Oil prices are set to post a loss for the week.


Friday, June 5th, 2019

Oil prices are set to post a loss for the week despite being bolstered by the OPEC+ deal and the forthcoming restart of trade talks between Washington and Beijing. It seems that economic concerns will continue to weigh on the market in the coming weeks.

U.S. shale production faces spacing problem. According to the Wall Street Journal, a drilling test conducted by Encana (NYSE: ECA), has proved to be a dramatic disappointment. Encana’s “cube” development envisioned packing dozens of wells together – originally supposed to be as much as 60 – from a single location. However, instead of cutting costs and boosting output, the wells performed poorly, and they are expected to produce as little as half of the oil as other wells drilled farther apart. The result suggests U.S. shale could peak sooner than expected, the WSJ said.

UK seizes Iranian oil tanker. The British Royal Marines seized an Iranian oil tanker in Gibraltar on Thursday for attempting to take oil to Syria, which violates European Union sanctions. But the move could escalate tension between Iran and the West. “This is the first time that the EU has done something so public and so aggressive. I imagine it was also coordinated in some manner with the U.S. given that NATO member forces have been involved,” Matthew Oresman, a partner with law firm Pillsbury Winthrop Shaw Pittman who advises firms on sanctions, said in a Reuters interview.

BP: Some oil reserves “won’t see the light of day.” A BP (NYSE: BP) official admitted that some of the company’s “more complicated to extract” resources will have to be sold or otherwise will stay in the ground. More expensive and time-consuming reserves “won’t see the light of day,” Dominic Emery, BP’s head of strategy, told Bloomberg. Climate change, peak demand and investor pressure to focus on short-cycle projects will ultimately mean that some resources “won’t come out the ground.”

U.S. shale destroyed 80% of its value since 2008. Former EQT (NYSE: EQT) chief executive Steve Schlotterbeck said that the shale industry continues to destroy capital “every time they put the drill bit to the ground.” He spoke at a petrochemical conference where he said that the industry has destroyed 80 percent of its value since 2008.

Trump considers quiet waiver for China on Iran imports. The Trump administration is reportedly weighing whether to allow China to continue to import Iranian oil in order to avoid looking powerless as China imports oil anyway. The U.S. had vowed to “sanction any imports of Iranian crude oil,” threatening to enact punishment on anyone buying oil from Iran. However, as China recently did just that, the Trump administration fears looking impotent. According to Politico, U.S. officials are considering using a loophole to grant China a waiver.

OPEC production drops to new low. OPEC’s production declined to a five-year low in June, largely due to sharp losses from Venezuela and Iran, according to Reuters. The group produced 29.6 mb/d, down 170,000 bpd from May. Reuters estimates that Iran’s oil exports have fallen below 400,000 bpd.

Europe building battery supply chain. Europe is aiming to funnel over 100 billion euros into building a supply chain for lithium-ion battery packs for electric vehicles, according to Bloomberg. In addition to greenhouse gas reductions, a significant motivator is ensuring that top European automakers can pivot to the electric future, as well as fears that China will dominate the industry.

U.S. auto sales plunge, jobs up. While Europe and China are showing signs of an economic deceleration, the U.S. is throwing up mixed signals. Manufacturing data is weak, and auto sales could dip below 17 million this year for the first time since 2014. Also, more than 80 percent of companies in the S&P 500 revised their earnings forecast lower, a sign of a deterioration in the broader business environment. But the latest jobs report showed the U.S. added an unexpectedly strong 224,000 jobs in June, easing concerns about a slowdown. However, the job gains lessen the pressure on the Federal Reserve to cut interest rates.

U.S. gasoline imports from Europe up on Philadelphia outage. The shutdown of the crippled refinery in Philadelphia, the largest on the east coast, means that the eastern seaboard will have to import more gasoline. The U.S. east coast accounts for a third of the country’s gasoline demand and 70 percent of its imports. Gasoline stocks at the key European ARA hub plunged by 9.4 percent this week, a sign that more gasoline is heading from Europe to the U.S., according to Commerzbank. “The refinery outage could therefore push up gasoline prices in Europe,” the investment bank said in a note.

Tesla hits sales target. Tesla (NASDAQ: TSLA) delivered a record number of vehicles in the second quarter, easing the pressure on Elon Musk. After reporting that it had delivered 95,200 cars, Tesla’s stock jumped 7 percent.

Oil and gas industry hit by tariffs. The U.S. oil and gas industry was relieved that Trump and Xi decided to restart trade negotiations, but existing tariffs still impact drilling operations. “Section 301 tariffs have been levied on more than 100 products - including bearings, drill collars, electronic circuits, fluids, lithium batteries, meters, motors, pumps, pump parts, rotors/stators, steel, turbines, and valves - are hurting the natural gas and oil industry,” Aaron Padilla, American Petroleum Institute's senior advisor for international policy, recently told the U.S. Trade Representative in a testimony. U.S. oil and gas exports to China have plunged, with no LNG cargoes delivered during the second quarter.

Eni starts production in Mexico. Eni (NYSE: E) began production at the first offshore oil project in Mexico since the country launched its reforms five years ago. The field, off the coast of Campeche, is estimated to hold 2.1 billion barrels of oil equivalent.

Saudi Arabia and Kuwait nearing deal on Neutral Zone. Saudi Arabia and Kuwait have reportedly made a breakthrough in negotiations over the restart of the Neutral Zone oil fields along their shared border. The fields have around 500,000 bpd of capacity, but have been offline for years as both countries dispute their sovereignty.

Thanks for reading and we’ll see you next week.

