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U.S. Shale Surging, But Oil Holds Steady

Oil Rig

Rising production in the two biggest U.S. shale basins and Saudi Arabia's newly ambiguous stance on the OPEC deal extension have resulted in oil prices falling early this week. 

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Chart of the Week

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• China has surpassed the U.S. as the largest oil importer in the world, with imports rising due to growing demand and falling domestic production.

• But while OPEC countries have historically been China’s main supplier, the growth of imports is being captured by new suppliers, giving the cartel a run for its money.

• 65 percent of the growth of imports came from non-OPEC countries between 2012 and 2016, with top suppliers including Russia (14 percent of China’s total imports), Oman (9 percent) and Brazil (5 percent).

Market Movers

Energy Transfer Partners (NYSE: ETP) says that the Dakota Access Pipeline will begin interstate oil delivery on May 14. The $3.8 billion pipeline will ferry oil from North Dakota through the Midwest and into an existing pipeline system that will take the crude on to the Gulf Coast.

Petrobras (NYSE: PBR) might be able to pull out of pre-salt assets even if it wins an auction if the company feels it cannot afford them, according to new regulations from the Brazilian government. Brazil is planning two pre-salt auctions this year and it will be the first offerings following the major energy reform that will allow foreign companies to take an operating role in pre-salt projects.

Chevron (NYSE: CVX) is considering the sale of its 20 percent stake in Canada’s Athabasca Oil Sands project, a sale that could bring in $2.5 billion. Related: Russian Tanker Owner Holds PDVSA Oil Cargo Hostage Over Debts

Tuesday April 18, 2017

Oil prices dropped to their lowest levels in nearly two weeks, down slightly on expectations of rising U.S. oil production. The EIA reported in its Drilling Productivity Report that it expects an increase of 124,000 bpd in May, with output gains in the Permian (+76,000 bpd) and the Eagle Ford (+39,000 bpd). Big banks and private equity are stepping up their investment in the U.S. shale patch, so analysts foresee further production gains ahead.

OPEC aims for $60 per barrel. Top OPEC members Saudi Arabia, Iraq and Kuwait are reportedly targeting $60 per barrel, according to the WSJ. At that price level, government finances would stabilize a bit while it would still be low enough to prevent a dramatic resurgence of U.S. shale. “Iraq wants prices to rise to $60. This our aim,” said Iraq’s oil minister Jabbar al-Luaibi in an interview. A move up to $60 per barrel would also bolster the valuation of Saudi Aramco ahead of its IPO. However, the danger is that OPEC is underestimating the ability of shale to ramp up. Indeed U.S. shale output is already rebounding. Nevertheless, the desire from OPEC to reach $60 per barrel bodes well for an extension of the collective production cuts.

Citi sees mid-$60s this year. Investment banks are growing more bullish on commodities, including crude oil. Citi says it sees oil moving up into the mid-$60s later this year. Even as U.S. shale comes “roaring back,” Citi analysts see OPEC efforts as more than sufficient to tighten the oil market. “With a continuation of the OPEC and non-OPEC producer deal in the second half of 2017 and the expected associated inventory draw-down, we expect oil prices to move above $60 a barrel by the second half of the year,” Citi analysts wrote in a research note.

China’s economy better than expected, oil imports surging. China reported a 6.9 percent annual growth rate in the first quarter, much better than expected. It is also setting new oil import records by the month, dispelling fears that its economy and crude oil demand was slowing down. Imports hit a record high 9.21 million barrels per day in March, an increase of 11 percent from February. That spike is likely temporary, but China no longer appears to be the downside risk to oil prices that many analysts had feared earlier this year.

Blackstone bets on Permian gas. Private equity giant Blackstone spent $2 billion to takeover EagleClaw Midstream Ventures LLC, a move widely seen as a major bet on natural gas production in the Permian. The midstream company expects to see gas flows rise five-fold over the next five years, Blackstone’s CEO said this week. Natural gas is produced in association with oil when companies drill, and this “associated gas” is expected to surge in the Permian because of the oil drilling frenzy unfolding today.

BP stops oil spill in Alaska. Last week BP (NYSE: BP) reported an oil and gas spill at its North Slope facility in Alaska. The oil spill was relatively minor and was stopped, but gas continued to spew out of the well over the weekend. By Monday, it seems, the well had been stopped.

Russia and Saudi Arabia ink $3 billion deals on joint projects. Russia and Saudi Arabia pledged to deepen their trade relationship with $3 billion in joint deals covering a wide range of sectors, according to TASS, including energy, geological exploration, mining, petrochemicals, tanker construction, investment cooperation, and the training of personnel.

Saudi Arabia to develop 30 solar and wind projects over next 10 years. As part of Saudi Arabia’s $50 billion campaign to increase electricity capacity to free up oil for export, the government has plans to generate at least 10 percent of its electricity from renewables by 2023. The first round will consist of 700 megawatts of solar and wind, with a tender slated for later this year.

Oil and gas companies lobby Trump admin to stay in Paris Climate Accord. Although it may seem counterintuitive, oil and gas companies ranging from ExxonMobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS.A) to Cheniere Energy (NYSE: LNG), and even some coal companies like Cloud Peak Energy (NYSE: CLD) are pressing the Trump administration not to withdraw from the Paris Climate Accord. Cheniere, for example, would benefit from a global shift from coal to natural gas-fired electricity. Coal companies see climate policy as a vehicle to receive support for carbon capture technology. Others, including the oil majors, argue that exiting the pact would damage U.S. goodwill. A decision by the White House will likely be made in the next few weeks. Related: Oil Prices Drop As Saudis Say Too Early To Decide Cuts Extension

Chevron to exit oil sands. Chevron (NYSE: CVX) could become the latest oil major to abandon Canada’s oil sands. The U.S. company is exploring a $2.5 billion sale of its 20 percent stake in the Athabasca Oil Sands project. The sale would come following similar moves by Royal Dutch Shell (NYSE: RDS.A), ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP).

Canada could see production rise by 1 mb/d by 2020, but only with more pipeline. According to a new report from IHS Markit, Western Canada could see a 1 mb/d increase in output by the end of the decade, but only if the region sees an increase in pipeline capacity. “The need for new pipelines departing Western Canada has not diminished with lower oil prices, quite the opposite,” said Kevin Birn, energy director for IHS Markit. A few major pipeline projects could move forward, but none would come online before 2019. IHS says that a resurgence in the use of crude-by-rail is inevitable in the short run.

By Tom Kool for Oilprice.com

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