Oil prices seem to have stabilized after a steep selloff mid-wee
Friday, October 12th, 2018
Oil prices seem to have stabilized after a steep selloff mid-week. Brent fell from around $85 to $80 over a two-day span, but prices were back up slightly in early trading on Friday. The global stock market plunge dragged down crude prices, but bearish figures from the EIA and OPEC accentuated the decline.
Stock markets pause after plunge. Global equities crashed this week, although finally seemed to gather their footing on Friday. Markets in Europe, Asia and the U.S. were up (at least at the time of this writing), and positive export data from China released on Friday helped sooth market concerns. Oil prices remain highly vulnerable to volatility in the financial markets.
EIA data bearish. The weekly data from the EIA magnified bearish sentiment, and the timing was poor given the worldwide decline in financials. The EIA reported a 6-million-barrel increase in crude oil inventories, while gasoline stocks also rose by 1 million barrels. Exports rose and imports fell, so the inventory increase cannot be chalked up to trade anomalies. Refinery utilization was sharply down – which helps explain the crude stock increase – but the uptick in gasoline inventories was not received well.
OPEC revises down demand for its crude. Rising U.S. production could give OPEC more breathing room. “OPEC revised its forecast for the call on OPEC in 2019 down by 270,000 to 31.8 million barrels per day due to the steep rise in non-OPEC supply. By contrast, OPEC production rose to 32.8 million barrels per day in September, despite falls in Iran and Venezuela,” Commerzbank wrote in a note. “Thus OPEC is currently producing roughly 1 million barrels per day more than will be needed next year, creating a substantial cushion for any further outages in Iran and Venezuela.”
IEA: Oil market to hit 100 mb/d. In its latest report, the IEA said that both supply and demand are closing in on 100 million barrels per day for the first time ever. The agency also said that there is no sign that peak demand is at all close as the drivers of demand growth are “very powerful.”
IEA: Oil market “under strain.” In the short run, the IEA said that “expensive energy is back,” and it could threaten economic growth. Rising production from Saudi Arabia over the last few months leaves the market “adequately supplied for now,” the IEA said, although because the gains have come at the expense of spare capacity, the market is now suffering from some strain. Meanwhile, the IEA also downgraded its oil demand forecast for 2019 from 1.4 to 1.3 million barrels per day, citing emerging market weakness.
Chevron looking to build or buy refinery on Gulf Coast. Chevron (NYSE: CVX) is looking to either build or purchase an oil refinery on the U.S. Gulf Coast in order to process all of the oil that it is producing in the Permian basin, according to Reuters. Chevron already has a downstream presence in Mississippi, and so is looking for a refining asset on the Houston Ship Channel. The interest highlights the knock-on effect of the surging shale production in West Texas. Rising downstream capacity is an outgrowth of abundant shale supply, with a particular focus by companies on processing light sweet crude.
BP open to higher cost projects. In a sign that pricing expectations are rising from within the oil industry. BP’s (NYSE: BP) CEO Bob Dudley said that his company is now planning investments based on a price of $60-$65 per barrel, a sharp increase from $50-$55 per barrel. Dudley said he does not expect prices to plunge again going forward, but the industry wouldn’t spend recklessly. “Are we now off to the races again with spending? My sense of the industry is it learned such a painful lesson,” Dudley said. “Capital discipline is really important.” Still, the rally in prices and the revised pricing target for BP suggests executives won’t be as tightfisted as they have been over the last few years.
Gas prices spike in Pacific Northwest after pipeline explosion. A natural gas pipeline owned by Enbridge (NYSE: ENB) exploded in British Columbia earlier this week, a critical artery that supplies much of the U.S. Pacific Northwest with natural gas. The incident caused a ripple effect, forcing at least four oil refiners in Washington to curtail operations because they lacked the gas for electricity and steam. As a result, wholesale gasoline prices in the Pacific Northwest spiked.
Fallout from missing Saudi journalist spreads. The apparent murder of a Saudi journalist at the hands of the Saudi government – and perhaps with the direct involvement of Crown Prince Mohammed bin Salman – is threatening to isolate Riyadh. “The disappearance of Saudi journalist Jamal Khashoggi in Istanbul raises fresh questions about Crown Prince Mohammed bin Salman’s reputation as a reformer and political developments pose a growing threat to the economic outlook,” said Jason Tuvey, an economist at Capital Economics, according to the Wall Street Journal.
