No OPEC Deal Extension Without Cut From Iran – Oil report March 24, 2017
Friday, March 24, 2017
Oil prices fell slightly this week on another crude inventory build in the U.S., although the report was slightly tempered by another decline in gasoline stocks.
Saudi Arabia’s credit rating cut. Fitch Ratings slashed Saudi Arabia’s credit rating by one notch to A+ from AA- over concerns about public finances. The downgrade comes as Saudi Arabia and other major oil producers struggle with the dilemma of allowing oil prices to sink lower or make painful production cuts in order to keep prices elevated. Fitch also questioned whether or not the proposed economic reforms in Riyadh will be implemented. “The scale of the reform agenda risks overwhelming the government’s administrative capacity,” Fitch said.
Saudi Arabia might demand Iran cutback if OPEC is to extend deal. Speculation about whether or not OPEC will extend its production cut deal for another six months will be one of the most significant variables affecting oil prices in the short run. S&P Global Platts reports that Saudi Arabia might only agree to an extension if Iran agrees to cut its production, something that it did not have to do as part of the initial deal. Iran agreed to a cap on production slightly higher than its October baseline for the January to June period, but Saudi Arabia is growing tired of taking on the bulk of the sacrifice for the market adjustment and might stipulate that other countries make a larger sacrifice if the deal is to be extended through the end of the year.
OPEC meets in Kuwait to assess progress. OPEC officials are huddling in Kuwait this weekend to gauge the health of the oil market and figure out next steps. They won’t make any decisions until May at least, but they will likely discuss the painfully slow pace of market adjustment. A survey of 13 oil market analysts by Bloomberg concludes that OPEC has little choice but to continue their production cuts. “They’ll probably think they need to grin and bear it longer,” Citi’s Ed Morse said. “The glue that bound them together to begin with, which was higher prices, is the glue that will continue to bind them together.”
Libyan oil production back up to 700,000 bpd. Libya offered oil bulls a glimmer of hope in early March when it lost nearly 100,000 bpd in production because of fighting between competing factions over the country’s largest oil export terminals. However, production is back up to 700,000 bpd and Libya’s National Oil Company (NOC) has hopes of making much larger gains this year. “We are working very hard to reach 800,000 barrels by the end of April 2017, and, God willing, we will reach 1.1 million barrels next August,” NOC Chairman Mustafa Sanalla said in a statement. If Libya adds another 400,000 bpd by August, it will be hugely bearish for oil prices. The markets are not taking into account this supply potential, and it could blindside investors.
Frac sand prices rising. Sand prices are rising, raising the cost of drilling and eating into some of the “savings” that shale drillers have achieved over the last three years. The supply of sand is tightening as drillers rush back to the shale patch. “Companies are worried about it,” James West, a managing director at Evercore ISI, told the WSJ. “I think the threat of a bottleneck, at this point, is probably understated.” Sand prices have jumped to $40 per ton, more than double the $15 to $20 per ton that prevailed last year.
Trump approves Keystone XL. The nearly decade-old saga continues as President Trump revived the Keystone XL pipeline on Friday, granting a federal approval for TransCanada’s (NYSE: TRP) controversial $8 billion project. However, the pipeline still faces a variety of legal challenges at the state level, with Nebraska as a particular headache. Moreover, the pipeline also faces market pressure – two competing pipeline expansions have already been approved by the Canadian government, which, if completed, will add upwards of 1 million barrels per day of pipeline capacity. Kinder Morgan’s (NYSE: KMI) Trans Mountain Expansion and Enbridge’s (NYSE: ENB) Line 3 expansion might ruin the business case for Keystone XL, but that remains to be seen.
Interest in Gulf of Mexico picks up. The U.S. government received 189 bids on 163 blocks from 28 companies for its latest auction for offshore tracts in the Gulf of Mexico. The bids were worth an estimated $275 million. That represents a sharp increase in interest from a year ago. Royal Dutch Shell’s (NYSE: RDS.A) subsidiary Shell Offshore Inc. led all companies in bidding. The results of the auction suggest that even as companies are concentrating more resources on shale plays these days, interest in offshore drilling is still alive.
Eni makes Mexican oil discovery. Italian oil giant Eni (NYSE: E) announced a “meaningful” discovery in Mexican waters this week, the first well drilled by a private international company. The discovery is a boost to Mexican’s energy reform, which began years ago and is starting to bear fruit. It will also likely spark more interest in Mexico’s next auction in June for deepwater offshore acreage.
Shell responsible for “astonishingly high” levels of pollution in Nigeria. A new report finds that Shell’s Nigerian operations spilled oil in enormous volumes back in 2008, and the environmental damage continues to this day. The oil spills and leaks have ruined mangroves and creeks years after the events, endangering local communities. The head of the UN’s Environmental Program calls the situation as “one of the biggest environmental scandals and catastrophes anywhere in the world.” Shell says the report offers no new information, and in any event, the bulk of the spills are the result of sabotage, not wrongdoing by the company.
Venezuela suffering through gasoline shortage. Gasoline lines are growing in Caracas as Venezuela’s state-owned PDVSA is rumored to be struggling to pay for imported fuel. “They’re not importing enough because they are saving up to pay the debt,” Jose Brito, an opposition lawmaker in Venezuela told Bloomberg. “It’s unbelievable that this is happening in an oil producing country.” The economic crisis in Venezuela is worsening and there are growing fears of a default this year.