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ENERGY: Oil report for May 25, 2018 – LONG READ

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OPEC Sends Oil Prices Crashing

OILPRICE.COM – Oil prices collapsed on Friday morning as news of Saudi Arabia and Russia considering an increase in production hit markets, driving fears that the OPEC production cut deal may soon come to an end.

Oil prices plunged in early trading on Friday on news that OPEC and its partners, including Russia, are considering a loosening of their production limits (more below). Both WTI and Brent fell by more than 3 percent Friday morning.OPEC and Russia could raise production. Saudi Arabia and Russia are indiscussions about raising their production limits, perhaps adding as much as 1 million barrels per day to the market. The group could announce a change in Vienna next month. The steep losses from Venezuela meant that OPEC’s compliance with the cuts surpassed 150 percent last month. The idea would be to bring compliance back down to 100 percent, which would mean allowing members to produce more to offset Venezuela’s declines. Nothing is finalized yet and the talks will continue for the next few weeks. Oil prices sank on the news.

U.S. oil exports rising, but infrastructure faces constraints. U.S. oil exports hit a new record at 2.6 million barrels per day two weeks ago, but have dipped since then. Most analysts see exports continuing to rise, particularly with WTI trading at a steep $8-per-barrel discount relative to Brent. However, there are concerns that U.S. port infrastructure won’t be able to handle much higher levels of exports. Export capacity data isn’t tracked and the exact capacity is not known, although it is thought to be around 3.5 mb/d. As of now, the Louisiana Offshore Oil Port (LOOP) is the only Gulf Coast port that can handle very large crude carriers (VLCCs). “So far, export capacity is keeping pace, but we are walking a tightrope,” Bernadette Johnson, vice president at DrillingInfo, told Reuters.

BP cuts jobs. BP (NYSE: BP) said it will slash 3 percent of its workforce in its upstream unit this year, eliminating more than 500 positions. The oil giant said the move was done in the name of efficiency and competitiveness.

U.S. shale growth to disappoint. Industry veteran Mark Papa, CEO of Centennial Resource Development (NASDAQ: CDEV) and former head of EOG Resources (NYSE: EOG), says that the growth projections for U.S. shale are overly optimistic. Papa says growth disappointed last year and would continue to undershoot expectations, largely because the best sites have already been drilled. In the Eagle Ford and the Bakken “my estimate is that about 70% of the good quality drilling locations have already been drilled,” Papa said, according to S&P Global Platts. “So you’re left … with Tier 2 and Tier 3 quality geologic locations and there’s a really steep drop-off in the amount of oil you get per well with those locations.”

Peak oil demand to erase $19 trillion in oil income. The adoption of 240 million electric vehicles by 2040 will cause oil demand to peak by the mid-2020s, which will destroy $19 trillion in income, according to Aurora Energy Research Ltd. Aurora’s “analysis points to a possible energy future of mass electrification, digitization, and new technologies, in which the rise in electric vehicles and continued improvements in fuel efficiency lead to peak oil demand occurring in the mid-2020,” Richard Howard, head of research at Aurora, said in the report. Ultimately, the displacement of around 8 million barrels per day could cause oil prices to fall to as low as $32 per barrel by 2040.

NJ bails out nukes. New Jersey approved a bailout of its struggling nuclear power plants. Ratepayers will essentially subsidize the nuclear plants, operated by Exelon Corp. (NYSE: EXC), by about $300 million a year. The support for nuclear comes after New York and Illinois previously passed similar measures to rescue their nuclear power plants.

Large consumers step up oil hedging. With Brent oil near $80 per barrel, large industrial consumers, such as airlines and shipping companies, have increased their hedges, locking in oil for the next year or so, fearful of further price increases. “Consumers are hedging, which is supporting the back end of the Brent curve,” Thibaut Remoundos, founder of Commodities Trading Corp., told Bloomberg.

UBS: $100 oil possible. Investment bank UBS says that a price spike to $100 per barrel is possible, which should be worrying because it could trigger an economic recession. “Now that we are getting closer to $100/bbl the net impact of higher oil prices is again becoming a net negative,” UBS said in a research note. “The global sweet spot — where oil prices may have positively contributed to global growth — seems to be somewhere between $50/bbl and $70/bbl.”

ExxonMobil to slash methane by 15 percent. ExxonMobil (NYSE: XOM) said that it would voluntarily cut methane emissions by 15 percent by 2020 in an effort to reduce its impact on climate change. More and more oil companies are offering voluntary cuts to head off regulatory action.

EU settles antitrust case with Gazprom. The European Union officially settled a suit this week against Russian gas giant Gazprom, filed back in 2015, over anticompetitive behavior. Last year, Gazprom accepted changes to the way it conducts business in the EU, including allowing for the reselling of gas across borders and changes to pricing that will prevent the company from gouging individual countries who lack alternative supplies. “Gazprom won’t be able to play hardball,” Jonathan Stern, an analyst in the gas program at the Oxford Institute for Energy Studies, told the New York Times. Still, countries in Eastern Europe believe Gazprom got off easy.

Canadian oil exports to U.S. Gulf Coast surpass Venezuela’s share. Canada has long supplied the U.S. Midwest with heavy oil, but more Canadian oil is heading to the Gulf Coast. Canada’s oil exports to the U.S Gulf Coast topped that of Venezuela for thefirst time on a monthly basis. Both countries ship heavy oil to Gulf Coast refiners, but Venezuela’s losses mean that Canadian oil has become more important.

