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ENERGY: Oil report for September 13, 2019

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Trade War Hopes Halt Oil Price Slump


Trade overtures boost markets. A series of back-and-forth good will gestures between Washington and Beijing has boosted market sentiment. On Thursday, Chinese firms bought 10 shipments of U.S. soybeans in another effort to build confidence ahead of October trade talks. Politico reports that the Trump team is trying to find an “escape hatch” to get out of the trade war that the President started. With pain clearly deepening for both sides, there is a growing eagerness to head off trade escalation. Still, a breakthrough in negotiations is a big ask.

IEA: Oil tight now, surplus in 2020. The IEA said this week that the market will see inventory drawdowns of 0.8 mb/d in the second half of 2019, but that a surplus would return in 2020. The “call on OPEC” is set to decline by 1.4 mb/d next year, presenting a serious challenge to the cartel.

Saudi oil minister wants to rebuild OPEC ties. After several years in which the Saudi-Russian relationship seemed to take a higher priority over cohesion within OPEC, the new Saudi oil minister wants to rebuild trust within the group. “The new minister likes decisions to be unanimous instead of being presented as just Saudi-Russian agreements,” a source told Reuters. “He wants us to be a united front.” In an early sign of success, several OPEC members vowed to boost compliance with the cuts.

Pemex issued new bonds to pay old ones. Pemex issued $7.5 billion in new longer-dated bonds, easing the near-term path on bond payments for the world’s most indebted oil company. The move may also reduce the risk of a credit downgrade. In addition, the Mexican government is injecting another $5 billion into the company.

GE to give up control of Baker Hughes. GE (NYSE: GE) has decided to give up majority control of Baker Hughes (NYSE: BHGE) by winding down their stake in the company. The move is expected to raise nearly $3 billion for GE and take its stake below 40 percent. GE acquired a 62.5 percent stake in Baker Hughes in 2017. 

Netherlands to halt Groningen gas by 2022. The Dutch government said it would halt production of the massive Groningen field – Europe’s largest onshore gas field – by 2022, eight years earlier than planned. The increasing frequency and severity of earthquakes in the Netherlands, with an especially large one earlier last year, has accelerated the shutdown plans.

Colombian court upholds fracking ban. Colombia’s high court upheld a temporary ban on fracking, a decision denounced by the oil industry but celebrated by environmentalists. According to Argus Media and Ecopetrol data, Colombia’s Middle Magdalena Valley basin holds between 4 and 7 billion barrels of oil equivalent.

U.S. natural gas production hits new record. U.S. natural gas production rose to 91 Bcf/d in August, an all-time monthly high. The increase came despite low prices.

“Electric fracking” cuts costs, threatens services companies. As Reuters reports, a growing number of U.S. shale companies are turning to “electric fracking,” which uses natural gas to power fracking operations rather than costly diesel. E-frac, as the technology is called, could reduce the cost of a $6 million-$8 million shale well by $350,000. But while they save money for producers, they threaten the business model of oilfield services companies like Halliburton (NYSE: HAL), which have tens of billions of dollars tied up in older technologies. Halliburton said it would be too costly to make the switch.

Norway increases North Sea production. Equinor (NYSE: EQNR) started up production from the Mariner field in mid-August, and is aiming to begin production from the Johan Sverdrup field in October. Together, the fields could add almost a half million barrels per day of production by 2020.

Interior: Drilling in ANWR would have little impact. The Interior Department said that drilling in the Artic National Wildlife Refuge (ANWR) would have a negligible environmental impact, paving the way for a lease offering later this year. Meanwhile, the U.S. House of Representatives passed a bill reversing the law that allowed drilling in ANWR, although it is set to go nowhere with the Republican-controlled Senate.

Trump to move forward on stripping California of fuel economy authority. The Trump administration has decided to move forward on an attempt to strip California of its unique authority to set stricter fuel economy rules, according to Bloomberg.

Alta Mesa files for bankruptcy. Alta Mesa (NASDAQ: AMR) became the latest shale driller to file for bankruptcy, while an SEC investigation into potential fraud continues. As the Houston Chronicle notes, the shale company, led by a former Anadarko Petroleum chief executive, was valued at as much as $3 billion in early 2018, but has collapsed to just $30 million with its share price trading at less than 8 cents per share.

Greenpeace partially shuts Houston Ship Channel. Activists with Greenpeace partially shut the Houston Ship Channel on Thursday, repelling down a bridge to block shipping traffic in an effort to put a spotlight on the climate crisis ahead of the Democratic debate, which was held in Houston on the same day.

Banks step up efforts to track and report carbon. Major banks see risks to fossil fuel assets from climate change, and are increasing their efforts to track and report their involvement in carbon emissions, according to Bloomberg Businessweek. Roughly 45 global financial institutions have signed up for voluntary commitments to lower their emissions profiles in their lending.

Trump admin urges biofuels groups to accept compromise. In a closed-door meeting on Thursday, the White House urged U.S. biofuels companies to accept a 5 percent increase in blending requirements for 2020, according to Reuters. Biofuels groups want assurances that the move is not a one-off. The Trump administration has struggled to please both oil refiners and the biofuels industry, a conflict that escalated after an August decision to give 31 blending waivers to refiners.

