Oil received a jolt on Friday morning on unexpectedly positive.

Friday, November 1st, 2019

Oil received a jolt on Friday morning on unexpectedly positive manufacturing data from China and a continued rig count collapse, although it doesn’t put to rest concerns about an economic slowdown. Economic uncertainty continues to dominate the oil market narrative, and markets await the next move in the trade war.

Keystone pipeline spills, TC Energy declares force majeure. TC Energy’s (TSE: TRP) Keystone Pipeline ruptured and spilled more than 9,000 barrels of oil in North Dakota this week. The company declared force majeure on shipments from the 590,000-bpd pipeline. WCS prices fell by more than $3 to a discount of about $20 to WTI, the largest discount since prior to the mandatory production cuts announced by Alberta at the start of the year. “If you start to see this situation where flows are reduced for a long period of time, that’s when you’ll see a price impact” on both WTI and WCS, Mike Walls, an analyst at Genscape Inc., told Bloomberg. Meanwhile, Alberta lifted production curtailments for producers who are shipping oil by rail.

Encana leaves Canada. Encana (NYSE: ECA) said it was moving its headquarters from Canada to the U.S. and changing its name to Ovintiv Inc. “Sadly, I cannot say I am surprised, as Encana has been shifting its efforts to the U.S. for years, in large part due to harmful policies in Canada,” Sonya Savage, Alberta’s energy minister said in a statement.

Trade war hurdles remain despite soothing words. President Trump has raised expectations that a partial trade deal is all but a done deal, but hurdles remain. Reuters reports that Trump’s insistence on China buying as much as $50 billion in farm products – more than twice as much as China bought in the year before the trade war – is a sticking point. Bloomberg also reported that Chinese officials are not optimistic about a comprehensive deal, as they do not trust Trump to stick to the terms of any agreement. Still, press reports suggest there is momentum in the near-term for a partial deal.

Trump admin may back off auto freeze. The Wall Street Journal reports that the Trump administration is reconsidering its freeze on fuel economy standards, and instead might opt for 1.5 percent annual increases, putting it closer to the Obama-era proposal.

Saudi budget deficits widens to $50 billion. Saudi Arabia’s budget deficit is expected to widen to $50 billion next year.

Exxon earnings fall by half. ExxonMobil (NYSE: XOM) reported earnings of $3.17 billion in the third quarter, down from $6.24 billion a year earlier.

Iraq oil workers join protests. Oil workers in Iraq’s southern provinces are beginning to join anti-government protests, according to Iraq Oil Report. For now, Iraqi production has not been affected.

Total SA production hits record high. Total SA (NYSE: TOT) saw its output rise to 3.04 mb/d in the third quarter, up 8 percent from a year earlier. "The environment remains volatile, with uncertainty about hydrocarbon demand growth related to the outlook for global economic growth and in a context of geopolitical instability," Total noted in a results statement. Profits stood at $3.02 billion.

Rex Tillerson takes witness stand. In the trial of ExxonMobil (NYSE: XOM), former CEO and former Secretary of State Rex Tillerson took the witness stand. He disputed allegations that his company defrauded investors over its risk to climate change and regulation.

Oilfield services scrap equipment. Bloomberg reports that the surplus of fracking equipment is being stripped for parts and sold off, rather than merely being idled. The industry is expected to use around 13 million horsepower at the end of 2019, out of 25 million horsepower available. Bloomberg reports that around 2.2 million horsepower – about 10 percent of industry capacity – is headed for the scrap heap.

Denmark gives greenlight to Nord Stream 2. Denmark gave approval to the controversial Nord Stream 2 pipeline, which is the last major hurdle standing in the way of construction. The U.S., along with some countries in Eastern Europe, oppose the project. More than 87 percent of the project is already built and the project could be completed within the next few months.

China manufacturing data contracts sharply. Factory data from China showed a six consecutive month of contraction, and activity fell faster than expected. “We expect the official manufacturing PMI to remain sluggish in coming months, the growth slowdown could gather pace, and markets could become more volatile in coming months,” said analysts from Nomura in a note. New data on Friday, however, was more positive.

Shell said worsening economy could slow returns. Royal Dutch Shell (NYSE: RDS.A) said that a deteriorating in the economy could hit returns, and could put a $25 billion share buyback plan into doubt. Shell beat earnings estimates, but its share price fell anyway. “The prevailing weak macroeconomic conditions and challenging outlook inevitably create uncertainty about the pace of reducing gearing to 25% and completing the share buyback program within the 2020 timeframe,” Shell’s CEO Ben van Beurden said in a statement.

