Oil was up in early trading on Friday

Friday, January 25, 2019

Oil was up in early trading on Friday and could close out the week with a slight gain, but benchmark prices were remarkably flat given the turmoil raging in Venezuela.

Venezuela’s military backs Maduro. Venezuela has been rocked by turmoil this week, with the Maduro regime teetering on the brink of collapse. The U.S., clearly seeking regime change in Venezuela, recognized the head of the national assembly, Juan Guaidó, as the rightful president on Wednesday, which corresponded with massive nation-wide protests. However, by Thursday, the military stuck by President Maduro, which will provide the leader a lifeline. In the meantime, Venezuela’s oil production is expected to continue to decline. Guaidó has offered some details on new plans for the oil sector, including new picks to head up Citgo and PDVSA. He is trying to obtain control of the country’s oil assets, but with the military backing Maduro for now, there is no sign of an imminent downfall. Billions of dollars’ worth of investment from Russia and China are on the line.

U.S. sanctions on Venezuela possible. News reports suggest that the Trump administration is mulling harsh sanctions targeting Venezuela’s oil sector. It is unclear if the administration will follow through, but if it did, sanctions would hit U.S. Gulf Coast refiners that depend on heavy oil from Venezuela, including Citgo, Valero (NYSE: VLO), Chevron (NYSE: CVX) and PBF Energy (NYSE: PBF).

China turning to Russia for oil. Russia was China’s largest oil supplier in 2018 for the third year in a row, cementing its top spot ahead of Saudi Arabia for. Russia sent 1.43 million barrels per day to China last year, up 19.7 percent from a year earlier. China’s private refineries stepped up processing, while at the same time, China had to turn to Russia to replace lost barrels from Iran and Venezuela.

Freight rates decline, sign of economic slowdown. Freight rates for dry-bulk container ships have declined sharply over the last six months, a sign of flagging trade and a broader global economic slowdown. The Baltic Dry Index, which measures ship transport costs, has fallen by 47 percent since mid-2018, according to Reuters. “The global economy and dry-bulk shipping market are showing us very real signs of distress,” said Jeffrey Landsberg, managing director of commodity consultancy Commodore Research.

EIA: U.S. net energy exporter in 2020s. The EIA released its Annual Energy Outlook for 2019, which includes projections out to 2050. Some of the key takeaways include the projection that the U.S. will become a net energy exporter in the 2020s, due to surging natural gas and oil production. The U.S. has been a net energy importer since 1953.

CNOOC steps up spending and drilling. China’s state-owned CNOOC hiked spending this year to its highest level since 2014 in an effort to boost exploration and production. China’s aging fields have been declining for years.

EIA: U.S. shale to jump 63,000 bpd in February. The EIA’s latest Drilling Productivity Report projects shale growth of 63,000 bpd in February, a significant but smaller increase than in past months. The relatively slower growth rate suggests the shale industry is pulling back on drilling activity.

Russia wants to avoid price war with U.S. shale. A top Russian official said that his country should stick with the OPEC+ production cuts and avoid a price war with U.S. shale drillers. “For U.S. shale production to go down, you need oil prices at $40 per barrel and below. That is not healthy for the Russian economy,” Kirill Dmitriev, head of the state-backed Russian Direct Investment Fund, said at the World Economic Forum in Davos. “We should not take competitive action to destroy U.S. shale production.” Dmitriev was one of the original architects of the first coordinated production cut deal with OPEC several years ago.

Nigerian presidential candidate would rewrite oil deals. Atiku Abubakar, the leading opposition challenger to Nigeria’s president, said he would rewrite oil deals with foreign companies if elected in next month’s election. “I believe we need to review it to make it . . . more fair,” he said, according to the FT. Such contracts would include those with Royal Dutch Shell (NYSE: RDS.A), ExxonMobil (NYSE: XOM), and Chevron (NYSE: CVX). He also vowed to breakup Nigeria’s state-owned oil company, calling it a “mafia organization.”

BP CEO: Oil demand will remain steady. Despite fears of an economic slowdown, BP’s CEO Bob Dudley said that demand remains firm. "We're not actually seeing this worrying thought that it's all going to start falling," Dudley told CNBC in Davos. “We certainly don't see it yet in the numbers,” he added, referring to the IMF’s warning of a slowdown.

Aramco to spend billions on U.S. gas assets. Saudi Aramco is reportedly scouring the U.S. for natural gas assets, for which the company would pay “billions of dollars.” “We do have appetite for additional investments in the United States. Aramco’s international gas team has been given an open platform to look at gas acquisitions along the whole supply chain. They have been given significant financial firepower – in the billions of dollars,” Amin Nasser, Aramco’s CEO, told Reuters.

U.S. shale execs suggest slowdown is coming. U.S. shale executives said that the industry is set to slowdown this year. “I believe not as much money will be pouring into the Permian basin this time. I believe investors will hold companies accountable for returns and a lot of this didn’t happen previously,” Occidental (NYSE: OXY) CEO Vicki Hollub said in Davos. At a separate summit, hosted by Argus, Continental Resources’ (NYSE: CLR) Harold Hamm said that shale growth could drop by 50 percent this year. “Producers have become more disciplined in their approach to capex,” he said. “Several years back growth was a huge consideration. That consideration has been much less. The peak consideration now has been — are you overspending cash flow. Are you living within cash flow?”

EIA, IEA and OPEC agree: OPEC+ cuts could balance market. Data from the top three energy forecasters – the EIA, IEA and OPEC – all agree that the OPEC+ production cuts will head off a supply surplus. The data varies a bit, but they share the overall conclusion that the OPEC+ cuts will succeed in draining the surplus.

