual preferred shares in cash rather than stock.

• The share price of Carrizo Oil & Gas (NASDAQ: CRZO) fell by more than 6 percent after hours after reporting that its 2018 production could dip 10 percent, while also predicting that oilfield services costs would see a “double-digit increase” this year.

Schlumberger (NYSE: SLB) and Baker Hughes (NYSE: BHGE) were upgraded by Bank of America to a Buy rating, while Halliburton (NYSE: HAL) was downgraded to Neutral.

Oil prices gained a bit over the past few trading days, after a surprise drawdown in crude stocks last week. But analysts see that to be a one-off, with expectations that inventories will resume climbing this week.

IEA: U.S. to become world’s largest oil producer by next year. The IEA’s executive director said that the U.S. will surpass Russia to become the world’s largest oil producer “definitely next year,” if not in 2018. “U.S. shale growth is very strong, the pace is very strong … The United States will become the No.1 oil producer sometime very soon,” Fatih Birol told Reuters.

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Five oil market myths that need dispelling: Fuel for Thought

Five oil market myths that need dispelling: Fuel for Thought

The oil market has come to be defined by several narratives over the past couple of years: market rebalancing, OPEC versus shale, Russia’s delicate relationship with OPEC, OPEC’s conformity with production cuts with the latest deal extension running to end of 2018 and shale’s resilience to lower prices. But these frameworks have created a narrow ideology that could harm the way producers participate in the oil market this year and beyond.

Myth 1: OPEC’s exit strategy means exit

The idea that the 24 producers who came together and struck a deal to cut production by 1.8 million b/d in November 2016 are somehow going to ‘exit’ the alliance later this year is misleading. There will be no exit when OPEC, Russia and other non-OPEC producers decide the market has rebalanced—based on OECD stock levels reaching their five year average — rather a continuation of the grand alliance under amended, and most probably looser, terms.

OPEC’s hands are somewhat tied: unwind from the deal and undo all the good work achieved and so must continue managing the market in another guise to create stability and encourage long-term investment in oil.

Gary Ross at Platts Analytics has been talking of cuts “into perpetuity” since the historic deal was made and informed industry sources note that the exit strategy is the wrong phrase to be using. But while there is uncertainty as to what that new agreement will look like, the market will anxiously hang on to the exit strategy term and these jitters could serve to keep an ultimate cap on prices.

Myth 2: OPEC’s top priority is market rebalancing

Market rebalancing may be the measure, backwardation may be the means but price is the ultimate goal.

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Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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