Trump to meet Xi in November. The U.S. has decided to go ahead with a planned meeting between President Trump and Chinese leader Xi Jingping in November to see if they can overcome trade differences. Next week, the U.S. Treasury is expected conclude that China has not been manipulating its currency, which is seen as a small overture to China from Washington. There is an internal battle within the Trump administration on how hard of a line to take with China in regard to tariffs – some officials that oppose the trade war hope that the Trump-Xi meeting could lead to a breakthrough.
China’s car market stalls. The world’s largest car market is suffering from a slowdown. Last year, China sold 29 million cars, 70 percent more than the 17 million sold in the United States. However, in July and August, car sales fell compared to a year earlier, with indications that the decline continued into September. Car sales might actually even decline for the full year compared to 2017. Industry executives and analysts point to declining consumer sentiment in China, the U.S.-China trade war, volatility in China’s stock market and higher fuel prices, according to the FT.
Oil prices seem to have stabilized after a steep selloff mid-week. Brent fell from around $85 to $80 over a two-day span, but prices were back up slightly in early trading on Friday. The global stock market plunge dragged down crude prices, but bearish figures from the EIA and OPEC accentuated the decline.
Stock markets pause after plunge. Global equities crashed this week, although finally seemed to gather their footing on Friday. Markets in Europe, Asia and the U.S. were up (at least at the time of this writing), and positive export data from China released on Friday helped sooth market concerns. Oil prices remain highly vulnerable to volatility in the financial markets.
EIA data bearish. The weekly data from the EIA magnified bearish sentiment, and the timing was poor given the worldwide decline in financials. The EIA reported a 6-million-barrel increase in crude oil inventories, while gasoline stocks also rose by 1 million barrels. Exports rose and imports fell, so the inventory increase cannot be chalked up to trade anomalies. Refinery utilization was sharply down – which helps explain the crude stock increase – but the uptick in gasoline inventories was not received well.
OPEC revises down demand for its crude. Rising U.S. production could give OPEC more breathing room. “OPEC revised its forecast for the call on OPEC in 2019 down by 270,000 to 31.8 million barrels per day due to the steep rise in non-OPEC supply. By contrast, OPEC production rose to 32.8 million barrels per day in September, despite falls in Iran and Venezuela,” Commerzbank wrote in a note. “Thus OPEC is currently producing roughly 1 million barrels per day more than will be needed next year, creating a substantial cushion for any further outages in Iran and Venezuela.”
IEA: Oil market to hit 100 mb/d. In its latest report, the IEA said that both supply and demand are closing in on 100 million barrels per day for the first time ever. The agency also said that there is no sign that peak demand is at all close as the drivers of demand growth are “very powerful.”
IEA: Oil market “under strain.” In the short run, the IEA said that “expensive energy is back,” and it could threaten economic growth. Rising production from Saudi Arabia over the last few months leaves the market “adequately supplied for now,” the IEA said, although because the gains have come at the expense of spare capacity, the market is now suffering from some strain. Meanwhile, the IEA also downgraded its oil demand forecast for 2019 from 1.4 to 1.3 million barrels per day, citing emerging market weakness.
Chevron looking to build or buy refinery on Gulf Coast. Chevron (NYSE: CVX) is looking to either build or purchase an oil refinery on the U.S. Gulf Coast in order to process all of the oil that it is producing in the Permian basin, according to Reuters. Chevron already has a downstream presence in Mississippi, and so is looking for a refining asset on the Houston Ship Channel. The interest highlights the knock-on effect of the surging shale production in West Texas. Rising downstream capacity is an outgrowth of abundant shale supply, with a particular focus by companies on processing light sweet crude.
BP open to higher cost projects. In a sign that pricing expectations are rising from within the oil industry. BP’s (NYSE: BP) CEO Bob Dudley said that his company is now planning investments based on a price of $60-$65 per barrel, a sharp increase from $50-$55 per barrel. Dudley said he does not expect prices to plunge again going forward, but the industry wouldn’t spend recklessly. “Are we now off to the races again with spending? My sense of the industry is it learned such a painful lesson,” Dudley said. “Capital discipline is really important.” Still, the rally in prices and the revised pricing target for BP suggests executives won’t be as tightfisted as they have been over the last few years.
