Oil prices popped on Friday

Friday, January 4th, 2019

Oil prices popped on Friday as signs of a trade thaw emerged and data showed strong OPEC cuts in December.

Oil prices poised for large weekly gain. Brent and WTI are set to close out the week with the largest weekly gain since December 2016. This week, crude benchmarks could gain as much as 10 percent, owing to Saudi production cuts and a broader sense that the oil selloff has gone far enough. “Underpinning this wave of buying is mounting evidence that Saudi Arabia has taken an axe to its oil production,” Stephen Brennock, an analyst at PVM Oil Associates Ltd., told Bloomberg.

Strong U.S. employment data. The U.S. Labor Department reported strong job figures for December, with employers adding an estimated 312,000 jobs for the month, higher than expected. The data suggests the U.S. economy remains in solid shape, even as signs of a global slowdown have continued to mount. The downside of the jobs report is that it undercuts the case for the Federal Reserve to abandon interest rate hikes. It could also embolden the Trump administration to take a harder line in trade talks with China.

U.S.-China trade talks. U.S. and Chinese officials are set to meet on Monday to resume trade talks, and news of the meeting bolstered sentiment in financial markets. The three-month truce in the U.S.-China trade war ends in March, but the tone from officials from both countries has thawed recently. The shakiness in the global economy, which the trade war has contributed to, is also putting pressure on both sides to back away from the brink. “China has a strong desire to have a truce on trade war,” Shi Yinhong, a professor of international relations at Renmin University in Beijing, told the FT. “[T]he probability of the two sides reaching an agreement within the 90 days is growing”.

U.S. shale activity slowed in fourth quarter. The collapse of oil prices in the fourth quarter of 2018 led to a slowdown in the shale patch. The business activity index published by the Federal Reserve Bank of Dallas show that activity decelerated and production growth slowed. The data suggests that the U.S. shale industry was very responsive and sensitive to lower oil prices. The average prediction for year-end WTI prices from oil and gas executives was $59 per barrel.

OPEC production fell in December. OPEC’s oil production fell in December to 32.68 mb/d, down about 460,000 bpd from a month earlier, according to Reuters. It was the largest monthly decline in two years. The reductions came ahead of the OPEC+ deal, which begins this month, and suggests that Saudi Arabia wanted to unilaterally tighten up the market. Saudi Arabia alone slashed output by 400,000 bpd, and Saudi officials said they would cut deeper in January.

U.S. shale production problems. The Wall Street Journal reported that U.S. shale companies have over-hyped the production potential from thousands of shale wells. “Two-thirds of projections made by the fracking companies between 2014 and 2017 in America’s four hottest drilling regions appear to have been overly optimistic, according to the analysis of some 16,000 wells operated by 29 of the biggest producers in oil basins in Texas and North Dakota,” the WSJ wrote. “Collectively, the companies that made projections are on track to pump nearly 10% less oil and gas than they forecast for those areas.” The WSJ calculated that the lower-than-expected production adds up to nearly one billion barrels of oil and gas over 30 years, worth more than $30 billion at current prices.

Libya’s Sharara field sees more trouble. Libya’s largest oil field, the Sharara field, was hit with more bad news this week. “An inspection team reported the theft of key operational equipment, including transformers and cables from several wells. The incident will reduce Sharara's output by approximately 8,500 barrels per day even after the main system restarts operations,” Libya’s National Oil Corp. said in a statement. The Sharara field, which has typically produced in excess of 300,000 bpd, was temporarily shut down last month. “We are very concerned these attacks are not simple robberies but are part of a systematic attempt to destroy the Sharara system,” NOC chairman Mustafa Sanalla said.

Offshore drilling plans delayed on government shutdown. The U.S. Interior Department delayed the release of a proposed plan for offshore oil and gas leasing sales from 2019 through 2024 due to the ongoing government shutdown, according to S&P Global Platts. The plan was supposed to be released in mid-January but is now likely delayed.

Oil tanks in Permian caught fire. A series of oil tanks caught fire near a Noble Energy (NYSE: NBL) well site in the Permian in the early hours on January 2. The well was shut down and no injuries were reported.

