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Saudi Arabia Regains Influence Over Oil Markets

Saudi Arabia

Oil prices have spiked at the start of this week, with Brent breaking through the $50 mark in response to Saudi Arabia's promises to cut more oil and its determination to get compliance rates under control. 

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Chart of the Week

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• Electricity prices on the California grid are rising for morning and evening hours, and falling at midday.

• This is a reflection of a surge in solar installations, which has significantly cut into the need for peak midday generation.

• A rush of solar generation at midday means that there is a starker difference between midday needs and those for the morning and evening.

• The integration of a growing volume of solar power is challenging for grid operators, and the price disparities also highlighting the need for backup electricity storage.

Market Movers

Halliburton (NYSE: HAL) saw its stock price plunge after its second quarter earnings call. CEO Dave Lesar said that the rig count has slowed and shale drillers are “tapping the brakes.”

Schlumberger (NYSE: SLB) beat expectations on its second quarter earnings, generally seen as a positive sign for the sector despite some disappointing cash flow figures.

• U.S. regulators issued a final environmental impact statement for the Atlantic Coast Pipeline, a 600-mile natural gas pipeline that would connect Marcellus Shale gas to the U.S. southeast. The EIS said the pipeline would have some issues, but it was largely positive of the project. Dominion Energy (NYSE:D), which owns a 48 percent stake in the project, Duke Energy (NYSE:DUK) owns 47 percent and Southern Co. (NYSE:SO) holds 5 percent.

Tuesday July 25, 2017

The oil price gains continued this week after Saudi Arabia said that it would cut its oil exports deeper than before. The announcement suggests that the largest OPEC producer is keen to see the rebalancing accelerate.

OPEC says members need to up compliance. OPEC met in St. Petersburg on Monday for a routine meeting to monitor compliance, but the summit took on greater importance with oil prices faltering and data for the prior two months showing that members have boosted production. The cartel’s compliance rate has slipped in recent weeks, and Saudi energy minister Khalid al-Falih said on Monday that the members needed to step up their efforts.

Saudi Arabia to cap oil exports at 6.6 mb/d. Saudi energy minister Khalid al-Falih indicated that Saudi Arabia would cuts it crude exports to just 6.6 million barrels per day (mb/d) in August. The WSJ notes that because Saudi Arabia averaged exports of 7.2 mb/d between January and June, the export target would equate to a reduction of an additional 600,000 bpd. There is some discrepancy over the significance of this move. Taking 600,000 bpd off of the market appears very aggressive, but Saudi Arabia also typically sees exports fall in the summer because domestic demand spikes. Nevertheless, the focus on exports as opposed to production is a shift in thinking, a recognition that in prior months production might have fallen but exports declined only modestly. Related: Goldman Sachs Warns Of Global Oil Demand Peak

Oil majors to undergo another round of cost cutting. The oil majors have pulled off remarkable cost reductions over the past few years, a campaign to bring spending down to sustainable levels. That has led to an improvement in the financials this year compared to last, but the gains ran out of steam in the second quarter. Analysts estimate that net income for the oil majors fell by 20 percent in the second quarter compared to the first. That means that deeper cost reductions are likely in the offing. "The sector needs to continue doing more of the same," Jason Kenney, head of pan-European oil and gas equity research at Banco Santander, told Reuters.

Eni: oil markets need regulation from speculators. The CEO of Italian oil giant Eni (NYSE: E) said that oil prices are suffering from too much distortion from speculative moves. "The financial speculation is so strong that it has transformed even those with long term strategies into short term investors," CEO Claudio Descalzi told an Italian newspaper. "Perhaps we should adopt in the oil sector the sort of regulations and market controls that were imposed on banks. Banks have a central watchdog, while in the past, our the role it once had."

Schlumberger: oil prices depressed because too much Wall Street money. Schlumberger’s (NYSE: SLB) CEO Paal Kibsgaard, blamed investors from dumping too much money into U.S. shale drilling, which has led to a glut of supply that has depressed global prices. “What we are currently witnessing is that the U.S. equity investors and U.S. companies have spooked the market," said on a conference call. Schlumberger reported better-than-expected earnings last week on rising drilling activity, but it also got hit by lower prices. The WSJ reports that Wall Street has poured some $57 billion into the U.S. shale industry over the past year and a half, which has led to a swift rebound in production.

Physical crude market improving. While speculators are still unsure or pessimistic about the future of oil prices, the prices of various oil streams from different parts of the world are improving. These differentials are rising, showing tightness in the physical market. In fact, oil traders dealing in the real world, moving actual barrels around, say the situation is much more bullish than financial traders believe. "The improvement in physical markets is being ignored in the financial space," Amrita Sen, chief oil analyst at Energy Aspects Ltd., told Bloomberg. "In other words, even though physical differentials are strengthening, headline price is range-bound at best.” Related: Falling Chinese Demand May Be OPEC’s Biggest Dilemma

Anadarko slashes spending. Anadarko Petroleum (NYSE: APC) announced a cut to its spending plans for 2017 after reporting worse-than-expected financials for the second quarter. Anadarko said it would reduce capital expenditures by $300 million, citing lower oil prices, the first major oil producer to respond to the most recent market downturn.

U.S. threats to Venezuela could benefit Canadian producers. The U.S. has threatened to take serious action against Venezuela if the Maduro government proceeds with his plans to consolidate power. It is unclear exactly what measures Washington is considering, but any efforts to block Venezuelan oil exports would work to the benefit of America’s northern neighbors. Both Venezuela and Canada export heavy crude to U.S. refineries, and a sudden drop off of Venezuelan imports into the U.S. Gulf Coast would put a premium on heavy crude, and U.S. refiners would need to turn to Canada.

U.S. expected to approve Russia sanctions. The U.S. House of Representatives is expected to pass legislation that tightens the screws on Russia, and the bill specifically targets Russia’s energy sector. The legislation bars companies from working with Russian-owned energy projects, which would include the Nord Stream 2 pipeline. The bill has very large majorities, which could force U.S. President Donald Trump to begrudgingly sign it into law. The European Union is unhappy with the bill because it would affect European companies working on Nord Stream 2.

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