Gas prices spike in Pacific Northwest after pipeline explosion. A natural gas pipeline owned by Enbridge (NYSE: ENB) exploded in British Columbia earlier this week, a critical artery that supplies much of the U.S. Pacific Northwest with natural gas. The incident caused a ripple effect, forcing at least four oil refiners in Washington to curtail operations because they lacked the gas for electricity and steam. As a result, wholesale gasoline prices in the Pacific Northwest spiked.
Fallout from missing Saudi journalist spreads. The apparent murder of a Saudi journalist at the hands of the Saudi government – and perhaps with the direct involvement of Crown Prince Mohammed bin Salman – is threatening to isolate Riyadh. “The disappearance of Saudi journalist Jamal Khashoggi in Istanbul raises fresh questions about Crown Prince Mohammed bin Salman’s reputation as a reformer and political developments pose a growing threat to the economic outlook,” said Jason Tuvey, an economist at Capital Economics, according to the Wall Street Journal.
Trump to meet Xi in November. The U.S. has decided to go ahead with a planned meeting between President Trump and Chinese leader Xi Jingping in November to see if they can overcome trade differences. Next week, the U.S. Treasury is expected conclude that China has not been manipulating its currency, which is seen as a small overture to China from Washington. There is an internal battle within the Trump administration on how hard of a line to take with China in regard to tariffs – some officials that oppose the trade war hope that the Trump-Xi meeting could lead to a breakthrough.
China’s car market stalls. The world’s largest car market is suffering from a slowdown. Last year, China sold 29 million cars, 70 percent more than the 17 million sold in the United States. However, in July and August, car sales fell compared to a year earlier, with indications that the decline continued into September. Car sales might actually even decline for the full year compared to 2017. Industry executives and analysts point to declining consumer sentiment in China, the U.S.-China trade war, volatility in China’s stock market and higher fuel prices, according to the FT.
Volf
13.10.2018 kl 09:46
1203
Global Intelligence Report - 12th October 2018
Libya’s self-fulfilling prophecy
Libya is one of those venues where Western oil majors are not only willing to risk insecurity, but they’re hedging on that very insecurity to get better deals. Investigative journalists on the ground in Libya, with access to sources that include NOC and Libyan National Army (LNA) officials, tell us that the security situation has reached its worst point since 2014, yet this is exactly the moment Italy’s Eni chooses to move on BP’s Libya assets. This is about exploration, and Eni is ready to boost its exposure precisely as Tripoli is burning, oil is under attack and the end game is looming in terms of the hope to hold elections that aren’t likely to happen.
Eni has agreed to acquire a controlling stake in BP’s assets here in order to resume oil exploration, and the timing is certainly not coincidental. This has everything to do with Italy’s new far-right, populist government for which Libya holds some significance. The new government wants more involvement in Libya for two reasons 1) being in this specific area will ostensibly help them control the flow of migrants into Italy; and 2) a rivalry with the French for control over Libya’s vast resources. This second point circles back to the intensifying insecurity. This is the point where both Italy and France hedge their bets on which groups in Libya they win control over to further their interests. France is definitively backing the LNA’s General Haftar, and Italy’s move on BP’s assets will complicate matters due to the rivalry between France and Italy. The unknown here is Italy’s new far-right government, which will push against the idea of trying to hold elections in Libya on December 10th—a notion France has fa
cilitated. Taking over BP’s assets, Italy just bought more influence over what happens next.
Back at home, where the new far-right government is causing a great deal of concern in EU markets due to what is commonly viewed as irresponsible fiscal policy, a small group of former government officials and independent analysts tell us that there is an alternative view shaping up here: The new government is trying to push the envelope with the EU and to test it with its new draft budget due out later this month. In trying to promote their nationalist, nominally anti-EU agenda the new Italian government is looking to prove that their financial status is none of Brussels concern and that Italy isn’t Greece. There is also some truth to this way of thinking, according to our sources. What few consider is the fact that Italy’s financial structure is propped up by criminal structures that are completely engrained in the Italian economy and serve as a buffer zone against a financial crisis.
