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ENERGY: Oil report for August 10, 2018

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Oil Prices Take A Breather As Supply Jumps

OILPRICE.COM – Oil markets took a breather at the end of the week as new supply from Russia and Saudi Arabia calmed fears of a tightening market, but there are plenty of bullish catalysts on the horizon.

Friday, August 10th, 2018

The IEA said in a new report that more supply from Saudi Arabia and Russia has eased supply concerns, but that the current lull in the oil market might only be temporary with sanctions on Iran looming.

IEA: Oil market sees “cooling down” this summer. The International Energy Agency said that higher output from Saudi Arabia and Russia have tamped down concerns about supply. The partial recovery in Libya has also dialed down the danger to the oil market. The IEA slightly revised up its forecast for demand growth in 2019 to 1.5 million barrels per day (mb/d), up 0.1 mb/d from last month. For this year, however, demand growth slowed in the second and third quarter, after a blistering first quarter. This “cooling down” of the oil market – both in terms of fewer disruptions and slower demand – has caused prices to fall back from a few weeks ago. But it could be temporary. With Iran sanctions set to take effect in November, it could be “very challenging” to ensure adequate global supply, the IEA said.

ExxonMobil shopping long-term oil deals. ExxonMobil (NYSE: XOM) is reportedlytrying to sign up refiners to long-term oil purchasing deals. A lot of Middle Eastern oil producers conduct their trade under long-term contracts, but it is uncommon for oil shipments from the U.S. to be done this way. Exxon is hoping to sign up some Asian refiners to purchase its growing supply in the Permian basin.

China refrains from slapping tariffs on U.S. crude. Despite having proposed to include American crude oil under its list of tariff targets, China left oil off of its list this week when it imposed $16 billion worth of tariffs on U.S. products. The decision, analysts say, is a reflection of China’s import needs, particularly with supplies from Venezuela in decline and supplies from Iran potentially disrupted. Still, Chinese refiners have begun ratcheting down purchases of American oil and LNG anyway, in anticipation of potential tariffs. The trade fight helped push down oil prices this week, even though crude oil was not caught up in the new tariffs, as the oil market grew concerned about the impact on the global economy.

Chevron and Exxon double down on Permian. Pipeline constraints are slowing drilling in the Permian, but Chevron (NYSE: CVX) and ExxonMobil (NYSE: XOM) are unbowed as they ramp up their presence in West Texas, according to Argus. Chevron’s Permian output rose to 270,000 barrels of oil equivalent (boe/d) in the second quarter, and the company said it is “not materially exposed to the Midland basis differential,” a discount that has consistently exceeded $10 per barrel relative to WTI in Houston. Exxon added 7 rigs to the Permian in the second quarter, taking its total up to 34. Exxon’s output hit 250,000 bpd, a 30 percent increase from a year earlier.

U.S. judge authorizes seizure of Citgo. A U.S. federal judge authorized the seizure of Citgo Petroleum Corp. in lieu of failed payment on Venezuelan government debt. Citgo, a subsidiary of PDVSA, is the only U.S-based asset by the Venezuelan state-owned oil company. The decision could set off a scramble to seize assets and deepen the crisis in Venezuela, but the extent of the impact is still unclear because the full opinion by the judge is sealed.

U.S. predicts Iran will lose up to 1 mb/d. U.S. officials reportedly expect Iran to lose between 700,000 bpd and 1 mb/d of oil exports by November, according to Bloomberg. The Trump administration wants to take exports to “zero,” but clearly recognizes that the process will take time.

Shale drillers starting to step up spending. The “capital discipline” mantra has taken hold over the U.S. shale industry over the past two years, but higher oil prices are starting to lure shale drillers into higher spending levels. Parsley Energy (NYSE: PE),Pioneer Natural Resources (NYSE: PXD) and Continental Resources (NYSE: CLR)recently announced spending increases, joining others in the industry, Reuters reports.

U.S. selling more oil to India. India’s state-owned Indian Oil Corp. signed a term tender for American crude for delivery for November through January, a move that will ensure Indian receives supply at a crucial time when Iran begins to feel the pinch of sanctions.

U.S. sanctions on Russia could impact oil sector. New U.S. sanctions on Russia will take effect later this month, banning the export of “sensitive” goods and technologies. Russia depends on imported technology and equipment for much of its oil sector. The sanctions, particularly if Europe follows suit, could be damaging, as it would take time to switch over to Asian suppliers or develop home-grown technology. “New LNG, refinery, and petrochemical projects may be under threat,” Dmitry Marinchenko, oil and gas director at Fitch Ratings, told Bloomberg. “Oil production may be affected on the more complicated projects.”

China oil futures contract suffering from volatility. While Brent and WTI have been bouncing around modestly, China’s oil contract in Shanghai has been gyrating much more intensely, undermining the contract’s ability to compete with the more widely-traded benchmarks. “The price action does not do the contract any favors as it shows how speculative day-traders remain firmly in control and with that we can see temporary dislocations to the international market,” Ole Sloth Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen, told Bloomberg. The Shanghai contract is being driven by speculative forces, and there is a “disconnect” with the global oil market, Citibank said.

Exxon signs on to support Permian Highway pipeline. ExxonMobil (NYSE: XOM)signed a letter of intent to be a shipper on the proposed Permian Highway pipeline, a $2 billion pipeline that would carry Permian natural gas to the Gulf Coast

Global Energy Advisory – 10th August 2018
U.S. shale producers are raising their capital spending, encouraged by price optimism amid returning sanctions against Iran. Prices are likely to strengthen further in the coming months as well, after a fresh round of sanctions against Russia that could see a suspension of Russian crude oil and oil product imports into the United States.