Middle East instability top risk. Total’s (NYSE: TOT) CEO said that instability in the Middle East was his top worry, not Venezuela.

Thanks for reading and we’ll see you next week.
25.01.2019 kl 22:10 478

Oil Market Recovery Is Far From Certain
Brent has recovered some ground since the start of the year, despite continued concerns over the state of the world economy.

In demand terms, the upturn reflects hope that the US-Chinese trade war is moving towards a resolution, and that the UK parliament will somehow avert a ‘no-deal’ Brexit before the looming deadline of March 29.

There are also grounds for optimism on the supply side.

Saudi Arabia appears to be acting on the agreement struck in December between OPEC and associated non-OPEC producers with determination. Secondary source estimates put OPEC production down 630,000 b/d in December from November at 32.43 million b/d, the lowest level in six months. Riyadh curtailed its own production by 401,000 b/d, acting one month before it is formally required to do so, with promises of more cuts to come in January.

Activity also appears to be stalling on the US oil patch. There was the sharp drop in the business activity index of the Dallas Fed energy survey for the fourth quarter, and the US rig count trended down in the four weeks to January 18, shedding 25 rigs in the most recently reported week to 852.

Shifting sands

Nascent optimism surrounding the external trade environment is not misplaced, but neither an improvement in US-China trade relations nor the avoidance of a hard Brexit are done deals. Both still represent major uncertainties.

Chinese economic growth was reported in January at 6.6% in 2018 in line with expectations, but amid significant scepticism. China’s GDP data tends to hit government targets with uncanny accuracy.

Weakening industrial profits in the second half of 2018 implied a more significant slowdown than officially reported, although electricity demand ended the year up 6.8%, showing the strongest year-on-year growth in four months in December, according to China’s National Bureau of Statistics.

US benchmark West Texas Intermediate had followed Brent upward from its end of year slump to over $54/bbl by January 21. This may not be enough to reverse the apparent slowdown in new drilling activity, but may prompt US drillers to sell forward production from their voluminous stock of drilled-but-uncompleted wells (DUCs). The number of DUCs has been on a steady upward trend, rising 31% in the year to December when the US Energy Information Agency recorded 8,594.

Compliance issues

Nor is compliance with the OPEC/non-OPEC agreement, which aims to cut 1.2 million b/d of production from October levels, a given.

While Saudi Arabia acted swiftly, other key producers were more prosaic, using December to maximise output ahead of the new restrictions. Russia hit a new production record of near 11.5 million b/d in December, according to the International Energy Agency. Iraq increased production to 4.67 million b/d, with record export volumes of 4.14 million b/d.

Saudi Arabia may find itself rather lonely when it comes to real action to curb output.

The additional falls in OPEC output in December were delivered unwillingly or inadvertently, an 80,000 b/d drop from Libya as a result of the closure of the Sharara field and a 170,000 b/d reduction in Iranian output as Tehran struggles to find buyers for its crude, owing to US sanctions.

‘X’ factor missing

Moreover, this round of production cuts looks unlikely to be flattered by steady falls in Venezuelan production. Although the country remains in the midst of a seemingly endless economic and social crisis, national oil output appears to have stabilised just above the 1.1 million b/d mark.

The Venezuelan ‘x’ factor is missing, and so far does not look likely to be fulfilled by sanctions-hit Iran. The US is expected in May to reduce the number of waivers granted in November, removing Italy, Greece and Taiwan from the list. However, this would not represent any real toughening of Washington’s stance as these countries are already thought to have stopped imports of Iranian crude.

This puts a huge onus on Saudi Arabia to more than deliver on its share of the cuts. It also underlines the increasingly pivotal role of Iraq.

Reliable partner?

Iraq’s importance within OPEC grows with every additional barrel of productive capacity. While the boom in US liquids production has understandably grabbed the limelight, Iraq’s steady increase in production has been significant, doubling in the last eight years, despite the violence and insecurity inflicted on the country by the Islamic State insurgency.

Iraq has the capacity to produce as much oil as Saudi Arabia in the long term, and while its medium-term production prospects are heavily circumscribed by its lack of storage facilities, export capacity and water to repressurise its giant fields, output can still rise in the short term towards its much-reduced and admittedly still ambitious target of 6.5 million b/d by 2022.

But Baghdad will not give up its expansionary trajectory lightly, and the federal government was not slow to fudge the figures during the last round of OPEC cuts.

Iraq then had its own internal x factor – the ongoing divisions between the Kurdish Regional Government and Baghdad. Here relations appear to be improving as a result of the shift in political balance following parliamentary elections in 2018. While many issues will continue unresolved, the transfer of federal funds to the KRG is stabilising the region’s finances, underpinning payments to foreign oil firms and thus allowing further investment in the KRG’s own oil fields.

The record export volumes in December reflected the recovery of both KRG volumes flowing to Turkey’s Mediterranean oil terminal at Ceyhan to 420,000 b/d and an increase from 9,000 b/d to 99,000 b/d in federal oil also moving north. But there is still shut-in capacity in the Kirkuk area and spare northern export capacity via the 700,000 b/d KRG pipeline.

In the south, production capacity runs the risk of curtailment as a result of the limitations on the southern export system, although some production will be absorbed by rising domestic demand. But spare capacity in Iraq that could be exported -- as a result of the Erbil-Baghdad rapprochement -- is a relatively new situation.

As a result, in the absence of further major falls in either Venezuelan production or Iranian exports, Iraq’s compliance with OPEC’s latest strictures on production is likely to move centre stage.