Beware What Happens Next in Brazil
Brazilian run-off elections will be held on October 28, and this is where we see the continuation of the global populist wave as Brazilians tire of austerity, with far-right candidate Jair Bolsonaro pegged to win. For investors, though, this is a mixed bag of intense uncertainty. While on the surface, Bolsonaro has indicated that he’s going to push privatization and open up a foreign investment bonanza in Brazil, digging a bit deeper beyond the rhetoric, his agenda is extremely vague. Most notably, he has also stated that Petrobras’ core assets would not be part of this drive. And when you talk about privatization in Brazil, it means nothing without Petrobras. The reality is that not even Bolsonaro has a solidified vision of what would happen to Petrobras if he wins elections. He has a variety of advisors from various camps who are fighting over this now, which means that the near-term status of the state-run company is dangerous uncertainty. As October 28 nears, it will become clearer which of Bolsonaro’s ad
visors come out on top—those who wish to privative to pay off debt, or those who wish to keep the nationalist structure. All of it will deeply affect the pre-salt contracts the supermajors have just won.
Chinese Crude Import Data Falls Flat
New shipping data shows that China halted U.S. crude oil imports in August amid intensifying bilateral tensions, while there are some indications that Chinese refiners have placed orders for U.S. crude in October. In the meantime, China has halted public reporting of the origin of its imports. Simultaneously, customs data from China shows that overall crude imports have high a four-month high, despite some concerns about China’s economic growth rate. We expect this data to be further skewed (despite no direct connection between tariffs and crude imports) by the U.S. arrest of a Chinese intelligence official on charges of economic espionage and theft of trade secrets from aerospace companies.
More from the global playbook …
Deals, Mergers & Acquisitions
- Baker Hughes will buy a 5% stake in Emirati Adnoc’s drilling division for $550 million. The size of the deal values the whole company at $11 billion. This is the first time the Emirati company has sold a stake directly to a foreign company and it is part of the UAE’s plan of making better use of existing oil assets, including through stake sales.
- London-listed Columbus Energy Resources has bought Steeldrum Oil Company, which has given it the rights to develop two oil fields in Trinidad with a combined production of 250,000 bpd. The acquisition is part of Columbus’ expansion plans for Trinidad, which is the largest oil and gas producer in the Caribbean but production has been on the decline since the 1990s.
- Malaysian Hibiscus Petroleum has bought a 50% interest in two oil and gas blocks in the UK section of the North Sea, paying a total $37.5 million. Both blocks contain recent discoveries that are yet to be developed. The move is the latest in a string of acquisition in the legacy producing area that have seen Big Oil reduce its exposure to the North Sea, replaced by smaller, often private equity-backed companies.
Tenders, Auctions & Contracts
- French Total and Algeria’s Sonatrach have inked a deal for the joint development of the Erg Issouane gas field, which, Total says, will require investments of $400 million. Another new agreement between the two will see the setting up of a joint venture that will build and operate a petrochemical complex in western Algeria. Algeria is a major gas producer and exporter to Europe.
- Aramco and Total have signed a contract for the joint construction of a petrochemical complex in Saudi Arabia that will cost $5 billion. The facility will feature an ethylene cracker with a capacity of 1.5 million tons annually and will target the Asian polymer market, which is growing fast, according to Total’s chief executive Patrick Pouyanne.
- Talos Energy is leading a consortium looking to partner with Pemex on the development of the Zama offshore project, where Talos struck oil in 2017. The estimated reserves of the discovery are 2 billion barrels of crude, of which 800 million barrels recoverable reserves. However, the reservoir may extend into a neighboring block whose development rights belong to Pemex, which plans to start drilling there in 2019.
Discovery & Development
- Norway’ state oil and gas major Equinor said it has cut its planned investments in offshore projects by as much as $3.62 billion. The company managed to drive down costs by combining enhanced drilling efficiency and simplifying all processes involved in the projects’ development.
- The U.S. Office of Foreign Assets Control has granted BP and Serica Energy a license to continue operating the Rhum gas field in the North Sea, which is 50% owned by Iran. The companies have undertaken to suspend all payments from gas sales from the field for the Iranian side for the duration of the sanctions. The license will also allow BP and Serica to complete the deal for BP’s sale of its stake in Rhum to the UK company.
