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ENERGY: Oil report for October 11, 2019

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Oil prices rose in early trading on Friday on hopes that the U.S.-China trade negotiations might result in a limited breakthrough. President Trump said that talks on Thursday went well, and the two sides resume negotiations on Friday. An attack on an Iranian tanker (more below) also bolstered oil prices.


IEA cuts demand forecast. The IEA cut its demand forecast once again to just 1 mb/d in 2019 and 1.2 mb/d in 2020, a cut of 100,000 bpd for both. The agency also raised its forecast for supply growth from non-OPEC sources by 400,000 bpd.

Iran says tanker was attacked. Two missiles apparently struck an Iranian oil tanker traveling through the Red Sea off the coast of Saudi Arabia on Friday. Oil leaked into the Red Sea. The incident could rachet up tensions once again between Iran and Saudi Arabia.

Pioneer Natural Resources upgraded, Continental downgraded. Pioneer Natural Resources (NYSE: PXD) rose by more than 2 percent on Thursday after Mizuho upgraded the company to Buy. Mizuho analyst Paul Sankey said the company has shifted its strategic focus to free cash flow. Meanwhile, Mizuho downgraded Continental Resources (NYSE: CLR) to Neutral over spending concerns and long-term quality of acreage.

Total SA wins big in Brazil auction. Total SA (NYSE: TOT) and partners won an offshore block in a Brazilian offshore auction, agreeing to pay $978 million.

Argentina could freeze energy tariffs. Argentina’s front-runner for president Alberto Fernandez is under pressure from his party to freeze natural gas and power tariffs, and also to peg oil product prices to pesos instead of dollars. Some economists warn that doing so would deter investment in the Vaca Muerta shale. The number of frac stages have already fallen by 25 percent since current President Mauricio Macri implemented temporary price freezes, according to S&P Global Platts.

ExxonMobil awards $13 billion to three companies for Mozambique. ExxonMobil (NYSE: XOM) awarded $13 billion to three companies as it seeks to develop its LNG project in Mozambique.

Oil Prices Rise On Trade War Optimism And Tanker Attack

Oil prices spiked on Friday morning as trade war negotiations appeared to take a positive turn while Iran reported an oil tanker attack as tensions in the Middle East soar.

Saudi Aramco to publish prospectus by end-October. Saudi Aramco plans to offer 1 or 2 percent of the company and could publish a prospectus as soon as October 25.

Ecuador unrest disrupts oil. Ecuador’s President Lenin Moreno is fending off nationwide protests after his decision to remove fuel subsidies. He moved his government out of Quito, temporarily decamping to Guayaquil. Protestors seized some oil installations, disrupting 165,000 bpd, or nearly a third of production. On Wednesday, Ecuador’s state-owned oil company declared force majeure on trading operations. The cuts came as part of IMF prescriptions in conjunction with $4.2 billion in loans. U.S. West coast refiners are most exposed to the disruption, such as Marathon’s (NYSE: MPC) refineries in L.A. and San Francisco.

Chevron boss likes Texas. Chevron CEO (NYSE: CVX) Mike Wirth had disparaging words for his company’s home state of California, while praising Texas. “The policies in California have become pretty restrictive on a lot of business fronts, not just the environment,” Wirth said. “I don’t know there’s a better place in the world for us to do business than” Texas and the Gulf Coast, he said at an event in Houston. Chevron’s home may be in California, but its largest office is in Houston, which continues to grow with the company’s increased focus on the Permian Basin. Wirth also said that Chevron will cut flaring rates.

Halliburton slashes jobs. Halliburton (NYSE: HAL) announced that it would cut 650 jobs across four U.S. states this week. The oilfield services company blamed the slowdown in shale drilling.

World’s 50 largest oil companies to increase supply by 7 mb/d. The world’s 50 largest oil companies have plans to increase oil production by 7 mb/d over the next decade, according to The Guardian. The research suggests that the companies could add 35 percent more between 2018 and 2030 compared to the previous 12 years. The Guardian notes that these plans stand in direct contradiction to greenhouse gas emissions reductions required to avoid the climate crisis.

Nigeria gains higher OPEC quota. OPEC granted Nigeria a larger production quota as part of the curtailment agreement with non-OPEC countries. Nigeria has been allocated 1.774 mb/d, up from 1.685 mb/d previously.

Large oil traders bearish on prices. Vitol Group and Trafigura, two of the world’s largest oil traders, see oil prices languishing in the $50s next year. “Without some resolutions to the trade wars then we remain a little bit bearish, a five handle for us,” said Russell Hardy, chief executive officer at Vitol.

India’s Reliance to resume Venezuela oil loadings. Indian refiner Reliance Industries Ltd. is set to resume purchasing oil from Venezuela in October after a four-month pause, according to Reuters.

Fort McMurray goes bust. Fort McMurray in Alberta was once the booming capital of Canada’s oil sands industry. Now it has gone bust.

