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Oil report for August 22, 2017

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•    The EIA included the Anadarko Region in its Drilling Productivity Report for the first time, a sign that the Oklahoma area is gaining importance for oil and gas exploration.

•    The region’s most important areas are the STACK and SCOOP plays, which have seen a surge in investment and drilling in the past few years.

•    The Anadarko is expected to produce over 6 bcf/d of natural gas and over 450,000 bpd of oil in September.

Market Movers

•    Royal Dutch Shell (NYSE: RDS.A) is reportedly in talks to purchase natural gas from Israel’s Leviathan field, combine it with gas from the Aphrodite field off the coast of Cyprus, and use it in order to service an LNG terminal in Egypt. The gas fields are turning the Eastern Mediterranean into a major source of gas production.

•    Lithuania reported the arrival of the first LNG shipment from the U.S., which came from Cheniere Energy’s (NYSE: LNG) Sabine Pass facility in the Gulf of Mexico. The shipment highlights the changing nature of the gas trade in Europe, providing the Baltics with an alternative to pipeline gas from Russia.

•    Total (NYSE: TOT) is set to purchase Maersk (OTCPK: AMKAF) for almost $5 billion plus $2.5 billion in debt. The deal expands Total’s portfolio, making it one of the largest oil producers in the world. The acquisition means that Total is expected to be able to produce 3 million barrels of oil equivalent per day by 2019.

Chart of the Week

Oil prices dove on Monday after a rally at the end of last week, a dip that analysts attributed to profit-taking. Investors have pulled back recently after building up large bullish bets on crude futures, a sign that the optimistic outlook has tempered. On Tuesday, oil was flat in early trading.

OPEC production falling in August. According to PetroLogistics, OPEC production is on track to decline by 419,000 bpd in August, compared to July. The sharp decline comes after a recent monitoring meeting where OPEC officials browbeat laggards within the group, imploring them to step up compliance with the deal. Compliance weakened in June and July, pushing the cartel’s collective output up to a year-to-date high. But fresh data suggests that they are improving the situation, with output dropping so far this month.

OPEC to discuss extending cuts or letting them expire. At the next official OPEC meeting in November, OPEC will reportedly discuss whether or not the group will extend the cuts beyond the March 2018 expiration date. “At our next meeting at the end of November…the most important items will concern the fate of the agreement to extend or terminate the production cut,” Kuwait’s oil minister Essam al-Marzouq told Kuwait TV in an interview.

Kuwait: inventories are falling because OPEC deal is working. Kuwait’s oil minister Essam al-Marzouq told CNBC on Monday that U.S. crude oil inventories are decliningfaster than expected, a sign that the OPEC deal is working as planned. “We are now seeing the impact of those cuts (in the first half of the year) as U.S. oil inventories fall by more than expected,” he said. “Week after week we are seeing a much bigger-than-expected fall in inventories.”

Lithuania receives first U.S. LNG cargo. In what could be a watershed moment, the first U.S. LNG cargo landed in Lithuania, providing the Baltic States with an alternative source of natural gas. The Baltics have been wholly dependent on Russian natural gas, and the landing of a U.S. LNG cargo has already forced Gazprom to lower its prices. Meanwhile, Russia is trying to protect market share in its backyard, lowering prices, seeking an expansion of the Nord Stream pipeline system, and also developing its own LNG. The competition between U.S. LNG and Russian gas in Europe will play out in the years ahead – U.S. LNG supply is set to climb sharply next year and again towards the end of the decade.

Tesla’s bonds drop in value on financial concerns. Tesla (NYSE: TSLA) issued corporate bonds almost two weeks ago, which have since declined in value by more than 2 percent, the WSJ reports. The bond issuance of $1.8 billion were aimed at paying for the mass production of the Model 3, the mass market electric vehicle. The annual yield is as high as 5.3 percent, but because the bond price has dropped over the past week, the yield has jumped even higher. The price decline shows that bond investors are concerned that Tesla, which has not turned an annual profit, is becoming more risky as it accelerates spending.

BHP Billiton to exit U.S. shale. Determining that shale exploration is not part of its core business, mining giant BHP Billiton (NYSE: BHP) said that it would sell off its shale assets after a lengthy review. BHP has more than 838,000 acres in the Permian, Eagle Ford, Haynesville and Fayetteville shale regions. BHP also announced a threefold increase in its final dividend.

Saudi budget to see $21 billion increase in non-oil revenues. In a sign that the economic diversification efforts are starting to bear fruit, Bank of America Merrill Lynch estimates that Saudi Arabia will take in an additional $21 billion in in non-oil revenue next year. The revenue boost will come from the implementation of a series of new taxes, which were an outgrowth of the ballooning budget deficit over the past few years.

Canadian oil sands performing well, but could be short-lived. Canadian oil sands companies have beat expectations as of late, but the strong performance might not last. The Western Canada Select benchmark has narrowed its discount to WTI to its smallest gap in years, the result of declining heavy oil production in Latin America, plus the OPEC reductions. But if the OPEC deal expires, the pressure on Canada’s benchmark will increase. Meanwhile, Canadian oil sands operators are set to add an additional 200,000 bpd of new supply before the end of the year, which will also weigh on prices.

JP Morgan: EVs to take off. JP Morgan warned that there will be a lot of losers as the electric vehicle revolution takes off. The investment bank estimates that EVs will capture 35 percent of the auto market by 2025 and 48 percent by 2030. Car dealers will lose out because maintenance is much lower for an EV. The volume of vehicle sales will also decline because EVs are thought to last longer than a traditional vehicle. As such, the auto financing industry will also take a hit. And of course, oil prices will be a major loser – oil demand could shrink by 15 percent by 2035. And interestingly, JP Morgan says that could set off a death spiral for oil prices as oil producers try to monetize their assets, producing as much as possible as the market shrinks.

Brent-WTI spread widens. The spread between the Brent and WTI benchmarks has widened recently, a symptom of ongoing production increases in the U.S. coupled with production cuts elsewhere in the world. Meanwhile, rising global demand is also putting upward pressure on Brent, particularly from China.

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