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$60 Oil Enters The Realm Of Possibility

Oil

Oil markets took a bullish turn this week amid growing geopolitical tensions and a tightening oil market. 

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- China and India will account for much of the growth in energy consumption for the next few decades, but the EIA says that energy consumption will also rise sharply in other parts of non-OECD Asia.

- Southeast Asia in particular will see a sharp increase in consumption, with Indonesia, Thailand and Malaysia standing out.

- Energy consumption expands across multiple sectors. Industrial consumption in non-OECD Asia (excluding China and India) will rise by 60 percent between 2015 and 2040; passenger travel will more than triple; and freight transit will increase sharply.

Market Movers

- Chevron (NYSE: CVX) said it would invest $4 billion in the Permian Basin in 2018, and the oil major has plans to ramp up production from the shale basin to over 400,000 bpd over the next few years.

- Continental Resources’ (NYSE: CLR) Harold Hamm has said the EIA is overestimating U.S. shale production, arguing that the industry will only grow production by about 500,000 bpd this year instead of the 1 mb/d that the government agency forecasts. Hamm says the EIA is distorting global oil prices from the projections.

- The U.S. International Trade Commission ruled that U.S. solar panel manufacturers are harmed by cheap imports, which could be the basis for President Trump issuing tariffs on imported panels. The tariffs would severely impact the U.S. solar industry, damaging most solar installers, as well as Chinese producers. First Solar (NYSE: FSLR) saw its share price jump on the news, as it is viewed as one of the lowest cost U.S. producers, and could benefit from reduced competition.

Tuesday September 26, 2017

Brent oil prices jumped on Monday to new two-year highs at nearly $58 per barrel, stemming in part from the tightening oil market, but also more immediately from the Kurdish independence vote that sparked a backlash from its neighbors.

Kurdish referendum roils Middle East. Kurdistan voted for independence in a highly-anticipated referendum on Monday, a move that has led to a spike in tensions with Baghdad and its neighbors. Oil prices hit 8-month highs on the same day. Turkey threatened to cut off the pipeline that carries Kurdish oil through its territories to the port in Ceyhan. Baghdad called for an international boycott on Kurdish oil in response to the vote, which it says is illegal. “If this boycott call proves successful, a good 500,000 fewer barrels of crude oil per day would reach the market,” Commerzbank said in a note. Related: What Happens If Trump Trashes The Iran Nuclear Deal?

Oil back to bull market. Brent crude is getting closer to the all-important (at least psychologically) threshold of $60 per barrel, and oil prices are back in bull market territory. They slipped a bit at the start of trading on Tuesday, but crude markets are demonstrating some of the strongest momentum in years.

Hedge funds bullish on oil, but could be stretched. Hedge funds have ratcheted up bullish bets on crude futures over the past month, pinning their optimism on declining inventories, strong demand, and restraint from OPEC. However, Reuters says that investors could be once again overplaying their hand, with the positioning of hedge funds and other money managers looking overstretched. That raises the odds of a sudden, and potentially sharp, correction back down for oil prices.

Lawsuits pile up from Harvey. The major fuel disruptions in Texas after Hurricane Harvey is expected to lead to a wave of force majeure declarations, which could result in lots of legal haggling over who is at fault for disrupted fuel flows. As refineries come back online and restore production, “customers may insist on reviewing contractual terms with their energy industry suppliers for the product they did not receive while plants were shuttered,” Reuters reported.

China to reduce oil exports to North Korea. China said that it would reduce oil exports to North Korea, capping exports at 2 million barrels a year, while completely cutting of natural gas flows. The move comes in response to North Korea’s belligerence, but was also clearly made in an effort to calm the saber-rattling from Washington.

Permian to face growing pains. A new report from Wood Mackenzie predicts that the Permian Basin, the hottest shale play on the planet, will bump up against some constraints as the field has become too crowded. The supply of labor, equipment and drilling services has become strained, leading to cost inflation and delays. The EIA’s baseline assumption is that Permian production will rise from the current 2.6 million barrels per day up to 5 mb/d by 2025. But Wood Mackenzie argues that the basin will peak at 3.5 mb/d by 2021 without significant advancements in technology.

Permian has 60 to 70 billion barrels left. While WoodMac sees trouble ahead for the Permian, a separate study from IHS Markit estimates a massive volume of oil still remains in the Permian, and that the best days for the shale basin are ahead. The IHS study says that the Permian still has a gargantuan 60 to 70 billion barrels of technically recoverable oil reserves.

BP: OPEC needs to extend cuts. A top BP executive said that OPEC will need to prolong its production cuts if the market is to rebalance. “Rebalancing is already on the way,” Janet Kong, Eastern Hemisphere Chief Executive Officer of integrated supply and trading at BP, told Bloomberg. But the group needs “definitely to cut beyond the first quarter” if inventories are to come back to average levels, she added. She argued that a return to $60 is possible next year, but only if OPEC extends the cuts.

U.S. oil exports to surge through 2022. U.S. crude exports will grow to a 5 percent market share by 2022, aided by a desire for low-sulfur crude from global refineries. An executive of Enterprise Partners LP told Reuters that he expects U.S. oil exports to jump from around 1 mb/d for much of this year to about 4 mb/d by 2022. Meanwhile, in the short-term, the differential between Brent and WTI has widened to its largest extent in two years at about $6.50 per barrel, a level that has many analysts predicting a coming surge in U.S. crude exports. Related: As OPEC Compliance Peaks, Can The Drawdowns Continue?

Iran: OPEC deal needs to include Libya and Nigeria. Iran’s oil minister Bijan Zanganeh said that compliance with the OPEC deal thus far “has been acceptable overall,” but he said that “some changes are needed,” according to SHANA, the Iranian oil ministry’s news agency. “Firstly, all members should commit 100 percent to the production cut agreement and secondly, the production level of Nigeria and Libya should be brought into consideration,” he said. For now, Nigeria and Libya are not included in the agreement, but there has been a growing chorus to limit their output.

California considers ban of internal combustion engine. Inspired by the proposed phase out of gasoline and diesel powered vehicles in China, California regulators are looking at similar action. The legal mechanism is tricky, since the state would have to avoid using powers that could be overruled by the federal government. But if California follows through on a planned phase out – still an uncertain outcome – it would send shockwaves through the global auto market.

Gas shortages in Australia threaten exports. The Australian Prime Minister warned that natural gas exports might have to be restricted if the major exporters – including Royal Dutch Shell (NYSE: RDS.A), ConocoPhillips (NYSE: COP) and Santos – fail to ratchet up supply to satisfy domestic demand. Australia’s energy market operator estimates that the country faces a gas supply shortfall of about 17 percent of market demand next year. The gap is much worse than previously expected.

By Tom Kool for Oilprice.com 

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