Oil prices fell sharply on Thursday

Volf
FRO 24.03.2018 kl 09:21 1759

Friday, March 23, 2018

Oil prices fell sharply on Thursday on news of $60 billion worth of tariffs on China. China followed up on Friday with an initial announcement of $3 billion worth of tariffs on U.S. pork, fruit and recycled aluminum and steel pipes. Wall Street fell sharply over fears of a brewing trade war. That dragged down oil prices, although benchmark prices rebounded in early trading on Friday.

Oil jumps on Saudi comments. Oil prices rose by 1 percent on Friday morning after Saudi Arabia said that the OPEC production curbs could be extended into 2019. "We still have some time to go before we bring inventories down to the level we consider normal," Saudi oil minister Khalid al-Falih told Reuters. "We will hopefully by year-end identify the mechanism by which we will work in 2019."

Trump installs ‘hawkish’ John Bolton. President Trump tapped former U.S. Ambassador to the UN, John Bolton to replace H.R. McMaster as National Security Adviser. The reshuffling is widely seen as a major shift towards a hawkish foreign policy, raising the odds of conflict with Iran and North Korea, in particular. As the year wears on, U.S. confrontation with those two countries could be incredibly bullish for oil.

Trump launches $60 billion in tariffs. The Trump administration announced plans for a variety of tariffs targeting an estimated $60 billion worth of Chinese goods. The move was met with a stock market selloff, which also dragged down crude oil. The risk of a trade war is rising sharply, as China has vowed retaliation. The IMF, along with a long line of economists, governments and business groups, have warned that protectionism poses a grave risk to the global economy. Meanwhile, the Trump administration exempted a series of parties from the previously announced steel and aluminum tariffs, including the EU, Argentina, Australia, Brazil, South Korea, Mexico and Canada.

Shale drillers looking at Meramec in STACK. The Meramec formation held within the STACK play in Oklahoma is seeing a surge of interest from shale drillers, according to Reuters. Top shale companies like Devon Energy (NYSE: DVN) and Marathon Oil (NYSE: MRO) scooped up acreage during the market downturn several years ago, and production is now coming online. Devon says its output in STACK will jump to 140,000 barrels of oil equivalent per day (boe/d) by the end of the year, up from 107,000 boe/d in early 2017. Most of Devon’s spending in STACK will be directed at the Meramec formation. The bottom line is that shale companies are looking at the Meramec because of low breakeven prices, combined with the fact that Permian land prices are already sky-high, which has forced many in the industry to look elsewhere.

OPEC looking at new metric to measure oil market. OPEC said that oil inventories in the OECD are only 44 million barrels above the five-year average, which suggests the oil market is getting close to “re-balancing.” However, OPEC officials have recently commented that the measurement might not accurately portray the state of play in the oil market, and the group is looking at other metrics. Some ideas include non-OECD inventories, floating storage, and days of coverage, although nothing has been decided.

Chevron acknowledges climate change, denies role. In a potentially significant court case in California, Chevron (NYSE: CVX) acknowledged the reality of climate change and the role of humans in causing it, although Chevron said the case against it should be dismissed. The case brought by the cities of San Francisco and Oakland allege that Chevron and its peers should pay damages for the responses the municipalities have to take to respond to flooding caused by climate change. Chevron argued that “billions” of parties share responsibility. The case is viewed as a bellwether in terms of the potential litigation risks for oil companies related to climate change.

Gulf of Mexico sale flops. The U.S. held the largest offshore oil auction in its history this week, but it was met with only tepid interest from the oil and gas industry. Although an estimated 77 million acres were offered, companies only successfully bid on 1 percent of them. The Interior Department had hoped that the large offering, combined with lower royalty rates for shallow water, would entice drillers. But the poor showing suggest that many in the oil industry are cautious when it comes to offshore drilling, and are likely focusing on other areas – such as Latin America – as well as on onshore shale.

China crude futures launching Monday. China is set to launch an oil futures contract on Monday, an effort that is several years in the making. The Shanghai Crude future is hoping to rival WTI and Brent as a market for oil, but it will lack liquidity, at least in the beginning. Yuan-denominated oil contracts will also have some rules that are unfamiliar to western traders. It is unclear how the new oil futures contract will fare, but it is part of China’s effort at gaining more influence over how oil is traded, as well as a way to boost the standing of its currency.

Biofuels feud drives down RIN prices. Oil refiners have been battling with the Corn Belt over the requirement to blend ethanol into their fuels. The Trump administration has been caught in the middle, but the feud has already succeeded in driving down the prices of Renewable Identification Numbers (RINs), the credits refiners can purchase in lieu of using ethanol. RIN prices are down by half since October, granting a windfall to oil refiners.

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

Best Regards,

Tom Kool
Editor, Oilprice.com

P.S. – In this week’s Executive Report we take a look at the latest IEA report, examining the impact of low oil prices on the recent boom in global crude demand. The 2017 increase in oil demand was the largest in recent years, and it looks likely that 2018 will see yet another increase. Follow all of the most important statistics in the energy markets by signing up to the Oil & Energy Insider
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Volf
24.03.2018 kl 09:23 1738

Global Energy Advisory March 23rd 2018
China is preparing to challenge the reign of the U.S. dollar as the ultimate petrocurrency by launching much-delayed yuan-denominated oil futures next Monday. The contracts should start trading on the Shanghai International Energy Exchange on Monday, after several years of postponements.

China is being very careful with the futures, seeking to avoid excessive price volatility, which was what led to the end of the short life of Beijing’s first attempt at these contracts back in the 1993. Now, regulators have set strict trading bands of 5% on either side, except the first day of trading when the band will be 10% to allow for the initial excitement to drive more trade in the contracts.