IHS Markit report predicts low natural gas prices for years. According to IHS Markit, U.S. natural gas prices could average below $2/MMBtu next year, the lowest price in real terms since the 1970s. Demand is rising, but not by enough to absorb oversupply. “It is simply too much too fast,” Sam Andrus, executive director of IHS Markit, said in a statement. “Drillers are now able to increase supply faster than domestic or global markets can consume it. Before market forces can correct the imbalance, here comes a fresh surge of supply from somewhere else.”

BP to sell some oil projects to comply with Paris agreement. BP’s (NYSE: BP) CEO Bob Dudley said that the company would sell some oil projects in order to align its business with the Paris Climate Agreement. One idea would be to exit the most carbon-intensive projects, although BP declined to specify those. The consideration is a sign that oil majors are coming under pressure to make strategic decisions to plan for a low-carbon future.

Oil Demand Destruction: A Trade War Reality

Chinese-US trade figures in August came in well below expectations illustrating the negative impact of the ongoing trade war. Chinese exports to the US in August were down 16%, while imports from the US dropped by 22%. Overall, Chinese exports fell 1% year on year, the biggest drop since June, when they slumped 1.3%.

However, Beijing and Washington have agreed to restart trade negotiations in early October with officials already attempting to lay the groundwork.

The problem is we have been here before only to see the talks break down and the US escalate the war with new tariffs, against which China then retaliates. New talks are positive, but only if they produce a positive result.

Another problem is that time has taken its toll.

Already back in June, the World Bank revised down its forecast for global GDP growth to 2.6%, creeping back up to a still meager 2.7% in 2020 and 2.8% in 2021. In early September, BP chief financial officer Brian Gilvary forecast that global oil demand would rise by less than 1 million b/d this year as consumption slows.

In its latest Short-Term Energy Outlook, the US Energy Information Administration has also cut back its forecast for growth in global liquids consumption this year from 1.0 million b/d to 0.89 million b/d. Growth in 2020 is forecast at 1.4 million b/d. This has to be set against growth in non-OPEC supply of 2.18 million b/d in 2019 and 2.21 million b/d in 2020.

Weak demand undermines OPEC’s production cuts and accentuates the impact of the expected increase in non-OPEC production this year and next. OPEC is in effect swimming against the tide.

It has also now seen two consecutive monthly rises in its own production. Secondary source estimates showed an overall rise of 50,000-80,000 b/d in OPEC output in August, with Iraq again failing to comply with the organisation’s agreed quotas.

Even if optimism surrounding the renewal of trade talks grows, it is increasingly likely that further supply-side restraint or unanticipated disruptions will be needed to keep the oil market steady.

False optimism?

The main reason to hope for an end to the trade war is that both the Chinese and US economies are suffering, but by how much?

US non-farm payrolls rose by 130,000 in August, below expectations and accompanied by downward revisions to previous months’ data as well as being boosted by federal recruitment for the 2020 census, but the US economy is still creating jobs. The unemployment rate at 3.7% is holding steady at a very low level and the employment-population ratio is at a ten-year high of 60.9%.

Even so, the forward looking indicators for the US are deteriorating – the World Bank’s forecast sees US GDP rising by 2.5% this year, but then slowing to 1.7% in 2020. US business confidence turned negative in April, suggesting that investment levels will not be sufficient to keep non-farm pay rolls on an upward trajectory.

Already suffering in the opinion polls and with the November 2020 presidential elections looming, US President Donald Trump arguably needs to act before his trade war chickens really come home to roost.

But there is little sign that Washington and Beijing are any closer to an agreement. US demands for intrusive enforcement mechanisms are highly unlikely to be conceded by China. Should the talks fail again it will serve only to underline the divisions between the US and China on the latter’s industrial policies and lack of intellectual property protection.

A continuation or even further escalation of the trade war remains a plausible scenario, exacerbating the demand-side shock to oil demand of weak global trade.

Alternative reality

The argument for a resolution is that the longer the trade war goes on, the deeper the economic damage becomes and the more likely it becomes that a deal will be done. This logic appears to become increasingly compelling as the US presidential elections approach.

But it ignores the possibility that neither side will make the necessary concessions. The alternative is that US-Chinese trade antagonism becomes an enduring feature of the world economy and Trump campaigns for re-election on the basis that he will not concede on US trade interests.

A return to the pre-Trump status quo looks unlikely. A key difference under Trump is that the US no longer looks for dispute resolution through multilateral rules-based bodies, but pursues a unilateral approach, which is intrinsically less predictable.

If a deal is done, questions will remain over its stability. Either side might form the perception that the other is acting in bad faith. Trump has reshaped US-Chinese relations, making them less stable. Concessions by either side now may be seen as pragmatic, but also as unfinished business to be addressed when the time is right.

—— AUTO – GENERATED; Published (Halifax Canada Time AST) on: September 13, 2019 at 05:34PM

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