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Suckered Again: How Likely Is An OPEC Production Cut?

The upcoming OPEC oil production…

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Is The Permian 20 Billion Barrel Oil Discovery Real?

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Rudderless OPEC Doesn’t Know How To Respond To U.S. Shale

Rudderless OPEC Doesn’t Know How To Respond To U.S. Shale

We begin by taking a quick look at some of the critical figures and data in the energy markets this week. The key market movers will then be highlighted before an analysis of the top news events taking place in the global energy complex this week is provided.

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Related: Iraq On The Brink Of Chaos As Oil Revenues Fall 

Chart of the Week

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• U.S. oil production has been slow to decline, but part of the reason for that is higher production from the Gulf of Mexico (GoM), which is masking the deeper decline in U.S. shale.

• U.S. GoM production is set to hit a record in 2017, due to a list of projects currently in development. GoM production will average 1.63 million barrels per day (mb/d) in 2016, which will climb to 1.79 mb/d in 2017.

• By December 2017, the EIA estimates that GoM production will hit a highpoint of 1.91 mb/d.

• Oil drillers are now scrapping projects that have not already been greenlighted, meaning that after the current spate of projects are completed there could be a dearth of new production. But that won’t be felt for several years.

Market Movers

• Marathon Oil (NYSE: MRO) made fresh spending cuts last week to its 2016 drilling plan. Marathon will spend $1.4 billion this year, a decline of 52 percent from last year and a 75 percent decline from 2014 levels. The Houston-based company posted its first annual loss in two decades.

• Devon Energy (NYSE: DVN) cut its dividend and announced job losses on February 16. Devon will slash 20 percent of its workforce, and cut spending by 75 percent to $1.1 billion. The Oklahoma City-based driller also cut its dividend 75 percent and raised another $1.3 billion in new equity. Devon’s share price fell more than 10 percent last week.

• Moody’s Investors Service downgraded another eight oil and gas companies on Friday. Anadarko Petroleum (NYSE: APC), Continental Resources (NYSE: CLR), Hess Corp. (NYSE: HES), Murphy Oil (NYSE: MUR), Southwestern Energy (NYSE: SWN), and Western Gas Partners (NYSE: WES) were all cut to junk. National Fuel Gas (NYSE: NFG) and Noble Energy (NYSE: NBL) were downgraded to Baa3, one level above junk levels. Related: Is This The Best Moment To Get Into Oil?

Tuesday February 23, 2016

Oil executives, energy market analysts, and government officials have descended on Houston this week for the IHS CERAWeek conference, a top industry conference often likened to oil’s version of the Davos World Economic Forum.

IEA report launched in Houston. At the forum, the International Energy Agency published its closely-watched Medium Term Oil Market Report, which offers an outlook on oil markets through the end of the decade. The IEA sees oil prices remaining low through 2016, with supply and demand only starting to converge in 2017. On the other hand, the agency also said that U.S. shale will finally start posting more substantial declines this year, dropping by 600,000 barrels per day. As a result, the market will slowly adjust, although incredibly high levels of oil placed in storage will slow the balancing.

Oil prices rallied more than 6 percent on Monday following the IEA’s comments, with hopes pinned on declines in shale production.

OPEC production freeze. OPEC’s Secretary-General spoke at the conference, where much of the oil world closely listened to his comments regarding OPEC’s recent production freeze deal announced with Russia. Secretary General Abdalla Salem El-Badri said that the freeze was the “first step,” which could be followed by “other steps in the future.” He also said that everyone will wait and see how the results of the freeze over the course of the next few months.

OPEC recognizes role of shale. El-Badri largely admitted OPEC’s waning influence due to the rise of U.S. shale. "Shale oil in the United States, I don’t know how we are going to live together," he said in Houston on Feb. 22. “Any increase in price, shale will come immediately and cover any reduction.”