Michigan to review Line 5 pipeline plans. The eleventh-hour deal between Enbridge (NYSE: ENB) and Michigan’s outgoing Republican governor is now being scrutinized by the new Democratic Governor and the state’s Attorney General. The plan calls for Enbridge to build a new line next to the aging Line 5 system, which is over sixty years old. Environmental groups and native tribes have vociferously opposed the plan, which they argue could spoil the Mackinac Straights. Line 5 carries crude oil and natural gas liquids from Canada, across Michigan, to a major petrochemical hub in Sarnia, Ontario.
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Global Intelligence Report - 4th January 2019

- Former government official in Burkina Faso
- Turkish private intelligence operative with a Western firm
- Turkish investigative journalist

The Syria Withdrawal

Talk of a U.S. withdrawal from Syria sparked rumors—first surfacing from a question posed by former NATO commander General Wesley Clark—as to whether Turkey had blackmailed Trump into a pullout. A Turkish private intelligence source on the ground in Istanbul describes Clark’s claim as baseless for three reasons: 1) Turkish officials were as shocked as the rest of the world at news of a U.S. withdrawal; 2) Turkey doesn’t actually want the U.S. to pull out of Syria because that would harm its own interests in multiple ways; 3) Although likely unintentional, the withdrawal announcement serves several U.S. interests, which Turkey does not share. Namely, it stalls and controls the upcoming Turkish operation, leaving the military burden of fighting ISIS on Turkey’s shoulders and the economic burden on Saudi Arabia’s, paving the way for rapprochement between these two hostile countries, while also removing a pillar of Turkey’s politics on the balance of power between Moscow and Washington. The withdrawal (which will just be replaced with air strikes on ISIS positions when necessary) makes sense for the United States, whose only point in being there was to counter Russian and Iranian influence, at which they have failed. ISIS has not been defeated in Syria, as a side note to anyone who has taken this propaganda to be fact. This is largely now a Russian game. For oil, in the near and medium term, it’s a Kurdish game, and the Kurds—who control a key oil producing region, have been selling to the Iranians while at the same time being backed by the U.S.—a sore point for Trump and another excuse for the withdrawal. At the same time, watch all the Gulf countries—Iran’s enemies—stake their official presence in Syria now. The UAE and Bahrain have already reopened their embassies in Damascus, and Kuwait signaled it would follow suit. This is a major coup for Assad, who will benefit financially as the Arab nations buy their influence as a bulwark against Iran.

India and Iran Loophole

India’s government has exempted from taxes all payments made to the National Iranian Oil Company by local refiners for crude oil imports in the latest indication one of Asia’s top crude oil importers is actively looking for ways to circumvent US sanctions against Tehran. All payments made into accounts held by foreign entities in Indian banks are subject to a 40% tax, which Tehran had protested. That protest led to the freezing of some $1.5 billion in refiners’ payments until New Delhi caved and issue the exemption. Payments by Indian refiners for Iranian oil are being made in rupees to avoid dollar exchange. In exchange for the tax exemption, the government has required that NIOC refrains from any business activity on Indian territory. Currently, eight Iran oil importers are exempted from the sanctions, including India and China. The waivers, however, expire in May and Washington repeatedly making it clear it was unwilling to make any compromises.

Burkina Faso Erupts, Threatening Mining Interests

A spike in Islamist attacks in Burkina Faso indicate that jihadists are making their move to exert more control over the country, and natural resource concessions should feel threatened. They have been under threat of mining code revisions for months already, with new jihadist violence prompting ethnic clashes as well and adding more pressure that the fragile government may not be able to withstand. That pressure has been mounting since the March 2018 attack on the French Embassy. The current president, Kabore, won elections in 2015 and there are concerns that the next elections scheduled for 2020 may be moved ahead to this year. At the same time, struggling with major security issues, the government is also trying to get more out of its natural resources and we believe they will push for a revision of the mining code, following a current trend in Africa. Gold production here is expected to increase exponentially, and the country could end up being the third-largest gold producer on the continent. We’ve seen an uptick in interest from foreign mining companies here, and the government feels it now has more leverage with foreign investors and is looking for better deals. There are indications that the government will increase its taxes for foreign mining companies and it will seek to increase its stake not only in any new operation that is going to be established but also in terms of its existing projects.

Libya Bleeding Oil

Libya’s Sharara field is bleeding 8,500 barrels of crude daily to looters as it remains closed after a force majeure was declared by the National Oil Corporation following its takeover by local tribesmen and members of the Petroleum Facilities Guard. Sharara is the largest producing field in Libya, pumping about 315,000 bpd under normal circumstances.

