Crude Crumbles On Weak IEA Data

Oil prices fell 3% on Tuesday on bearish IEA data and a strong dollar after posting small gains on Monday. 

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• The March 2011 nuclear meltdown in Japan led to the country’s shuttering of its entire nuclear fleet, or 54 nuclear reactors. Now there are five reactors that have received approval for restart, with three of them currently operating.
• There are a further 21 reactors under review for a restart.
• The 2011 catastrophe had far-reaching effects, beyond Japan’s electricity sector. Japan needed to replace its lost power with imported gas, coal and oil. Japan’s need for imports drove up LNG prices in Asia, contributing to an export frenzy in the U.S.
• The restart of so many reactors would be hugely bearish for global LNG prices, and although to a lesser extent, it would also bearish for coal and oil.

Market Movers

• Groningen gas demand is expected to fall sharply from 2020 after production is reduced, the Dutch economy minister says. The gas field is a joint venture between ExxonMobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS.A), and once supplied 10 percent of EU gas demand, but production is being curtailed because of earthquakes.

• Statoil (NYSE: STO) says that its Johan Castberg project could become unfeasible if the Norwegian government requires it to run a cable from the mainland rather than allowing it to use cheaper gas power. The cable would add roughly $1.46 billion in costs. Johan Castberg, a project in the Arctic, could hold 400 to 600 million barrels. Statoil was down 2.1 percent on the news.

• Anadarko Petroleum (NYSE: APC) has agreed to buy deepwater Gulf of Mexico assets from Freeport McMoRan (NYSE: FCX) for $2 billion. Anadarko said it would add 80,000 barrels of oil equivalent per day to its portfolio, but it will need to issue new common shares to finance the deal. Anadarko was down 4.4 percent in after hours on Monday on the news.

Tuesday September 13, 2016

The IEA crushed the hopes of oil bulls on Tuesday when it published its September Oil Market Report. The Paris-based energy agency said that global oil demand is growing a much slower pace than it previously expected, lowering its forecast for 2016 to just 1.3 million barrels per day, or about 100,000 barrels per day lower than last month’s estimate. The IEA said that the oil market’s “balance” will be delayed, citing discouraging trends – demand is actually slowing while supply has begun to rise. As a result, oil “stocks of oil in OECD countries are swelling to levels never seen before,” the IEA said. China and India are “wobbling” and the momentum in the U.S. is also slowing. The result is that supply will continue to exceed demand through at least half of next year. Bad news for oil prices.

$45 to $55 is the “new range.” One often-cited range for oil prices in this era of abundance has been $50 to $60. That is a range that OPEC has been rumored to target. But as many oil producers show resilience in the face of low oil prices, that range could be a bit optimistic. Amrita Sen, chief oil analyst at Energy Aspects, says that $45 to $55 is the “new range” that oil will trade between. High inventories and record production from OPEC has put a ceiling on oil prices at that upper bound, preventing any rally beyond that point.

Oil megaproject could startup in October. One of the world’s most expensive oil projects, the Kashagan oil field, could finally come online (again) in October. The project has taken 16 years, cost more than $50 billion, and has had several false startups. It was supposed to begin operations a decade ago, but has suffered from delays, massive cost overruns, and technical problems. Nevertheless, the Caspian Sea oil field is massive, and could add 370,000 barrels per day of supply to global markets within a year. It is being jointly developed by Royal Dutch Shell (NYSE: RDS.A), Total (NYSE TOT), ExxonMobil (NYSE: XOM), Eni (NYSE: E) and the Kazakh government, with Eni in the lead. Wood Mackenzie is not as confident in those production figures, however; the consultancy only sees Kashagan bringing 154,000 barrels per day online next year and then only exceeding 300,000 barrels per day sometime in the 2020s. The project, despite its huge reserves, could continue to pose challenges for its owners. Total has called it the “the mother of all projects,” and instead of its real name, The Economist once dubbed it “Cash All Gone.”

Related: Why $50 Is The Right Price For Oil

U.S. oil production continues to fall. The latest monthly data shows U.S. oil production down to 8.7 million barrels per day in June. A more recent but less accurate weekly assessment puts output at 8.45 million barrels per day as of September. And the latest EIA Drilling Productivity Report, which looks only at shale, expects the major shale basins to lose another 61,000 barrels per day in October, after losing 85,000 barrels per day in September.

135 oil and gas companies in danger of default. According to Debtwire Analytics, there are at least 135 oil and gas companies that are in financial trouble, as debt piles up and revenues have been gutted by low oil prices. But the list is smaller than it was in January, when there were 180 companies at risk of default. Already there have been 170 oil and gas firms that have declared bankruptcy over the past two years.

Obama admin temporarily blocks Bakken pipeline. The Dakota Access pipeline, led by Energy Transfer Partners (NYSE: ETP), hit a huge setback last Friday after the White House halted construction until regulators can take another look at the permit. The pipeline could still move forward, but now that it has become a potent political symbol, its prospects have significantly weakened. That could be damaging to Bakken oil producers, who need more pipeline capacity to connect their oil to Midwest refineries. Energy Transfer Partners has lost more than 7.5 percent since Friday’s announcement.

Attacks on Libyan oil ports. Forces loyal to the eastern government in Libya, under the leadership of General Haftar, attacked and took over three export terminals, which were under control of the internationally-recognized Government of National Accord, or the unity government for the country. The attacks threaten to delay Libya’s effort to bring back substantial volumes of oil to the international market. The West has tried to convince Gen. Haftar to support the unity government, but the recent attacks prove that he has no interest in coming on board.

China’s oil production hits six-year low. China’s oil output fell by nearly 10 percent in August from a year earlier, dropping to about 3.89 million barrels per day. That is lowest total since 2009. And production is down by 5.7 percent year-to-date. Chinese oil companies are cutting back on spending, just like their international peers, and reducing maintenance at high-cost fields.

Russia and Turkey to ink pipeline deal. Russia and Turkey are expected to sign an agreement next month to move the Turkish Stream pipeline forward. Negotiations over the project stalled last year after Turkey shot down a Russian air force jet. Turkish Stream would carry Russian oil through Turkey and onto Europe.

By Evan Kelly of Oilprice.com

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