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Bulls Crushed As Oil Crashes Again

Oil

Oil markets received a heavy blow on Tuesday morning as oil crashed by 3 percent due to a surge in OPEC's July output.

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Chart of the Week

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• The EIA published a new report on global oil chokepoints, or narrow channels that pose a vulnerability in the oil trade.

• The Strait of Hormuz is the most strategic and important chokepoint in the world, a narrow channel that sees 18.5 million barrels of oil pass through it every single day.

• The Strait of Malacca is the other highly important chokepoint, with 16 mb/d of oil passing through daily, mostly Middle Eastern oil heading for China.

Market Movers

Penn Energy (OTCQX: PVAC) agreed to buy $205 million worth of Eagle Ford assets from Devon Energy (NYSE: DVN).

• Natural gas prices fell 5 percent on Monday on weather forecasts predicting below-average temperatures for the next two weeks. September contracts moved down to $2.79/MMBtu in the largest daily loss in roughly six months.

EQT (NYSE: EQT) and Rice Energy (NYSE: RICE) both fell more than 3 percent on Monday on speculation that their merger could fall apart.

Tuesday August 1, 2017

WTI hit $50 per barrel for the first time since May this Monday, but the benchmark then crashed on Tuesday morning as OPEC exports surged. Crude prices appeared to have firmed up this month and there was a greater sense of optimism in the oil market, but the Tuesday morning crash suggests volatility is still the defining feature of today’s markets. There was little expectation of prices moving significantly higher than $50, but the more than 3 percent crash in prices seemed unlikely. Most analysts see oil prices remaining “range bound” for the foreseeable future, stuck between roughly $45 and $55.  

Investors want less spending. In the past, growth-at-all-costs was the name of the game. But with few expecting a strong rebound in prices, investors are increasingly pushing oil companies to focus on profitability, even if that means forgoing drilling. “The market is signaling spending less is OK,” Dan Pickering, head of the asset-management arm of investment bank Tudor, Pickering Holt & Co., told the WSJ. “The market is very afraid of U.S. oversupply.” But that doesn’t mean less spending on shale. Anadarko Petroleum (NYSE: APC) and ConocoPhillips (NYSE: COP) announced spending cuts for 2017 by a combined $500 million last week. But the cuts will come largely from outside the shale patch. Both of their share prices rose on the news. Related: Is This The End Of The Oil Glut? 

U.S. announces sanctions on Venezuelan President. After Venezuela moved forward with its “constituent assembly,” a vote intended to defang the opposition to President Nicolas Maduro, the U.S. responded with another round of sanctions, this time targeting the President himself. Again, it was seen as the milder option on the table for the U.S., although news reports indicate that the U.S. Treasury Department has explored oil-related sanctions, either targeting oil imports from Venezuela, or barring PDVSA from doing financial business with U.S. dollars, or barring exports of U.S. refined products to Venezuela. All would have varying effects on Venezuela, but given the precarious state of the country right now, the U.S. government has decided to push off those ideas for fear of deepening the humanitarian crisis. Nevertheless, the situation is dire in Venezuela, and the wheels could come off at any moment. The country’s 1.9 mb/d of oil production hangs in the balance.

OPEC no longer low-cost producer. OPEC is struggling to hold onto market share while also attempting to boost prices. Everyone seems to agree that if OPEC really wanted to drive U.S. shale out of business, it would have to pump full-tilt and let prices crash for an extended period of time. That might have worked in the past, but OPEC members are no longer strong enough financially to survive a lengthy downturn. That’s because public spending needs have skyrocketed since the Arab Spring. For example, according to the WSJ, the UAE can produce oil for $12 per barrel, but really needs oil prices at $67 per barrel to cover its budget. The story is similar for many Gulf Arab countries, as spending needs have spiked in response to an increasingly restless and restive population. The upshot is that OPEC is not willing or capable of enduring another price downturn.

OPEC to meet on August 7-8 for follow up on faltering compliance. OPEC issued a statement saying that its representatives will meet next week to discuss why countries are falling short on their production cuts. Some countries, such as Iraq, dispute the data, arguing that they are indeed complying fully with their obligations. Still, Saudi Arabia said last week that it would step up the pressure on its peers to cut deeper. Kuwait and the UAE have since promised to redouble their efforts and boost compliance. Meanwhile, a Reuters survey estimates OPEC production actually rose in July by 90,000 bpd, putting the group’s collective output at a 2017 high.

Saudi Arabia considering tax for Aramco. Bloomberg reported that Saudi Arabia is considering a new tax system for Aramco ahead of its IPO. The proposal would increase taxes on the company when oil prices rise, a move that would replace the existing fixed royalty system. The variable rate could help raise more revenue for the government if oil prices rise, although it would certainly be frowned upon by investors eyeing the Aramco IPO.

BP profits beat expectations. BP (NYSE: BP) reported second quarter earnings today, posting a $684 replacement cost profit (similar to net profit). Those figures beat expectations but were also lower than the $1.5 billion the company earned in the first quarter and down from the $720 million it took in a year earlier. However, BP’s second quarter performance was marred by a $750 million write-down on its stalled project in Angola. Related: This Oil Price Rally Has Reached Its Limit

Canadian heavy crude benchmark narrows to WTI. Canadian producers are having a better time lately because of falling production in Latin America. Declining heavy crude production in Venezuela, Colombia and Mexico is opening up space for Canada. As a result, the price for Western Canada Select (WCS) has climbed, putting it at its smallest discount to U.S. benchmark prices ever recorded. The discount would likely vanish if the U.S. actually implemented oil-related sanctions on Venezuela.

Fire at Shell refinery hits European production. A fire at the Pernis refinery in the Netherlands has shut down an estimated 404,000 bpd of refined product output. Royal Dutch Shell (NYSE: RDS.A), the facility’s owner, said that the fire was under control. But the Pernis refinery is Europe’s largest, and the outage will push up prices for diesel, jet fuel and gasoline.

Keystone XL might not be needed. TransCanada (NYSE: TRP) says that it might not end up building the Keystone XL pipeline because of lack of interest. After roughly a decade of legal and political battle, the Canadian company is having trouble selling capacity on the proposed pipeline. Company officials said that they would decide by the end of the year if they plan on moving forward.

By Tom Kool for Oilprice.com 

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  • Rational Man on August 01 2017 said:
    I believe OPEC stands for "Organization of Petroleum Exporting Clowns."

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