We begin by taking a look at some of the critical data in the energy markets this week, which reveals that despite high levels of outages, oil prices fell as the rig count increased for the second consecutive week.
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Chart of the Week
• Oil supply outages are at their highest levels since 2011.
• In May 3.6 million barrels per day (mb/d) were knocked offline. Canada saw around 1 mb/d disrupted from wildfires. Nigeria has lost over 1 mb/d because of sabotage from the Niger Delta Avengers. Bad weather in Iraq disrupted 50,000 barrels per day.
• Canada’s production should start to come back online, but the disruptions elsewhere, particularly in Libya and Nigeria, seem less likely to return.
• The outage of more than 3 mb/d may have pushed the global surplus into deficit, although estimates vary.
• ConocoPhillips (NYSE: COP) reportedly rejected a $2 billion bid for its North Sea assets from Ineos, a private chemicals company. The bid apparently occurred earlier this year and was just reported by the Sunday Times.
• The value of Norway’s oil and gas fields under state control has fallen by roughly $50 billion over the past two years, or about one third. Half of the Norwegian government’s revenue comes from oil and gas.
• Venezuela’s PDVSA are close to a deal with Schlumberger (NYSE: SLB) in order to bolster the company’s presence in Venezuela. Schlumberger had announced its decision to curtail operations in the country after PDVSA ran up billions of dollars in unpaid bills with the oilfield services giant. Venezuela’s oil minister says "there are 14 Schlumberger drills that will start operations soon under a different financing scheme." Schlumberger did not comment. Despite the announcement, Venezuela’s oil outlook does not look good (more on that below).
Tuesday June 14, 2016
Oil prices fell on Monday following news on Friday of a second consecutive week of an increase in the rig count. Drillers added another 3 oil rigs last week, raising concerns about a possible uptick in drilling. Prices fell back on Monday following concerns about global economic growth, the rising support for a “Brexit,” and a stronger dollar.
Brexit more likely. The support for the UK leaving the EU has increased in recent weeks, fueling concerns about the fallout to the British and European economies. Investors started off this week with bearish moves on emerging markets, currencies, and sovereign debt. Volatility in the stock markets of emerging markets surged 40 percent over the past several days, according to Bloomberg, which is the most since last summer. That combined with a potential rate hike from the Federal Reserve has led to a strengthening of the dollar, which is putting downward pressure on oil prices.
More rigs, more oil? The additional rigs suggest that some drillers find it profitable to return to drilling at $50 per barrel. The markets are concerned that a return to drilling could put a cap on oil prices. “The uptick in U.S. rig counts, as well as steady U.S. crude production in the weekly data, suggest to us that $50 crude is a threshold at which U.S. upstream players feel much more comfortable again,” Julius Walker, senior consultant at JBC Energy in Vienna, told Bloomberg. “As a result of this and other fundamental signals, we do not expect crude prices to show much upside to current levels in the short term.” Related: Russia’s Oil Giants Feel The Crunch But Stay In The Black
OPEC sees oil market balancing. In its June Oil Market Report, OPEC left its forecast for the year largely unchanged, projecting that supply and demand will come into balance in the second half of the year. Demand should hold steady at 1.2 million barrels per day while non-OPEC supply continues to fall.
The IEA concurs. The IEA weighed in with its own monthly report out on Tuesday, largely agreeing with its counterpart about the oil market balancing later this year. The Paris-based energy agency said that the global surplus in oil production shrank from 1.5 million barrels per day down to just 800,000 barrels per day in May, largely because of the outages in Nigeria and Canada. Global output is now about 590,000 barrels per day below May 2015 levels, the first substantial year-on-year decline since 2013. The IEA also revised up its demand forecast by 100,000 barrels per day to 1.3 mb/d for the year. In a bullish note, the IEA said that “less oil has been stockpiled than we originally expected.” Looking forward to 2017, the IEA sees demand growth continuing at a steady pace of 1.3 mb/d, while global stockpiles could start to shrink in the second half of next year.
Which way are oil prices going? Crude continues to back off of its 2016 highs hit last week, falling below $50 per barrel. Some see the rally as overdone, with supplies coming back online from disrupted sources. But Michael Rothman, president of Cornerstone Analytics and a top Wall Street energy analyst, predicts that oil prices will surge above $85 per barrel before the year is out. That echoes the views of Harold Hamm, CEO of Continental Energy, who sees oil at $70 this year. They are not necessarily in the mainstream, but sometimes it pays to take a contrarian view.
Venezuela production could fall. Venezuela’s oil sector could start to deteriorate because of the economic, financial, and political chaos spreading across the country. OPEC said that Venezuela’s oil production fell by 120,000 barrels per day in May, the largest monthly decline in a decade. With state-owned PDVSA pretty much out of cash, it can no longer invest in the needed maintenance to keep oil output steady. “This is very surprising,” Francisco Monaldi, a Latin American energy policy fellow at Rice University in Houston, told the WSJ. “If you want to point to the biggest problem, it is cash flow, which for PDVSA now looks worse than we had imagined.” The IEA said that more declines could be coming, adding to the supply outages in Canada and Nigeria, among other places. “This current list of shut-ins might soon be augmented by Venezuela where the deteriorating situation could affect the operations of the oil industry,” the IEA warned.
Iran oil exports near more than 4-year high. In June, Iran’s oil exports could hit a four and a half year high, according to Reuters. Oil exports have almost doubled since sanctions were removed at the start of the year. Exports are on track to reach 2.31 mb/d in June, the highest level since January 2012. Intriguingly, Iran is reclaiming some market share in Europe with exports up from 530,000 barrels per day in May to 580,000 barrels per day in June. Iran is battling for the European market against regional rival Saudi Arabia. Related: How Far From An Electric World Are We?
Saudi prince meets Obama. Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman flew to Washington to meet President Obama, with several items on his “to do” list. He is seeking to patch up differences with the U.S., while also pressing the President to take a harder line against Iran. After his visit, the powerful young prince will meet tech executives in Silicon Valley. The prince is trying to diversify the Saudi economy away from a dependence on oil sales.
Gas pipeline to Mexico moves forward. Spectra Energy (NYSE: SE) and TransCanada (NYSE: TRP) won contracts on Monday from the Mexican government to build a $3.6 billion natural gas pipeline from Texas to the Mexican city of Tuxpan in the state of Veracruz on the Gulf Coast. Mexico is in need of natural gas for its power plants and Texas has a lot of it. Spectra will build the U.S. section of the pipeline and TransCanada will pick it up in Mexico, taking it to its destination on the Gulf Coast. Not only will the pipeline help Mexico but it will also offer another export market for Texas shale drillers. The pipeline should come online in 2018.
By Evan Kelly of Oilprice.com
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