Investors may not be particularly happy with oil companies’ spending plans but they have less reason to be unhappy with West Texas Intermediate at $67 a barrel, and many, including Continental Resources’ Harold Hamm, expecting a further price rise as Iranian sanction begin to bite.

But shareholders must also be satisfied by the share buyback programs and higher dividends oil companies began paying out after prices started improving. With these higher shareholder returns, they are now in a better position to focus on production growth.

So what we’re seeing is capex plans being expanded by hundreds of millions of dollars, with ConocoPhillips boosting its capex for 2018 by $500 million to $6 billion and Continental is adding $400 million to its already approved budget, with $200 million slated to be invested in more rigs and well completions. Pioneer will add $450 million to its 2018 capex plan but the company noted that some of the additional spending will go towards covering higher cost.

This sheds light on the dark side of the oil industry recovery: Service providers are charging more for their services, as demand begins to outstrip supply, which effectively interferes with the drillers’ ability to make the most of cost cuts achieved during the downturn and higher prices.

Deals, Mergers & Acquisitions

• Noble Energy, Delek Group, and Egyptian East Gas are close to finalizing a deal that will give the three control over a natural gas pipeline between Israel and Egypt, advancing a $15-billion gas export deal between the operators of the Tamar and Leviathan offshore gas fields, and the Egyptian company. The companies already have a deal for the gas exports but it had been blocked by four arbitration lawsuits against Egypt regarding an older gas supply deal. The new three-way deal will see the three set up joint ventures through which they will acquire the share in the pipeline project held by the authors of the lawsuits.

• Apache Corp has teamed up with investment company Kayne Anderson on a pipeline joint venture that will provide a partner to Apache for the operation of its West Texas pipeline assets. These assets include a fully owned pipeline in the Permian, stakes in five other pipelines, and several processing plants. The tie-up will see Apache bring in $1 billion in assets to a new company to be named Altus Midstream Co., while the investment firm will provide $900 million after a share placement. Apache will be majority shareholder with a stake of 71.1%.

Tenders, Auctions & Contracts

• The Mozambican government this week approved contracts that will grant several foreign companies exclusive rights to developing oil fields in an area dubbed Block 5. The contracts follow four years of negotiations that not everyone had the patience to complete: Norway’s Equinor dropped out of the talks this January and Singapore-based Delonex Energy also quit after failing to reach an agreement on terms with the government. This means Block 5 will be shared by Eni, Exxon, Sasol, and the local, national oil company, ENH.

• Aramco has signed a contract with Mazda for research in engine efficiency. The deal is part of Aramco’s attempts to pursue a more environmentally responsible business model, focusing on improving fuel efficiency in internal combustion engines. Aramco already operates a research center in Detroit and now the Mazda deal highlights its interest in fuel efficiency. The JV will seek to provide drivers with low-carbon fuels from Aramco and a new, more efficient engine from Mazda.

Discovery & Development

• Plains All American has accelerated two pipeline projects as capacity bottlenecks in the Permian force producers to sell their crude at a discount to the WTI benchmark. The first of these, the Sunrise pipeline extension, will begin partial service in the final quarter of the year, and the Cactus II pipeline will start operating—again at partial capacity—in the third quarter of 2019. The Sunrise extension will boost the original pipeline’s capacity by half a million barrels daily and the Cactus II will have a total capacity of 670,000 bpd.

• Exxon may be close to making a significant discovery in Pakistan that could see the country enter the top 10 list of oil producers in the world. The Pakistani Foreign Minister said if the discovery lives up to expectations, Pakistan could even overtake Kuwait in terms of oil reserves. Kuwait boasts 101.5 billion barrels of oil reserves, which makes it the seventh-largest producer in terms of reserves.

• Tullow Oil and the Kenyan government have agreed on a resumption of oil production at fields operated by the UK-based company. Work at these fields was suspended amid protests from the local communities insisting on better security in the region. The protests blocked oil trucks that transport the crude from the fields to the coast. Before that, the fields in Turkana produced some 2,000 bpd.

Company News

• Occidental Petroleum reported a 66% improvement in its net profit for the second quarter to $848 million thanks to higher oil prices and despite a dip in production to 639,000 bpd.

• Rosneft reported a record-high net result of $3.6 billion for the second quarter on the back of the price improvement and a weaker ruble, which reduces production costs.

• Aramco and Petronas have approached banks with a request to restructure a short-term loan to the tune of $8 billion with a long-term facility. The companies took the loan from an international banking consortium to help finance the $27-billion RAPID petrochemical project, to be built in Malaysia. The consortium includes Standard Chartered, ING Bank, BNP Paribas, and Citibank.

Regulatory Updates

• The Bureau of Land Management may offer more oil and gas drilling leases in public land in California after the end of a five-year moratorium. This could open as much as 1.6 million acres of land to drillers. The move has naturally sparked a strong response from environmentalists who are particularly concerned about the potential increase in fracking activity in the state.

Politics, Geopolitics & Conflict

• Saudi Arabia cut off diplomatic ties with Canada following criticism from the Canadian Foreign Ministry of the Kingdom’s human rights policies: Minister Chrystia Freeland called on Riyadh to free several women’s rights activists from prison. However, Saudi Arabia said the diplomatic row will not have any impact on Saudi oil supplies to Canada. Canada gets some 10 per cent of its oil imports from Saudi Arabia. Bilateral trade between the two nations is US$3 billion a year.

• China has threatened a 25% tariff on some $60 billion worth of U.S. imports, including LNG. If imposed, these tariffs could lead to a major shift in global LNG markets, hurting the budding U.S. LNG export industry. China was the world’s second-largest importer of LNG last year and expected to be number one in 2019. Last year, about 15 percent of U.S. LNG exports went to China.

—— AUTO – GENERATED; Published (Halifax Canada Time AST) on: August 10, 2018 at 03:38PM

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