- One of the most devastating storms in U.S. history, Hurricane Michael, shut in more than 40% of oil production capacity in the Gulf of Mexico but the interruption will be only short as the storm moved on before it had time to do any substantial damage to either platforms and rigs, or refineries on the Gulf Coast.
- Mexico’s Pemex has announced seven new discoveries in the shallow waters of its side of the Gulf of Mexico, which may together hold around 180 million barrels of crude oil. The discoveries are conveniently close to existing production and transportation infrastructure but their development will still require quite a lot of investment—somewhere in the vicinity of $7-10 billion.
- Russia’s Novatek said it had discovered a potentially major natural; gas field in the Gulf of Ob in the Arctic. The find is near Novatek’s operating Yamal LNG and also to its proposed Arctic LNG 2, which will be built across the Gulf of Ob from Yamal LNG. According to the company, the newly found deposit contains up to 320 billion cu m of natural gas.
Next week … insider insight into the death of Saudi journalist Jamal Khashoggi allegedly at a Saudi consulate in Turkey and the fallout inside Riyadh.
Libya’s self-fulfilling prophecy
Libya is one of those venues where Western oil majors are not only willing to risk insecurity, but they’re hedging on that very insecurity to get better deals. Investigative journalists on the ground in Libya, with access to sources that include NOC and Libyan National Army (LNA) officials, tell us that the security situation has reached its worst point since 2014, yet this is exactly the moment Italy’s Eni chooses to move on BP’s Libya assets. This is about exploration, and Eni is ready to boost its exposure precisely as Tripoli is burning, oil is under attack and the end game is looming in terms of the hope to hold elections that aren’t likely to happen.
Eni has agreed to acquire a controlling stake in BP’s assets here in order to resume oil exploration, and the timing is certainly not coincidental. This has everything to do with Italy’s new far-right, populist government for which Libya holds some significance. The new government wants more involvement in Libya for two reasons 1) being in this specific area will ostensibly help them control the flow of migrants into Italy; and 2) a rivalry with the French for control over Libya’s vast resources. This second point circles back to the intensifying insecurity. This is the point where both Italy and France hedge their bets on which groups in Libya they win control over to further their interests. France is definitively backing the LNA’s General Haftar, and Italy’s move on BP’s assets will complicate matters due to the rivalry between France and Italy. The unknown here is Italy’s new far-right government, which will push against the idea of trying to hold elections in Libya on December 10th—a notion France has fa
cilitated. Taking over BP’s assets, Italy just bought more influence over what happens next.
Back at home, where the new far-right government is causing a great deal of concern in EU markets due to what is commonly viewed as irresponsible fiscal policy, a small group of former government officials and independent analysts tell us that there is an alternative view shaping up here: The new government is trying to push the envelope with the EU and to test it with its new draft budget due out later this month. In trying to promote their nationalist, nominally anti-EU agenda the new Italian government is looking to prove that their financial status is none of Brussels concern and that Italy isn’t Greece. There is also some truth to this way of thinking, according to our sources. What few consider is the fact that Italy’s financial structure is propped up by criminal structures that are completely engrained in the Italian economy and serve as a buffer zone against a financial crisis.
Beware What Happens Next in Brazil
Brazilian run-off elections will be held on October 28, and this is where we see the continuation of the global populist wave as Brazilians tire of austerity, with far-right candidate Jair Bolsonaro pegged to win. For investors, though, this is a mixed bag of intense uncertainty. While on the surface, Bolsonaro has indicated that he’s going to push privatization and open up a foreign investment bonanza in Brazil, digging a bit deeper beyond the rhetoric, his agenda is extremely vague. Most notably, he has also stated that Petrobras’ core assets would not be part of this drive. And when you talk about privatization in Brazil, it means nothing without Petrobras. The reality is that not even Bolsonaro has a solidified vision of what would happen to Petrobras if he wins elections. He has a variety of advisors from various camps who are fighting over this now, which means that the near-term status of the state-run company is dangerous uncertainty. As October 28 nears, it will become clearer which of Bolsonaro’s ad
visors come out on top—those who wish to privative to pay off debt, or those who wish to keep the nationalist structure. All of it will deeply affect the pre-salt contracts the supermajors have just won.
