Bullish sentiment has dominated oil markets in recent months, driven by a fear of supply shortages, but this sentiment has seemingly vanished over the last week
Friday, October 19th, 2018
The oil market is suddenly rather sanguine about a supply shortage in the short run. “The concerns about a tightening of supply, which dominated markets until two weeks ago, have abated despite the fact that the reasons for them (falling Iranian oil exports, declining oil production in Venezuela, reduced spare capacities) still apply,” Commerzbank said in a note. The bank said that the recent uptick in inventories provides some cover, and traders are no longer on edge about shortages. “Nonetheless, we believe it is still too early to sound the all-clear for the oil market.”
Oilfield services face tough quarter. Oilfield services companies are expected to post mediocre figures when they report third quarter results in the coming days. Oil producers have been under pressure to keep costs low, which means less revenue for servicers as more drillers are doing work in-house. Also, U.S. tariffs are driving up the cost for projects. “The risk for a number of (oilfield service) firms is to the downside,” Brad Handler, a Jefferies equity analyst in New York, told Reuters.
U.S. sanctions losing effectiveness. The overuse of sanctions by the Trump administration is undermining their effectiveness, according to Jacob Lew, the U.S. Treasury Secretary under President Obama, and Richard Nephew, the lead on Iran sanctions during the Obama administration. “Today, Washington is increasingly using its economic power in aggressive and counterproductive ways, undermining its global position and thus its ability to act effectively in the future,” Lew and Nephew write in aForeign Affairs essay.
Goldman: $100 oil not likely. Jeff Currie, head of commodities research at Goldman Sachs, said that $100 oil is not “very likely.” “We're not saying $100 oil cannot happen. It's not our base case nor do we think it's very likely,” Currie told S&P Global Platts in an interview. Reaching $100 would require a “sustainable loss in all of Iran's oil exports for an extendable period of time.”
Oil prices fall on U.S. production. The latest EIA report showed another strong increase in inventories, which helped push down prices mid-week. The data release also revealed a sudden drop in production, but that figure is an anomaly due to hurricane-related outages. Also, the effort by the Trump administration to smooth over tension with Saudi Arabia tamped down geopolitical concerns. “The inventory numbers were a real bearish surprise,” Michael Lynch, president of Strategic Energy & Economic Research, told Bloomberg. “That combined with the gradual lessening of tension” between the U.S. and Saudi Arabia “has taken some of the steam out of the market.”
SPR justified by Iran sanctions. The outages from Iran give the Trump administration the legal justification for a release from the strategic petroleum reserve (SPR). “I don't agree with the reimposition of sanctions against Iran, but if you are of the view that we need to take the strictest possible line to crack down on Iran's egregious behavior and we have to take their oil exports to zero ... then I think there is a plausible argument to say that is a legitimate emergency supply disruption that justifies a release from the Strategic Petroleum Reserve,” Jason Bordoff, founding director of Columbia University's Center on Global Energy Policy, said in an interview with S&P Global Platts.
ExxonMobil betting on China’s LNG demand. ExxonMobil (NYSE: XOM) is betting big on Chinese gas demand for the long haul. Exxon already has its massive Papua New Guinea gas production and LNG export facility, and it is looking to build LNG export capacity in Mozambique. Both gas-exporting regions are situated to serve Chinese demand. Meanwhile, Exxon is also building gas storage facilities and a major petrochemical complex in China, investments that will soak up the gas coming from its upstream assets in East Africa and the Pacific. The combination “will guarantee us a steady outlet for lots of our LNG for decades,” an unnamed Exxon manager toldReuters.
Turkey seeking U.S. waiver on Iran. Turkey’s top refiner, Tupras, is seeking a waiver from the U.S. government that would allow it to continue importing oil from Iran beyond the November 4 implementation of sanctions. Turkey imported 97,000 bpd from Iran in August and 133,000 bpd in September. Other nations in Asia are in talks with the U.S. for waivers, and some refiners are confident they will receive one.
Neutral Zone fields to remain offline. Saudi Arabia had sought to revive talks with Kuwait over the restart of the Neutral Zone oil fields that straddles the border of the two countries. The fields have been offline for several years and have a capacity of around 500,000 bpd. The two sides seemed to be making progress but the talks recently broke down, suggesting the fields will remain offline for the foreseeable future.
U.S. sees no need for more sanctions on Venezuela. Venezuela’s catastrophic meltdown and the spiraling oil production crisis means that there is little reason to impose more sanctions, several U.S. officials say. “The fact is that the greatest sanction on Venezuelan oil and oil production is called Nicolas Maduro, and PDVSA’s inefficiencies,” an official told Reuters. “At the end of the day, Nicolas Maduro has taken care of really running PDVSA to the ground, and essentially more and more making it a non-factor.”
ConocoPhillips clears hurdle for Alaska drilling. ConocoPhillips (NYSE: COP)has cleared a key hurdle that could allow it to move forward with a $1.5 billion project in Alaska’s National Petroleum Reserve.
Flood of light oil from the Permian. Permian drillers are producing a flood of light oil, leading to more varieties of oil sold to refiners. “There’s room for more segregation instead of just West Texas Sour and WTI Midland crudes,” Neil Earnest, president of industry consultant Muse Stancil & Co., said in a phone interview with Bloomberg. “The growing production from the Permian has given rise to increasing variety of crudes.”
Colorado setback referendum sparks fear in industry. The Colorado referendum that could increase drilling setback distances from 500 feet to 2,500 feet has attracted nearly $40 million in spending from the oil industry, which is desperate to defeat the measure. By some estimates, the greater setback distances could cut the state’s oil production in half.