Oil entered a bull market this week

Friday, January 11th, 2019

Oil entered a bull market this week, having gained 20 percent since the low point reached in December. WTI rose above $52 per barrel, while Brent moved above $61. “The mood brightens, and the market realizes that the world economy and oil demand are not grinding to a halt,” Norbert Ruecker, head of macro and commodity research at Julius Baer Group Ltd. in Zurich, told Bloomberg. “Moreover, there is confidence that the petro-nations will cut supplies as promised to balance the market.”

Saudi Aramco releases audit of oil reserves. Saudi Aramco released figures on its oil reserves this week, a figure that has been the subject of speculation for decades. The independent audit was originally initiated in anticipation of Saudi Aramco’s now-delayed IPO. The audit largely confirmed what Saudi officials have long said – that the Kingdom is sitting on massive reserves. The audit revealed 266.3 billion barrels of oil reserves and 307.9 trillion cubic feet of natural gas. Meanwhile, Aramco is expected to issue its first ever international bond sale later this year, with plans to use the proceeds to finance its acquisition of petrochemical giant Sabic.

BP eyes gas find in Caspian. BP (NYSE: BP) plans on drilling six new exploration wells in Azerbaijan by 2020, with the hopes of making another giant natural gas discovery. BP only recently brought its $28 billion Shah Deniz gas field online, but as Bloomberg reports, the oil major hopes to replicate that success. “Alongside Brazil, Azerbaijan stands out in terms of the areas of focus for the next few years,” Gary Jones, BP’s regional president for Azerbaijan, Georgia and Turkey, told Bloomberg in a phone interview. “It’s a very significant exploration program for us, which demonstrates the confidence and the role that we see in the Caspian.”

Automakers to spend $300 billion on electric vehicles. Global automakers have plans to spend at least $300 billion developing and rolling out electric vehicles over the next decade, according to a Reuters analysis. Nearly half of that total – $135 billion – will be spent in China, where a suite of government policies are pushing technologies and EV adoption forward.

Offshore oil spending to rise by 6 percent. The oil industry will increase offshore spending by 6 percent this year, according to Bloomberg and Rystad Energy. That figure will jump to a 14-percent increase in 2020.

China pulls back on renewables subsidies as costs decline. China is paring back subsidies for solar and wind because new projects can compete without government support. Reuters reports that unsubsidized renewable energy now costs about the same as coal-fired power plants. “Some regions with good natural resources and firm demand have already achieved subsidy-free, or grid price parity, conditions,” said China’s National Development and Reform Commission (NDRC).

New generation in U.S. mostly renewable. The EIA expects 23.7 gigawatts of new electric capacity to be installed in the U.S. this year, and more than 60 percent of that will be wind and solar.

Pompeo lays out activist U.S. foreign policy. U.S. Secretary of State Mike Pompeo laid out a “new” vision for U.S. foreign policy in a speech in Cairo, declaring that “the age of self-inflicted American shame is over.” The speech was vague but promised more action in the Middle East, mostly centered on containing Iran. The speech raised questions, however, because it seemed to contradict President Trump’s desire to withdraw troops from Syria.

Government shutdown hits ANWR. The U.S. Bureau of Land Management delayed hearings on its draft Environmental Impact Statement for oil and gas leasing in the Arctic National Wildlife Refuge due to the government shutdown.

Potential Permian pipeline delay. The 900,000-bpd EPIC oil pipeline that will run from the Permian to the Texas coast in Corpus Christi could face some delays due to regulatory holdups. EPIC Crude Pipeline LP said the expected third quarter startup is in “some jeopardy.”

India pays for Iranian oil in rupees. India has begun paying for oil from Iran in rupees, according to Reuters. India received a waiver from the U.S., allowing it to buy Iranian oil through May. Iran is attempting to construct payment structures and barter deals to bypass U.S. sanctions.

TAP pipeline eyes 2020 startup. The Trans-Adriatic Pipeline (TAP), which will ferry natural gas from the Caspian to Italy, and then on to other parts of Europe, has completed the $4.5 billion in project financing. This will allow the pipeline to finish up its final leg, putting the $40 billion project on track for a 2020 startup. TAP will allow Europe to access non-Russian gas, and as such, it has enormous geopolitical implications.

U.S. oil boom sets off scramble for ports. There are seven proposed oil export terminals for the U.S. Gulf Coast, as developers race to profit off of the export boom. Major developers, including Trafigura and a company backed by Carlyle Group, are battling it out to be the first mover.

Mexico faces widespread gas shortages. The Mexican government shifted gasoline shipments from pipelines to tanker trucks in an effort at cracking down on fuel theft from pipelines. However, the move has caused widespread fuel shortages in the country.