Chinese Crude Import Data Falls Flat
New shipping data shows that China halted U.S. crude oil imports in August amid intensifying bilateral tensions, while there are some indications that Chinese refiners have placed orders for U.S. crude in October. In the meantime, China has halted public reporting of the origin of its imports. Simultaneously, customs data from China shows that overall crude imports have high a four-month high, despite some concerns about China’s economic growth rate. We expect this data to be further skewed (despite no direct connection between tariffs and crude imports) by the U.S. arrest of a Chinese intelligence official on charges of economic espionage and theft of trade secrets from aerospace companies.
More from the global playbook …
Deals, Mergers & Acquisitions
- Baker Hughes will buy a 5% stake in Emirati Adnoc’s drilling division for $550 million. The size of the deal values the whole company at $11 billion. This is the first time the Emirati company has sold a stake directly to a foreign company and it is part of the UAE’s plan of making better use of existing oil assets, including through stake sales.
- London-listed Columbus Energy Resources has bought Steeldrum Oil Company, which has given it the rights to develop two oil fields in Trinidad with a combined production of 250,000 bpd. The acquisition is part of Columbus’ expansion plans for Trinidad, which is the largest oil and gas producer in the Caribbean but production has been on the decline since the 1990s.
- Malaysian Hibiscus Petroleum has bought a 50% interest in two oil and gas blocks in the UK section of the North Sea, paying a total $37.5 million. Both blocks contain recent discoveries that are yet to be developed. The move is the latest in a string of acquisition in the legacy producing area that have seen Big Oil reduce its exposure to the North Sea, replaced by smaller, often private equity-backed companies.
Tenders, Auctions & Contracts
- French Total and Algeria’s Sonatrach have inked a deal for the joint development of the Erg Issouane gas field, which, Total says, will require investments of $400 million. Another new agreement between the two will see the setting up of a joint venture that will build and operate a petrochemical complex in western Algeria. Algeria is a major gas producer and exporter to Europe.
- Aramco and Total have signed a contract for the joint construction of a petrochemical complex in Saudi Arabia that will cost $5 billion. The facility will feature an ethylene cracker with a capacity of 1.5 million tons annually and will target the Asian polymer market, which is growing fast, according to Total’s chief executive Patrick Pouyanne.
- Talos Energy is leading a consortium looking to partner with Pemex on the development of the Zama offshore project, where Talos struck oil in 2017. The estimated reserves of the discovery are 2 billion barrels of crude, of which 800 million barrels recoverable reserves. However, the reservoir may extend into a neighboring block whose development rights belong to Pemex, which plans to start drilling there in 2019.
Discovery & Development
- Norway’ state oil and gas major Equinor said it has cut its planned investments in offshore projects by as much as $3.62 billion. The company managed to drive down costs by combining enhanced drilling efficiency and simplifying all processes involved in the projects’ development.
- The U.S. Office of Foreign Assets Control has granted BP and Serica Energy a license to continue operating the Rhum gas field in the North Sea, which is 50% owned by Iran. The companies have undertaken to suspend all payments from gas sales from the field for the Iranian side for the duration of the sanctions. The license will also allow BP and Serica to complete the deal for BP’s sale of its stake in Rhum to the UK company.
- One of the most devastating storms in U.S. history, Hurricane Michael, shut in more than 40% of oil production capacity in the Gulf of Mexico but the interruption will be only short as the storm moved on before it had time to do any substantial damage to either platforms and rigs, or refineries on the Gulf Coast.
- Mexico’s Pemex has announced seven new discoveries in the shallow waters of its side of the Gulf of Mexico, which may together hold around 180 million barrels of crude oil. The discoveries are conveniently close to existing production and transportation infrastructure but their development will still require quite a lot of investment—somewhere in the vicinity of $7-10 billion.
- Russia’s Novatek said it had discovered a potentially major natural; gas field in the Gulf of Ob in the Arctic. The find is near Novatek’s operating Yamal LNG and also to its proposed Arctic LNG 2, which will be built across the Gulf of Ob from Yamal LNG. According to the company, the newly found deposit contains up to 320 billion cu m of natural gas.
Next week … insider insight into the death of Saudi journalist Jamal Khashoggi allegedly at a Saudi consulate in Turkey and the fallout inside Riyadh.