California blackout; Tesla tells car owners to charge up. PG&E (NYSE: PCG) issued a historic pre-planned blackout of nearly a million people in northern California in order to head off fire risk. Tesla (NASDAQ: TSLA) sent a message to owners of its vehicles to charge up ahead of the blackout in order to ensure they can still drive. PG&E’s share price fell nearly 30 percent on Thursday.

Sanctions on Chinese shipper interrupts LNG. U.S. sanctions on Chinese shipping company COSCSO could interrupt LNG shipments from Southeast Asia to China, according to S&P Global Platts. Shipping rates have also gone through the roof in the wake of the sanctions.

A Long-Term Crisis Looms For Oil

The US oil rig count continues to drop, falling by 3 to 710 for the week ending October 4, according to Baker Hughes data. It is now 18 percent down on the same week last year, a loss of 151 rigs, reflecting weaker oil prices, a steady deterioration in the global economic outlook and consequent downward revisions to forecast oil demand.

However, US shale will enter a period of dormancy rather than defeat. Shale oil’s most enduring legacy has been the introduction of a large element of price-responsive oil production. Shale producers retreat in the face of weaker market sentiment so that production responds to price changes, both up and down, over a period of about six to 12 months. Shale drillers also have a unique storage option in the form of drilled-but-uncompleted wells, which allows production capacity to remain in the wings ready to be brought on-stream if demand rises.

Automatic cost adjustment

Moreover, a pull-back in shale drilling has an immediate impact on the US oil services sector. Less drilling results in spare capacity pushing down the price of everything from fracking sand and chemicals to on-site power generation and drilling rig day rates. Inefficient rigs are laid up and less prolific shale plays are temporarily abandoned.

Just as production volumes react to lower oil prices, the cost of producing shale also falls. US shale goes into a period of dormancy from which it retains the capacity to emerge as strong as ever. The longer the period of dormancy the longer the recovery takes, but US shale is resilient even in retreat.

This will be an enduring problem for OPEC, particularly if, gradually, shale oil production internationalizes, for example emerging at scale in Argentina, Canada and Russia post-2025.

Long-cycle oil investment costs

However, long-cycle oil production has by no means disappeared although it has taken longer to adjust to the crash in oil prices from mid-2015. The difference to US shale is that it does not respond to short-term movements in the oil price.

The first of the new breed is Norway’s giant 2.7 billion barrel Johan Sverdrup oil field, which came on-stream in early October. Production is expected to ramp up to 440,000 b/d by summer next year and eventually hit 660,000 b/d at the end of 2022 when the second phase of the project is completed.

What is remarkable about the development is not just its size, but the $2/b operating costs claimed by developer Norwegian state oil company Equinor. Some $4.4 billion of capital expenditure was wiped off the field’s initial development plan.

This reflected major oil companies pushing back hard on the offshore oil services sector, but also rethinking their field designs and incorporating digital technologies into almost every aspect of development to replicate the cost reductions and efficiency gains achieved on the US shale oil patch.

South America re-emerges

Next in line is Guyana, which will also reap the benefits of offshore project rationalization and emerge as a new source of oil supply in 2020. Again, like Johan Sverdrup, these fields will be long-life assets producing regardless of short-term pricing signals.

ExxonMobil’s first Floating Production, Storage and Offloading vessel, the Liza Destiny, arrived off the coast of Guyana at the end of August. Liza Phase 1 is expected to start up in early 2020. The US company has gradually ramped up expectations for the oil basin based on further exploration success. The company now believes it will be producing 750,000 b/d of Guyanese oil by 2025.

With some larger caveats, given years of missed targets, Brazilian oil production also now appears to be on a steady upward trend finding ready markets in China and the US, where refiners remain short of heavier grades as a result of the collapse of Venezuelan oil production and sanctions.

With further auctions for new licenses scheduled for this year, interest is likely to be high. The ramp-up of existing FPSOs and new ones being deployed suggest Brazilian oil production could jump by almost a quarter to 3.2 million b/d by 2022. This is all being led by the country’s giant pre-salt fields, while output from other Brazilian production centers are expected to decline.

Maintaining a supportive and inviting investment environment remains critical to long-term progress, but there is little question about the prolific and giant nature of Brazil’s pre-salt discoveries.

Output up as demand falls

As a result, 2020 will see more non-OPEC oil production coming on stream, the key difference being that it will not be the result of US shale, but a result of the readjustment and rejuvenation of long-cycle non-OPEC offshore production.

This might mean little if demand were roaring ahead, but it isn’t.

Demand forecasts for oil demand this year and next remain on a downward curve. Much hangs on the outcome of renewed trade talks between the US and China and on the debacle represented by Brexit, which looks likely to come to a head by the end of October. The world economy already appears to be flirting with recession, but it and oil demand will take further body blows, if US-China trade antagonism becomes entrenched and Brexit proves hard rather than soft.

—— AUTO – GENERATED; Published (Halifax Canada Time AST) on: October 11, 2019 at 05:27PM

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