Oil report for September 12, 2017
• Data related to Hurricane Harvey is starting to come together. For the week ending on September 1, refinery inputs fell by 3.2 million barrels per day (mb/d), or 34 percent, according to the EIA.
• That was the largest week-on-week decline since 2008.
• The outages remain, with a little more than 2 mb/d of refining capacity offline, according to Goldman Sachs.
• ExxonMobil (NYSE: XOM) agreed to slash its LNG price to India under a 20-year contract, a major concession that demonstrates the increasing leverage that buyers have over sellers in an oversupplied market.
• Glencore (LON: GLEN) and Qatar announced a decision to sell their nearly 20 percent stake in Rosneft to a Chinese company. CEFC China Energy Co. will take a 14.2 percent stake in Rosneft, a sign of the burgeoning energy ties between Russia and China.
• BP (NYSE: BP) announced plans to spin off $100 million worth of pipeline assets into a master limited partnership called BP Midstream Partners LP. MLPs have proved popular with investors as they send much of their earnings to investors, helping them to avoid tax.
Oil prices held steady in early trading on Tuesday after the release of OPEC’s latest report, which struck a confident tone about the pace of rebalancing underway in the oil market.
OPEC sees strong oil demand. In its latest monthly report, OPEC revised up its forecast for global oil demand growth, predicting consumption will expand by 1.42 mb/d this year, an upward revision of 50,000 bpd from a month earlier. Meanwhile, OPEC’s collective oil production dipped in August for the first time in four months. Output fell by 79,000 bpd in August from a month earlier, mostly the result of sizable outages in Libya, but also because compliance with the group’s cuts improved among other OPEC members. OPEC’s estimate for oil inventories in OECD countries also declined for the third consecutive month, putting total storage at 195 million barrels above the five-year average. “It is clear the rebalancing process is under way,” OPEC’s Secretary-General Mohammad Barkindo said in a speech on Monday. OPEC also dismissed worries about demand falling short in the U.S. because of the two major hurricanes. The cartel said the storms will have a “negligible” impact on U.S. demand.
Chart of the Week
Goldman Sachs: Hurricanes Harvey and Irma cut oil demand by 600,000 bpd.Goldman Sachs says that Hurricane Harvey will reduce demand by 600,000 bpd in September while Irma could reduce demand by 300,000 bpd. After factoring in oil production outages in Texas from Harvey, which cut output by 300,000 bpd, Goldman says that on balance the two hurricanes will cut oil demand by 600,000 bpd in September. Other analysts agree. Thomas Pugh, a commodity economist at Capital Economics, estimates that the two hurricanes will lead to a steeper drop in demand than Hurricane Katrina in 2005, which saw a dip in U.S. oil demand by 2 percent in the three months following the storm. Ultimately, that could lead to an increase in crude oil inventories by about 40 million barrels in the next month, Goldman says. “That’s obviously not particularly useful for the global rebalancing effort,” he said, according to the WSJ. Meanwhile, the bank says that the refineries in Texas and Louisiana are still operating at reduced rates, keeping 2.24 mb/d of refining capacity offline.
Millions without electricity in Florida. Florida’s utilities said it could take weeks to restore power to the millions of people left in the dark from Hurricane Irma. According to the New York Times, about 62 percent of Florida’s residents have been left without power following the disaster.
North Sea oil storage falling. According to Reuters, the volume of crude oil stored offshore in the North Sea has declined over the past month, a sign that the market is rebalancing. The reduction of floating storage is consistent with the Brent futures market shifting into backwardation, a situation in which front-month oil contracts trade at a premium to futures dated further out. Backwardation makes storage uneconomical and tends to show up when there is some bullish momentum for crude. “The whole market is tightening up,” a North Sea trade source told Reuters. “Crude inventories have been drawn down, and there is no direct economic incentive for floating storage.”
Shell inks gas deal in Nigeria. Royal Dutch Shell (NYSE: RDS.A) signed an agreement with a Nigerian company to invest in natural gas pipeline infrastructure in an effort to boost gas demand. Shell’s Nigerian unit will invest $300 million “to develop, market and distribute natural gas around Lagos,” according to the FT.
Clashes in Iraq’s south threaten oil fields. Reuters reports that clashes among tribes in Iraq’s south have increased recently, a cause for concern because there is a vacuum in the region while much of the country’s security forces are in the north fighting ISIS. The violence is a worry because of its proximity to Iraq’s major oil fields – the vast majority of Iraq’s oil production comes from the south. The government has been trying to attract more investment from international oil and gas companies, a campaign that will be significantly handicapped by instability and violence.
More electric vehicles, more investment. Each week it seems like there is new ground being broken for electric vehicles. This week, Volkswagen said it would invest $24 billion in zero-emissions vehicles by 2030, which would result in the unveiling of 80 new electric cars across all of its brands. That is a more than doubling of the previous target of 30 new EV models. Also, Daimler said on Monday that its Mercedes-Benz brand would carry EV versions for all of its models by 2022. BMW said last week that it is retooling its factories to mass produce EVs beginning in 2020. More and more automakers are following suit. “It is quite clear the future will be electric,” Ralf Speth, Jaguar Land Rover chief executive, told CNBC on Tuesday. “We are going to deliver a step-by-step complete electrified portfolio and from 2020 onwards all of our cars will deliver the option to be electrified.”
China considers phase out of internal combustion engine. China is weighing a complete phase out of gasoline and diesel vehicles by 2040, a move that would follow the ban on sales of the internal combustion engine in France and the UK by the same deadline. Unlike the announcements from Europe, however, China’s decision would really change the game. As the largest auto market in the world, China’s phase out of the internal combustion engine would upend oil markets. The objective for China has several benefits – reducing oil imports, cleaning up local air pollution, and also dominating the EV production market.