Then, on Thursday, 3 January, Libya suspended all oil exports due to bad weather which has forced the shutdown of all export terminals.

In the meantime, a group of mercenaries from Chad attacked forces loyal to General Haftar in the south last week. ISIS also launched two suicide attacks in Ghadwa, in the country’s south. The suicide attacks are related to the Chadian mercenary attack on Haftar’s forces. In response to that attack, Haftar deployed additional forces to southern Libya, prompting ISIS revenge attacks there. Qatar is drumming up publicity for its theory that Haftar, backed by the UAE, is planning to have LNA forces take over key cities in the south in order to undermine the Government of National Accord (GNA).

On Christmas Day, ISIS launched a deadly assault on the Foreign Ministry in Tripoli, killing three people and demonstrating (as was the intention) that ISIS has already infiltrated the capital city of the GNA.

Global Oil & Gas Playbook

Deals, Mergers & Acquisitions

- BP has sold three wind farms in the United States to units of private equity firm Ares Management Corp. The move, BP said, was part of efforts to optimize its wind power operations in the country, which after the divestment consist of 11 wind farms across eight states.

- Shell has completed its exit from the oil and gas industry of New Zealand, selling its assets there for $578 million to Austria’s OMV. The assets in question include Shell’s 61% interest in the Great South Basin project, its majority stakes in two fields – Maui and Pokohura – both of over 80%, and a number of tank farms.

- Separately, Shell said it had won a license from the Chinese authorities to trade oil products independently on the Chinese wholesale market. This makes the supermajor the first foreign company permitted to trade independently on the Chinese wholesale oil products market.

- Norway’s DNO has extended its hostile takeover offer for Faroe Petroleum by two weeks as the two continue arguing over the valuation of the target company. Faroe already rejected DNO’s original offer saying it undervalued the company. DNO offered $1.91 per share for Faroe and has so far secured the acceptance of 13% of Faroe’s shareholders. As it owns a 30% stake in the company, DNO effectively has the backing of shareholders representing 43% in Faroe. It needs 57.5%.

Tenders, Auctions & Contracts

- Italian Saipem bagged a $2.5-billion construction deal from Russia’s Novatek for the company’s second LNG project, Arctic LNG 2. The work will involve the construction of gravity-based structure platforms offshore. The plant should be up and running by 2022-2023 as Novatek advances its ambitious plans of challenging Qatar’s number-one spot in LNG exports. Separately, Saipem won an engineering, procurement, construction, and installation deal with Petrobel for the huge Zohr gas field in Egypt.

- Subsea 7 scored a contract with BP for the construction of subsea umbilicals, risers, and floaters at the supermajor’s Manuel project in the Gulf of Mexico. The value of the deal was not disclosed but Subsea 7 said in its statement the contract was sizeable, which it defines as anything from $50 million to $150 million.

- Iraq and Kuwait are in the final stages of negotiating a natural gas export agreement that will see Iraq supply the commodity to Kuwait. Iraq used to export gas to Kuwait in the 1980s but later stopped. Now, despite its own growing demand for the fuel, the energy revenue-dependent state is once again willing to export part of the gas it produces.

- Cuba is looking for more foreign investment in its energy sector, with a focus on oil and renewables, and will begin tendering oil deposits in April this year. The tender will cover 24 blocks in the Cuban section of the Gulf of Mexico. Several prospects in Cuba’s exclusive economic zone have been studied and they are estimated to contain 10 billion barrels of recoverable crude.

- First Gen has submitted a bid to the Philippine authorities for the construction of an LNG plant. The Philippine energy company has partnered with Tokyo Gas Co. On the project. The Japanese company will have a minority stake of 20% in the facility.

Discovery & Development

- Russia’s crude oil production hit an all-time record high of 11.45 million barrels daily in December, making the average for the year 11.16 million bpd, up 1.6% on the year. The production increase is a surprise given Russia’s participation in the OPEC+ production cuts that lasted for six months in 2018 before the group agreed to reverse them in response to an oil price spike.

- Nigeria reported average daily crude oil production of 2.09 million barrels for last year, up 9% on the year. Finding buyers for the crude was not always an easy task, however, as competition among suppliers of crude intensified.

Company News

- Angola’s state oil firm Sonangol has sealed a deal