Best Regards,

Tom Kool
Editor, Oilprice.com

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Volf
06.07.2019 kl 09:49 536

Oil Markets Unbalanced By Brinkmanship
OPEC agreed in Vienna that it would roll over its 1.2 million b/d crude oil production cuts for another nine months, which would keep the agreement in place until end-March 2020.

On Tuesday, the oil cartel discussed the cooperation of non-OPEC producers, the key member of which is Russia. Both Saudi Energy Minister Khalid al-Falih and Russian President Vladimir Putin had already said at the G20 summit in Japan that they were in agreement on the rollover, so OPEC+ cooperation was more or less a formality.

The cuts promised by OPEC+ are already in place and there is little reason to expect any overall slippage. Saudi Arabia in May was producing about 600,000 b/d under its cap. Venezuela remains mired in an economic crisis that has severely eroded the operational capabilities of state oil company PDVSA. Iranian exports are strictly bound by US sanctions, and the Arab Gulf kingdoms will follow Saudi Arabia’s lead.

Other OPEC members have little spare production capacity. Iraq has been producing about 300,000 b/d above its cap and remains the compliance bad boy, but it is restricted by domestic infrastructural limits on crude production and exports. Russia’s output in the short term is curbed by the clean-up operations relating to the contamination of crude in the Druzhba oil pipeline.

Trade talks

The possibility of OPEC implementing deeper cuts was rejected largely on the basis of a softening of the US-China trade war. At the G20 summit, US President Donald Trump said that planned new tariffs would not be imposed on China. Trade talks are to resume. Trump even offered a concession on US sales to controversial Chinese tech giant Huawei.

The situation has reverted to one similar to the start of the year, but with the crucial caveats that six months have been lost and there is no guarantee that the resumed talks will not collapse again as they did in May. In the meantime, the world economic outlook has become gloomier as the impact of the tariffs already in place take their toll.

World economic growth is already slowing. The absence of more tariffs suspends an additional threat, it does not alter the despondent direction of travel.

Barriers to compromise

An end to the trade war requires both sides to cross lines drawn in the sand. The US negotiating position represents a challenge to the whole structure of the Chinese economy and to the ambitious modernisation path set out by Chinese President Xi Jinpeng.

Modernisation in the Chinese context does not mean market deregulation, but technological leadership. The state support for major industrial sectors - from steel to solar panels, electric vehicles, IT and AI - which the US is challenging, is an integral part of achieving that modernisation.

The US wants not just significant movement from China, but also mechanisms to ensure compliance. If presented via a multilateral body, like the WTO, such mechanisms can be framed as international rules, i.e. mutual cooperation, with independent verification and arbitration.

However, in the context of a bilateral Sino-US stand-off, concessions look like an affront to Chinese sovereignty. The US unilateral approach makes the discovery of a face-saving formula harder for both sides. The initial adoption of hard-line positions and their subsequent robust defence means compromise appears diplomatically more as a lose-lose than a win-win.

Optimism about the resumption of trade talks reflects the view that the political cost of damaged trade and slowing economies will start to outweigh the political gains of hard-line negotiating postures; the idea that ‘sense will eventually prevail’.

The downside scenario for the oil market is two-fold: either it takes more time, perhaps another six months, for sense to prevail; or alternatively, that what made ‘sense’ previously no longer applies, trade talks stall again, and both sides dig in for a long war of attrition.

US shale

The oil market has responded favourably to OPEC’s decision, with Brent pushing back up into the mid-$60s/bbl from a flirtation with $60/bbl in the early part of June. At this level, US shale production will continue to grow.

Falih’s comment that US oil output will peak and then plateau is questionable given the scale of the resource. The amount of ultimately recoverable oil is a function of both price and technology. It may be misguided to view US shale as a conventional oil resource that will uniformly follow a similar production path to the North Sea.

It is also a medium to long-term view that has little relevance to oil prices over the next three years. Even if US shale does peak and plateau, it is not expected to do so until the mid-2020s, by which time it may be supplemented by both Canadian and Argentinean shale production, even if the latter’s fortunes are heavily at risk from the coming presidential elections in Argentina.

Falih’s view also fails to take into account the possibility of peak oil demand. The Chinese-US trade war is an existing dampener on oil demand growth, peak oil demand is a more existential threat, but one which may become more evident coterminous with a peak in US shale production. The OPEC rollover is a short-term fix for today’s market conditions rather than a long-term strategy.

Iran/US

Trump is a man fighting wars on multiple fronts. Not only is he engaged in a trade war with China, but an even more tense stand-off with Iran. As OPEC talked, Iran was breaching its commitment on low-level uranium enrichment in the nuclear agreement reached with the P5+1 group of world powers from which the US withdrew.

Here again, hard-line brinkmanship on both sides appears to demand humiliating capitulation rather than compromise. Iran’s breaking of the nuclear agreement terms is unlikely to galvanise European or other opposition to the US position.

The stakes in this dispute are higher even than the trade war because there is a real risk of conflict, which would severely impact both crude oil and LNG flows from the Arabian Gulf. Recent attacks on tankers and Iran’s shooting down of a US drone in June were dangerous flashpoints.

Again, compromise would most likely occur through a multilateral or multiparty agency, but Trump doesn’t appear to do multilateralism. There appears to be very little prospect of movement on either side and the outlook is thus for an extended period of heightened Gulf tension, while sanctions take their slow and uncertain effect.

The US/Iran stand-off will add volatility to oil markets. OPEC’s rollover stabilises the supply-side of the market for the moment but is another gift to non-OPEC producers because it will come at the expense of market share. Russia’s commitment to the rollover is uncertain as it is masked by short-term practical necessity. It may now be trapped long-term in its cooperation with OPEC, but it could also, in 2020, decide that it wants its free-rider benefits back.