The IEA’s report mostly backed up that sentiment. Although the Paris-based energy agency predicted shale would decline substantially in 2016 and 2017, the IEA also said that shale would bring back 1.3 mb/d of liquids production by the end of the decade.

Low prices now, but high prices in the future? But El-Badri also said that the large cuts to upstream investment today will lead to “a very high price” in the future. “The concern is no investment now, no supply in the future. It’s as simple as that,” El-Badri said. “If there’s no supply coming to the market, prices will go up.”

That is another conclusion in which the IEA and OPEC are in agreement. The IEA said basically the same thing in its Medium Term Oil Market Report, warning that the dearth of investment today could create the conditions for a price spike in the future. With most of the industry scaling-back exploration, the potential for a sharp rise in prices will be just “as de-stabilising as the sharp oil price fall has proved to be,” the IEA wrote.

Hess not so sure about shale. While El-Badri and the IEA see U.S. shale surging back once prices rise, not everyone agrees. Hess Corp.’s (NYSE: HES) CEO John Hess downplayed the power of U.S. shale at CERAWeek. “Very few things make sense at $30. They barely made sense at $50,” Hess said. “It’s better to leave the oil in the ground.” He also said that shale is not a swing producer, but rather a “short-cycle producer.” In fact, he said, the only swing producer is Saudi Arabia. “Shale is such a capital intensive investment,” he added. “Once you’re in, you have to keep putting more money in.” Hess cut their rig count down to just 2 in 2016, a sharp fall from the 14 the company had operating in 2014. “We’ve been disproportionately hurt in the U.S.,” Hess said. “Our activity level is bare minimum.” Related: Shale Set To Decline Substantially This Year

Mexico stays the course on oil auctions. Also at IHS CERAWeek, Mexican President Enrique Pena Nieto reassured the industry that his country would press forward with their ongoing overhaul of the energy sector. President Pena Nieto pushed through a historic reform of Mexico’s oil and gas industry several years ago, liberalizing it for the first time in over seven decades. But the timing could not have been worse. Mexico held several auctions in 2015 for shallow water oil and gas fields, with rather disappointing results. The crash in oil prices fueled speculation that the government would put further auctions on hold. But President Pena Nieto said in Houston that it would move forward with deepwater auctions in December 2016.

U.S. LNG. Cheniere Energy (NYSE: LNG) could be just days away from shipping the first LNG cargo from the United States. Reuters reported that an LNG tanker has docked at the facility on the Gulf Coast. Cheniere Energy has said that the first cargo will depart by the end of February or early March. The development marks a new era for U.S. energy, an era of abundance. But Cheniere and its peers are now facing a dramatically different market for LNG than it did a few years ago when a flurry of interest sparked enormous excitement about the potential for U.S. LNG. Today’s market is oversupplied, with more exporters set to come online over the next few years and demand that is growing only slowly.

Iraq needs money. Iraq could return to the bond market this year to access much needed capital to stay afloat. The war-torn country has seen revenues plunge along with oil prices, but it cancelled a debt offering last year because the markets demanded a yield that would have been too painful for the country to bear. The finance minister said that Iraq could try again in the second half of 2016, but it is unclear if the market will be more forgiving than it was in 2015. Iraq’s credit rating is a B-, or six notches into junk territory. Iraq went to the IMF last year, obtaining $1.25 billion in emergency assistance. More help might be needed.

North Sea oil in crisis. The North Sea oil industry is sitting “at the edge of a chasm,” according to a new report from Oil & Gas UK. While annual investments in new oil projects in the North Sea have averaged around £8 billion per year over the past five years, less than £1 billion in new investment is expected to be approved in 2016. Failing to invest now would mean the hollowing out of the British oil industry. By 2025, oil and gas production could fall by half, down to just 800,000 barrels per day of oil equivalent. The British government has cut taxes in an effort to reduce the pain on the industry, but the region suffers from high costs and mature fields, which leaves its future in doubt.

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