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ENERGY: Oil report for October 25, 2019

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Oil Bulls Broken By Economic Fears


Friday, October 25, 2019

Oil was down at the start of trading on Friday, but was poised to close out the week with modest gains on the back of EIA inventory drawdowns and rumors of OPEC+ cuts.

Trade talks eye turning back the clock. Top U.S. and Chinese trade negotiators have discussed a plan in which China would buy more farm products in exchange for the U.S. removing some tariffs, according to Reuters. The outlines of the partial deal are striking since they would essentially attempt to take the trading relationship back to where it was before the trade war, without touching the hot button issues of intellectual property. Even still, there is a long way to go – for now, President Trump has only agreed to cancel the October 15 tariff increase on $250 billion worth of goods. China is offering more purchases, but also wants the planned December tariffs scrapped.

Offshore oil companies use loophole to save $18 billion. A new government report found that a loophole has allowed offshore oil drillers to avoid paying a combined $18 billion in royalties to the U.S. government over the past few decades.

U.S. refined product exports barely grew in 1H2019. Exports of gasoline, diesel and other refined products have soared over the past decade, but growth came to a halt in the first half of 2019. Exports averaged 5.47 mb/d, according to the EIA, up by a paltry 19,000 bpd (0.3 percent) from the same period in 2018. The agency said the sudden slowdown is likely due to lower refinery runs and a slowing economy.

Rosneft switches from dollars to euros. Russia’s Rosneft has entirely switched the currency of its oil contracts from dollars to euros, a move intended to avoid U.S. sanctions. It is part of a broader de-dollarisation plan by the Russian government.

Low-sulfur stockpiles growing. With the implementation of the IMO rules on marine fuels just two months away, stockpiles of low-sulfur fuels held in floating storage around the key storage hub of Singapore are growing. Roughly 32 supertankers are anchored in Malaysian waters near Singapore, according to Reuters.

IEA: Offshore wind a “game-changer.” A new report from the IEA explores the “game-changing” potential of offshore wind. Costs for the technology are forecasted to fall by 40 percent by 2030. The IEA said the magnitude of the potential is on par with two other energy revolutions of the past decade – fracking for shale and the explosive growth of solar. “Looking at the future of offshore wind…it has the potential to join the ranks of shale [gas] and solar photovoltaics in terms of steep cost reductions,” IEA executive director Fatih Birol said. Total investment in the offshore wind sector could reach $840 billion over the next two decades.

Russia sees the end of U.S. shale. Russia’s energy minister Alexander Novak said that U.S. oil production growth leveling off. “In the near future, if forecasts turn out correct, we will see a plateau in production,” Novak said.

U.S. moves to protect Citgo. The Trump administration blocked required bond payments by Citgo to creditors. The U.S.-based Venezuelan refining company faced imminent breakup due to a $913 million bond payment, but the Trump administration views the company has crucial to the opposition leader Juan Guaidó. The move gives Citgo a 90-day reprieve.

Trump sides with refiners on biofuel dispute. Biofuel groups revolted after the latest proposal by the EPA to increase demand for ethanol disappointed, and Bloomberg reports that the White House essentially sided with the EPA and refiners over the objections of the Department of Agriculture and biofuels groups.

Tesla beats short sellers. Tesla (NASDAQ: TSLA) posted a surprise profit in the third quarter, and the company’s stock price jumped by 20 percent, burning short sellers.

Climate litigation week. ExxonMobil (NYSE: XOM) went on trial this week for allegedly defrauding investors over its climate risk. However, several other cases also inched forward. On Tuesday, the U.S. Supreme Court rejected a request by more than two dozen oil companies to block a state court lawsuit brought by the city of Baltimore. The industry wants the case in federal court, not state court. Baltimore is suing for damages related to climate change. Separately, the Attorney General of Massachusetts sued ExxonMobil on Thursday for defrauding investors, mirroring the case in New York.

Chevron sees Permian boom continuing. Chevron (NYSE: CVX) dismissed rising concerns about the longevity of the shale boom. “We see a long, healthy pace of activity in the Permian and Texas for decades to come,” Steve Green, president of Chevron’s North American business, said at a forum sponsored by the Texas Oil & Gas Association.

Kuwait could limit oil production on climate concerns. Kuwait may cut its long-term oil plans due to climate change, a move that would raise eye-brows since most state-owned companies have not waded into such waters. Bloomberg reports that a source with knowledge of internal discussions said that Kuwait Petroleum Corp. could cut its plans to reach 4 mb/d of capacity by 2020 to 3.125 mb/d instead. It would also lower its 2040 target to 4 mb/d instead of 4.75 mb/d.