Saudi Arabia eyes carbon trading. Saudi Arabia said it plans on launching a cap-and-trade scheme to reduce emissions and help diversify the economy. “We will come soon with a suggestion on carbon trading that would be a fair carbon trading system ... And I think it will work,” Prince Abdulaziz bin Salman said at the Future Investment Initiative conference in Riyadh.

Best Regards,

Tom Kool
Editor, Oilprice.com
01.11.2019 kl 21:48 413

Are Oil Markets About To Turn?
Brent crude climbed back above $62/barrel in intraday trade toward the end of October, before heading back down again, owing to concerns about weak Chinese industrial growth, following data showing Chinese industrial company profits had fallen for the second month in a row. Earlier data put India’s oil imports in September at three-year lows. India and China have over the past decade accounted for more than 50% of global oil demand growth.

Nonetheless, the earlier optimism suggests that given the right conditions, oil prices could shrug off the current weakness engendered by a slowing global economy, but it will be an uphill and uncertain struggle prone to reversal.

Trade talks

The US-China trade talks appear to be making progress, although the pattern of the recent past has been one of sudden breakdowns, followed by the US upping the ante and piling on more tariff pressure, resulting in tit-for-tat Chinese responses.

For the moment, the atmospherics appear better with the ‘Phase 1’ deal essentially parking harder-to-resolve issues in the hope that some positive momentum can be created by the postponement of new tariffs and potentially the removal of some existing ones.

However, splitting the deal into easy and hard phases puts all the tough nuts to crack into one basket, while a likely softening of tariffs may reduce the economic pressure on the Chinese side to make concessions in Phase 2. Nonetheless, on balance, the next few weeks look likely to offer some positive trade news which should boost business confidence.

US resilience

US economic indicators are likely to remain mixed. Early in the month, the Institute for Supply Management’s factory index slipped to 47.8 for September, a ten-year low, amid signs that the services sector was also beginning to weaken.

However, although sentiment in the auto sector remains weak, US manufacturing activity as shown by the purchasing managers index, released later in the month, came in above expectations and was the strongest since April, according to preliminary data.

Meanwhile, the unemployment rate also trended lower in September to just 3.5%, a remarkable 50-year low, with 136,000 new jobs created.

With third-quarter GDP data out Wednesday expected to show a slowdown in growth from 2.0% in the second quarter, expectations have risen that the US Federal Reserve will cut interest rates for a third time when it meets the same day.

Supply-side dynamics

There are also grounds for oil price support on the supply side. Although the real challenge for OPEC in the first-half of 2020 is the combination of rising US and other non-OPEC crude production, it can at least expect some slowdown in the US shale juggernaut’s growth rate. The Baker Hughes US oil rig count dropped to 696 October 25, down 17 from the week before and 181 active rigs below the start of the year, indicating slowly contracting activity.

US shale production expands and contracts like a sine curve as the losses from legacy wells gather pace in a downturn, feeding off the prior period of expansion, and the gains from new wells fall as fewer wells are drilled.

The US Energy Information Administration’s October Drilling Productivity Report suggests net gains from the country’s main shale plays in November will be 58,000 b/d, down from 74,000 b/d in October and 85,000 b/d in September. Legacy losses have not yet picked up by much and the change in net gains is, for the moment, mainly a function of a reduced number of well completions.

In tandem with a slowing US oil sector, OPEC is raising expectations that it may cut production further when it meets next in December. A meeting of the OPEC+ Joint Technical Committee, which monitors the output agreement currently in place, is expected to make its recommendations known in November.

For now, Riyadh is putting the focus on Iraq and Nigeria’s non-compliance with the existing deal in an effort to boost OPEC’s cohesion ahead of any further action.

Iraqi stability

Mass protests in Iraq against government corruption and low living standards, alongside a potential opening for Islamic State in Syria, following the withdrawal of US troops, have revived concerns over the country’s stability. Successive administrations have failed to turn rising oil production and revenue into improvements in the lives of ordinary Iraqis.

Iraqi crude oil production has nearly doubled over the last decade to a point where it is again hitting the limits of export constraints and internal capacities, for example, the supply of water. Should it overcome these constraints, accommodating its oil production will be difficult for OPEC in the longer term, particularly so in a slow-growing market.

But the flip side is that internal instability could once again threaten Iraq’s current production levels and throw off course future expected rises in the country’s crude output.