ExxonMobil considers EV infrastructure investment. ExxonMobil (NYSE: XOM) is reportedly mulling an investment in EV recharging infrastructure, although the company has declined to reveal details. If true, it is a glaring recognition that even the more conservative oil executives see the future as one dominated by clean energy. While several European oil majors have made investments in EVs, recharging infrastructure and renewable energy, Exxon has notably refrained from such moves.
11.01.2019 kl 22:22 576

2019 - Sell The Rumor, Buy The Fact
2019 starts with a high degree of uncertainty over the path of the global economy. Leading economic indicators point to a downturn and US trade policy has halted the former direction of travel towards more globalised free trade.

The Chinese/US trade war rumbles on, the EU and the UK stand on the precipice of a ‘no deal’ Brexit divorce, which threatens the economic prospects of both. The era of quantitative easing appears to be over and interest rates are on the rise. All of the world’s major economies face a tougher economic outlook.

Given the close correlation between global GDP and oil demand, oil market participants have become bearish, calculating that muted oil demand growth means OPEC must do more than it currently intends to balance supply and demand.

At its last meeting in December, OPEC and its non-OPEC partners agreed to curb output by 1.2 million b/d for the first six months of this year. Given rising US output and the deepening gloom overhanging the global economy this was regarded by the market as inadequate, causing oil prices to plummet from just over $60/bbl in mid-December into the low $50s towards year’s end.

However, despite the prevailing pessimism, a downturn is not yet established fact, nor is a significant supply surplus in the oil market throughout 2019.

Less growth not no growth

The IMF, in its October World Economic Outlook, predicted global GDP growth of 3.7%, the same rate as in 2017 and 2016, although the rate of expansion in advanced economies is expected to slow. The outlook into the early 2020s remains just above 3.5%, which, while unspectacular, is relatively robust.

Interest rates are still at historically low levels. The European Central Bank (ECB) expects eurozone inflation to remain just below 2% in 2019 in line with the bank’s target. Considering the uncertainty surrounding Brexit, the ECB is unlikely to make aggressive interest rates changes unless there is a substantial overshoot on this forecast.

The US Federal Reserve signalled in 2018 that interest rates were likely to rise further in 2019, but this outlook was predicated on a strong US economy, and the Fed’s targets are less bound to inflation than the ECB’s. If interest rates are increased further, they are unlikely to go up far and fast, particularly amid signs that US growth is slowing.

Most economic forecasts now put global GDP growth slightly lower than the IMF’s October outlook, between 3.0-3.7%, but assume no major change in US interest rates as expectations about US GDP growth are revised downward.

At present, conditions certainly imply weaker oil demand than in the last four years, but no collapse. OPEC predicts demand growth of 1.29 million b/d in 2019, the International Energy Agency 1.4 million b/d and the US Energy Information Administration 1.52 million b/d.

Trading pains

It’s clear that whatever the relative pain, the Sino-US trade war is hurting both sides. In December, a deal was reached to delay the imposition of further tariffs and Chinese and US officials started new talks January 4. China has also announced stimulus measures for its banking sector aimed at increasing lending to boost domestic investment.

Although it’s difficult to gauge the likelihood of either, a reduction in trade tensions between China and the US combined with the avoidance of a no-deal Brexit could change the economic outlook for 2019, and thus the demand outlook for oil, quite radically and fairly quickly.

Supply-side risks

The supply side is no less uncertain. Saudi Arabia appears to have followed through on promises to cut oil production in December, despite the new OPEC/non-OPEC agreement only coming into effect from January.

According to a Reuters survey, OPEC output fell by 460,000 b/d in December, Saudi Arabia accounting for 400,000 b/d. Riyadh appears once again to be willing to over comply, potentially supported by the UAE and Kuwait, suggesting that OPEC as a whole may deliver more than it has promised and sooner.

In the US, shale production remains on the up and up, with net gains from shale production expected to grow into January and the number of drilled but uncompleted wells (DUCs) still increasing. However, the business activity index of the Dallas Fed Energy Survey showed a huge drop for the fourth quarter to suggest only a marginal expansion in energy sector activity from the third quarter.

Brent crude is bumping along in the mid-$50s, but US marker West Texas Intermediate is a good $9/bbl lower putting it in the high-$40s, a sea change from the first 10 months of last year and not a price level that will sustain the expansion of 2018. If the fourth-quarter pause continues into the first-quarter 2019, the EIA’s forecast of a rise in US crude production from an average 10.9 million b/d in 2018 to 12.1 million in 2019 will almost certainly be revised down.

Rising spare capacity in Saudi Arabia and in the form of US DUCs also provides scope for Washington to harden its sanctions policy on Iran. Waivers were granted to importers of Iranian crude largely owing to US government concern over the impact of rising pump prices ahead of mid-term elections in the US. That electoral pressure has dissipated and the impact of a tougher line on sanctions would be to the benefit of both US crude producers and US ally Saudi Arabia.

There are in effect two short-term corrective factors in the oil market – OPEC/non-OPEC producers’ willingness to agree and implement cuts and US shale production. While the actions of one counteract the actions of the other, both are price responsive, which results in an imperfect, jerky synchronicity. The production curbing actions of both could come together just in time for the 2019 US driving season, lifting some of the current oil market gloom.