Equinor profits disappoint. Equinor (NYSE: EQNR) reported a larger-than-expected decline in profits for the third quarter, due to a decline in natural gas prices and production. Earnings fell to $2.59 billion, down from $4.84 billion a year earlier.

California considers electric truck mandate. California air regulators are exploring mandates to require half of all medium and heavy trucks to be zero-emission by 2030, which would be the first of its kind. A final vote is expected by mid-2020.

Schumer proposes EV bill. Senate Minority Leader Chuck Schumer is proposing a $450 billion “cash for carbon” bill, a major initiative that would aim to replace a fifth of the U.S. auto fleet with EVs within 10 years. Senator Schumer said that the proposal would be part of climate change legislation if the Democrats retake the majority after the 2020 election.

What Will It Take For Oil Prices To Rise?

Economic doom and gloom remain the order of the day, so little wonder that hedge funds and other money managers spent the last week of September and the first part of October selling down their oil futures positions.

After a series of attacks on tankers in or near the Strait of Hormuz and in the Red Sea this year, vessel seizures, and then the major strike on the key Saudi oil facility of Abqaiq, it appears that nothing short of a conflict directly affecting at least one major Middle Eastern oil producer will drive up the price of oil.

OPEC production was down 1.6 million b/d in September from August, the lowest level since November 2003, but the price of Brent crude is back below $60/barrel.

Economic pessimism

The International Monetary Fund’s (IMF) October World Economic Outlook confirmed the uncertain outlook. The world economy is now forecast to grow at 3.0% in 2019, 0.3% lower than the IMF’s April projection. There are few signs that the economic situation has hit rock bottom and is entering a recovery phase. Further downgrades are still possible.

In particular, the Fund noted that manufacturing activity has weakened substantially to levels not seen since the financial crisis of 2008/09, although the service sector remains relatively resilient. The OECD’s Composite Leading Indicator continues to deteriorate, reaching 99.06 in August, notching up 20 continuous months of decline.

The Fund sees growth of 3.4% in 2020 and a slightly higher growth rate for 2021-24 but notes major downturns in many large developing market economies. It is their recovery in 2020 and beyond which underpins stronger growth and also stronger oil demand as growth in four key areas, representing half of global GDP – China, the euro area, Japan and the US – is expected to moderate.

Demand decline

As a result of the weakening economic outlook, the US Energy Information Administration has dropped its forecast for Brent by $5/bbl to $57/bbl in second-quarter 2020 as inventories rise in the first half of next year before the market tightens in the second half. Brent prices for second-half 2020 are forecast at $62/bbl. Again, this is a recovery-based scenario which does not entertain any further deterioration in the global economy.

While lower oil prices are weighing on US shale oil drillers, and hitting the oil services sector hard, such is the momentum behind US oil production that output will take time to slow. The EIA estimates US crude production will still increase by 0.9 million b/d next year to an annual average of 13.2 million b/d, building on the estimated 1.3 million b/d rise this year.

The International Energy Agency, in its latest oil report, sees total non-OPEC production growing by 2.2 million b/d next year, driven by the US, Brazil and Norway, but has crimped its demand forecast for 2020 again by 100,000 b/d to 1.2 million b/d, reflecting slower global GDP growth.

Adrenaline shot needed

To reverse this outlook, business confidence needs an adrenaline shot and quickly. The only likely source of such a tonic is the US-China trade talks, which according to US President Donald Trump are going well and could produce a deal on the first phase of the overall negotiations by the middle of next month in time for the Asia-Pacific Economic Cooperation meetings on November 16-17 in Chile.

The imposition of more tariffs has been avoided for now, but the Chinese description of the situation as ‘talking while fighting’ does not inspire confidence that a meaningful deal will be reached that results in a rapid reduction in trade tensions. 15 months on and it seems a long road back to what might be termed pre-trade war ‘normality’.

Looming surplus

In the short-term, global oil inventories should continue to fall. Seasonal summer demand in the northern hemisphere has been relatively strong and the huge Saudi outage will dent oil in storage.

But it is a likely surplus in first-half 2020 that OPEC will have to address when it meets next in December. Further cuts to supply, underpinned by Saudi Arabia and non-OPEC member Russia, are likely to be needed to restore a semblance of market control by the producer group.

Saudi Aramco is still pursuing plans for the partial floatation of its giant state oil company Saudi Aramco. It will not want to curtail production in such circumstances, but a reassertion of OPEC’s market relevance may be the only way to boost confidence.

The gloom can lift but it will take a combination of factors to do so: real progress in the US-China trade talks and the lifting of some tariffs; an orderly Brexit, or at least some reduction in uncertainty; and further supply curtailments by the OPEC+ grouping.

—— AUTO – GENERATED; Published (Halifax Canada Time AST) on: October 25, 2019 at 07:46PM

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