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Oil Prices Slip On Falling OPEC Compliance

Offshore

Oil prices fell on Friday after preliminary reports showed that OPEC’s July output has increased once again while deeper cuts remain unlikely 

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Friday, July 21, 2017

Oil prices posted more gains this week, as the EIA reported deeper inventory reductions with Brent briefly traded above $50 per barrel for the first time in nearly two months on Thursday. There is a bit more confidence in the oil market than a few weeks ago, although there are questions about the potential upside from here. U.S. oil production jumped again, putting output above 9.4 mb/d, which, along with fears of rising OPEC production, pushed oil down during early trading on Friday.

OPEC meets with little hope of additional action. OPEC members are meeting to monitor the progress of their production cuts, but analysts see little chance that they will take more aggressive action to balance the market. Deeper cuts would require more sacrifice and merely open up more market share for U.S. shale, while abandoning the collective output cuts would surely lead to another slide in prices. “They’re between a rock and a hard place,” Mike Wittner, head of oil market research at Societe Generale SA, told Bloomberg. “The bottom line is, it hasn’t worked.” Nevertheless, a report from Petroleum Policy Intelligence says that Saudi Arabia is considering unilateral cuts. Exports will probably drop by 600,000 bpd this summer as domestic consumption ramps up, but Riyadh is considering cuts on the order of 1 mb/d.

OPEC compliance slips again. New data from Petro-Logistics estimates OPEC production rising in July, further evidence of a weakening compliance rate for the cartel. The consultancy forecasts production rising by 145,000 bpd this month, pushing combined output above 33 million barrels per day. The production gains come from Saudi Arabia, the UAE and Nigeria. Oil prices appeared to fall on the news on Friday. Related: What Bitcoin And Solar Have In Common

ExxonMobil fined $2 million by U.S. government for violating Russian sanctions. The U.S. Treasury Department levied a $2 million fine against ExxonMobil (NYSE: XOM) for violating sanctions against Russian individuals. Awkwardly, the violation by the oil major occurred when current U.S. Secretary of State Rex Tillerson was the company’s CEO. Treasury said that Exxon subsidiaries conducted business with Rosneft CEO Igor Sechin, who was blacklisted by the U.S. government. Exxon, for its part, rejected the allegations and responded by suing the U.S. government, arguing that Sechin was only off-limits in his personal capacity.

Saudi Arabia cuts oil exports to the United States. U.S. imports of Saudi crude plunged to just 524,000 bpd for the week ending on July 14, the lowest figure in seven years. The prior four-week period saw Saudi crude oil exports to the U.S. average at 810,000 bpd. Saudi Arabia has intentionally sought to reduce exports to the U.S. in an effort to drain high levels of inventories. The U.S. has some of the most transparent and clear data on crude stocks, which means it plays an outsized role on the oil prices. By slashing exports to the U.S., Saudi Arabia hopes inventories will decline faster, creating a bullish mood in the oil market.

CSX: No more coal. U.S. rail giant CSX (NASDAQ: CSX) said that it would no longer purchase any rail cars intended to carry coal, acknowledging that coal has no future. “Fossil fuels are dead,” CSX COE Hunter Harrison said, according to the FT. “That’s a long-term view. It’s not going to happen overnight. It’s not going to be in two or three years. But it’s going away, in my view.” Almost one-fifth of CSX’s second quarter revenue came from moving coal.

Brazil to hike fuel taxes. Struggling with fiscal woes, Brazil will hike fuel taxes by an estimated 10.4 billion reais (US$3.3 billion). Gasoline taxes will jump to 79 cents ($0.25) per liter from 38 cents, the WSJ reports. Higher tax rates will likely put a dent in demand. Related: Why Oil Prices Aren’t Going Anywhere

BP looking to sell North Sea assets; IPO of pipeline assets in U.S. British oil giant BP (NYSE: BP) has reportedly shopped its North Sea oil and gas assets to potential buyers, the WSJ reports. BP currently produces 150,000 barrels per day in the North Sea, although some fields are approaching the end of their operating lives. The WSJ says potential buyers include private equity firms. BP says it remains committed to the North Sea and even has new projects that could take production up to 200,000 bpd. Meanwhile, BP is also considering spinning off its pipeline assets in the U.S. Midwest and Gulf Coast in an initial public offering.

New study: U.S. natural gas reserves spike. A new study from the Colorado School of Mines’ Potential Gas Agency estimates that the U.S. has 3,141 trillion cubic feet (Tcf) of natural gas, or about 10 percent more than previously thought. The study attributes the higher reserves estimate to new discoveries and more exploration.

Commodity traders have rough year. Banks and hedge funds have been hit hard this year as oil price volatility fell compared to last year. Oil prices have stayed relatively flat within a narrow band around $50 per barrel (before the June selloff). As the WSJ puts it: “Range-bound markets offer little opportunity for investors and traders to profit from major price moves and arbitrage divergences.”

Russia’s Rosneft looks to take over Venezuelan oil fields. Rosneft is negotiating to exchange its collateral in Venezuelan-owned but U.S.-based Citgo for stakes in Venezuelan oil fields, according to Reuters. Rosneft has a 49.9 percent stake in Citgo as collateral for a $1.5 billion loan the Russian company made to PDVSA. But potentially forthcoming sanctions from the U.S. has Rosneft seeking to avoid getting ensnared in the actions.

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