Global Energy Advisory 25th May 2018

OPEC has signaled it may decide to ease the oil production cuts it agreed to implement in late 2016 on the back of Venezuela’s catastrophic production decline and the pending U.S. sanctions against Iran, which combined to push Brent past the $80 mark for the first time in four years last week.President Trump was the first to voice concern about too-high prices and, not long after, India’s oil minister followed with a complaint about unreasonably high prices. In response, Saudi Arabia said there was no fundamental reason for Brent to trade at $80 as there was sufficient supply to meet rising global demand.

Following this statement and reports that other OPEC members could be mulling over higher production, to be discussed at the next OPEC+ meeting in late June, oil prices began to slide down, helped by assurances from Europe, China, and India they will continue to buy Iranian crude despite U.S. sanctions.

This week, prices got additional pressure from a surprise build of 5.8 million barrels in U.S. crude oil inventories as estimated by the Energy Information Administration, as well as the latest weekly increase in production, to 10.725 million barrels daily.

While prices may fall in the immediate term, the longer-term outlook is still bullish because of the new emission standards that the International Maritime Organization will enforce from the start of 2020, which will see vessels switch to low-sulfur fuel. According to analysts, oil refiners are not prepared to meet the slump in demand for high-sulfur fuel and the spike in low-sulfur fuel demand.

Deals, Mergers & Acquisitions

• Shell, Vitol, and Glencore are vying for the Nigerian business of Brazil’s Petrobras, which includes interests in two offshore blocks, whose combined value has been estimated at around $2 billion. The world’s top oil traders are not bidding on their own, however: they are each partners in three consortiums that submitted bids for Petrobras Africa in early May. The Brazilian company is expected to pick a winner by the end of the month.

• Australia’s Santos has rejected the final takeover offer of Harbour Energy, which valued the company at $10.8 billion on the grounds that it undervalued it. Santos was clearly seeking a higher price amid the surge in oil prices but now that these have begun to subside the company might not get a better offer. Harbour Energy upped its bid five times over the last nine months to reflect the oil price increase.

• Glencore has emerged as the preferred bidder for Chevron’s South African operations in a deal worth $1 billion, beating China’s CNPC. The assets Chevron has put up for sale include a refinery in Cape Town with a daily capacity of 100,000 barrels of crude and a network of more than 800 fuel stations across the country as well as in neighbor Botswana.

• Gazprom has struck a deal with UAE’s Mubadala Petroleum to sell it 44% in a regional subsidiary, Gazprom Neft-Vostok for up to $271 million. Separately, the head of Renova Group confirmed reports he is in discussions for the sale of its electric utility unit, T Plus, with Gazprom’s power division, Gazprom Energoholding.

Tenders, Auctions & Contracts

• Peru’s government has revoked five offshore oil licenses awarded by the previous government to UK-based Tullow Oil on the grounds that the previous president of the country, Pedro Pablo Kuczynski had not consulted coastal communities on the matter. What’s more, despite Kuczynski’s approval of the contracts, they were never signed. Peru is a minor oil producer and the licenses were one way of securing much-needed energy sector investment. Tullow had committed to invest $200 million in the five blocks awarded it by Kuczynski.

• Mexican energy companies Jaguar and Vista Oil & Gas have struck the first farm-out agreement for oil blocks in the country that does not involve state oil company Pemex. Under the agreement, Jaguar, a unit of Grupo Topaz, will sell 50% in three onshore blocks to Vista for $37.5 million. Vista will become operator of two of the blocks that already have producing fields, while Jaguar will retain the operatorship of the third block, which is still at the exploration stage.

Discovery & Development

• Protests have shut down production at the Raguba oil field in Libya, which normally pumps 5,000 bpd of crude. The protesters, who demand better social services, also threatened to shut down production at other fields in their area unless their demands are met. Meanwhile, a subsidiary of the Libyan National Oil Corporation suspended work at several fields because of a heat wave that affected oilfield turbines. The company, Agoco, said its production had as a result fallen by about 120,000 bpd.

• In the latest demonstration that the North Sea is very far from dead, the Oil and Gas Authority of the UK reported it had awarded 123 licenses for 229 blocks auctioned in the 30th offshore licensing round. A total 61 companies were awarded licenses in this round, which could see about a dozen new deposits tapped. Their reserves are estimated at around 320 million barrels of oil equivalent.

• Kenya’s central government has settled its differences with the leaders of oil-rich Turkana region and commercial oil production in the region’s Lokichar area should start next month. The crude will be transported to an export terminal by trucks under the Early Oil Pilot Scheme approved by the government after it became clear Lokichar contains commercial amounts of crude. The daily production rate under this scheme is 2,000 bpd.

• Australian FAR is getting ready to start drilling offshore Gambia in the Samo oil prospect, where it has partnered with Malaysia’s Petronas. The Malaysian company agreed to buy 40% in the prospect, which is half of FAR’s 80% stake, and will pay 40% of the costs associated with the drilling of the first well on the site, or a maximum of $45 million. Drilling work should start before the end of the year.

Politics, Geopolitics & Conflict

• Iran’s Supreme Leader Ayatollah Ali Khamenei has demanded that Europe provides guarantees to Tehran it will continue buying Iranian crude. In the absence of these guarantees, Iran will feel free to restart its nuclear program.

• A Syrian military source has accused the U.S. forces in the country of striking Syrian army positions in the eastern part of the country. The U.S. Army has denied the accusation.

• Israel’s Defense Minister Avigdor Lieberman will seek approval for another 2,500 new homes to be built in the West Bank. If approval is granted it will increase the tension between Israel and the Palestinian state. Israeli settlements on the West Bank are seen by most of the international community as illegal.

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