Beijing has also considered discouraging speculators from flocking into the first Asian oil benchmark by setting storage capacity prices significantly higher than the international average. Still, not all analysts and industry observers are convinced the Chinese oil futures will become a success.

The main reason is that foreign investors are wary of trading in China although the country’s commodity markets are certainly attractive with bustling activity that makes ICE, for example, look slow. Yet this activity could also discourage traders who remember the 2008 stock market meltdown in China. Also, all these safeguards against excessive volatility could turn away some genuine traders seeking to tap China’s commodity markets.

The country’s regulators have addressed this issue by earlier this week announcing a three-year income tax waiver for foreign traders in the new futures.

If the yuan oil futures are a success, they will constitute a major stepping stone on Beijing’s way to boosting the country’s international influence by making the yuan an international currency, which is the ultimate goal of the futures launch.

Deals, Mergers & Acquisitions

• The world’s top oil trader, Vitol, and French Total are competing for the acquisition of Brazilian fuel distributor Alesat Combustiveis. Besides them, there is a third suitor as well, an unnamed American commodities trading firm. Last year, Brazilian regulators blocked Alesat’s takeover by another local company, Ultrapar, forcing the target to seek other ways to grow its presence at home.

• Shell will sell its New Zealand assets to Austrian OMV for $578 million as part of its $30-billion divestment program that followed its $50-billion acquisition of BG Group. The assets OMV will receive include the Maui and Phokura gas fields, as well as the Tank Farm condensate and naphtha transportation system, and a project in the Great South Basin that includes a drilling commitment worth $50 million.

• South Korea’s SK Innovation struck a deal to acquire U.S. shale oil and gas driller Longfellow Nemaha LLC as part of a $453-million investment plan focused on U.S. shale oil. SK Innovation is the parent of South Korea’s largest refiner. Longfellow Nemaha has production assets in the STACK play in Oklahoma.

Tenders, Auctions & Contracts

• Iran will sign oil and gas field development contracts worth $6 billion with local exploration and production companies, with the funding coming from Iranian banks through the National Iranian Oil Company. The companies will partner with international majors in the development of some of these fields. There are more than 100 underdeveloped oil and gas deposits in the country, according to oil minister Bijan Zanganeh.

• CNPC was awarded 10% interests in two offshore concessions in Abu Dhabi, Lower Zakum and Umm Shaif and Nasr. CNPC’s listed business PetroChina paid $600 million for the Lower Zakum stake and $575 million for the Umm Shaif and Nasr concession. Among the Chinese company’s partners in the two concessions are Eni, Total, Inpex, and India’s ONGC Videsh. Local state energy company Adnoc will be operator of both concessions.

Discovery & Development

• Eni and Rosneft have failed to find crude oil in the Maria-1 well in the Black sea they started drilling in December. Eni is one of the few Western companies still active in the Russian oil industry amid EU and U.S. sanctions and the Black Sea was seen as a very promising reservoir by Rosneft. Yet exploration there is challenging because of the significant depths at which wells need to be drilled.

• Australia’s environmental regulator has greenlit a ConocoPhillips-led gas and condensate project offshore Australia. The Barossa field development will involve the deployment of a floating production, storage, and offloading vessel, with the annual output seen at 3.7 million tons of LNG and 1.5 million barrels of condensate.

• Shell plans to build 10,000 new fuel stations by 2025, doubling down on its downstream plans that seek to increase the share of these operations in the company’s overall revenues while cutting its carbon footprint. Geographically, Shell will prioritize emerging economies, including Russia, India, China, Mexico, and Indonesia.

• Eni will invest $30 million in a research center in the Republic of Congo that will explore for oil and renewable energy sources. The center will also help oil companies that win the rights to develop any oil and gas blocks in the country. Eni has the rights to develop an onshore block in the Republic of Congo but is still negotiating the production sharing agreement on the project with the local government.

• BP plans to start drilling the first well in an offshore oil and gas block in Mexico’s Gulf section in 2020, according to a development plan recently approved by Mexico’s oil and gas regulator. Total investments over the 4-year exploration plan are estimated at $199.5 million.

Company News

• Saudi Arabia has shelved its plan for an international listing of its state oil giant Aramco, sticking to only a local listing on Riyadh’s Tadawul. The decision was not a huge surprise given the number of challenges around an international listing and the uncertainty about whether the company will fetch the proceeds Aramco is eyeing, which are $200 billion for 5% of the company.

• The Asian Development Bank has provided Sinopec Green Energy Geothermal Co a $250-million loan that the Chinese company will share with Iceland’s Arctic Green Energy Corp. to develop geothermal energy solutions in northern China, where pollution levels are particularly high.

• Essar Oil will receive a $1-billion oil-for-cash loan with one of its majority owners, Trafigura, and supermajor BP. This is the first step in Essar’s funding diversification after its takeover by Rosneft and Trafigura.

Politics, Geopolitics & Conflict

• The U.S. government banned trade in Venezuela’s new oil-backed cryptocurrency, the Petro, whose initial public offering took place on Wednesday.

• Separately, Washington officials are negotiating with British, French, and German officials on amendments to the Iran nuclear deal to discourage it from seeking to increase its regional influence, one of the officials told media. Worries over the future of the Iran deal pushed oil prices up this week.

• The UN Security Council has threatened South Sudan with an arms embargo unless the country puts an end to the civil war that has been ravaging it since its secession from Sudan. The move follows fresh U.S. sanctions against South Sudanese oil companies.