America's Most Important Oil Basin Is Excelling

1. OPEC+ Speeds Up Oil Production Increases

- The most recent OPEC+ meeting this Thursday saw members of the oil group agree on production hikes of 648,000 b/d in both July and August, seeking to offset pressures coming from Russia sanctions.

- Interestingly, Russia approved of the deal – if one is to exclude it from the tally, OPEC+ has been underperforming its targets by 1.6 million b/d – so perhaps Moscow has little faith in the viability of output increases.

- With Saudi Arabia’s spare capacity assessed at 800,000 b/d and almost half of it coming from the Neutral Zone co-developed with Kuwait, even Saudi Aramco’s ability to produce enough crude is questionable.

- The OPEC+ speed up might have been a result of a diplomatic flurry between Riyadh and Washington, with rumors that US President Joe Biden is considering a visit to the Saudi capital.

2. Venezuelan Exports Drop to Almost 2-Year Low

- Venezuela’s oil exports plunged to their lowest level since October 2020 as repair works at the José terminal, the main oil port in the country, hindered loadings.

- According to PDVSA data reported by Reuters, May witnessed total exports dropping to 391,452 b/d, a 49% decline compared to April 2022.

- Whilst oil quality issues are still a problem with some Chinese buyers, the main cause of lower Venezuelan crude exports last month was José’s two largest berths being shut for maintenance.

- In addition to the above, two of the Latin American country’s upgraders were also temporarily shut due to outages, so production seems to have suffered, too.

3. Iranian Sanctions Nudge Chinese Teapots Towards Russian Crude

- A new set of US sanctions levied against individuals and entities involved in what the US Department of Treasury labeled an oil smuggling and money laundering network made it much harder for Chinese independent refiners to buy Iranian crude.

- Chinese refiners are faced with a dilemma of still-recovering domestic demand, whilst sourcing costs have been soaring as oil prices remain firmly in the triple digits.

- Whilst it was six months ago that the last Urals cargo was delivered to Shandong province where most of the teapots are located, the Iran conundrum rekindled buying interest in discounted Russian crude.

- Iranian exports have risen to their highest since 2019, with monthly outflows averaging around 900,000 b/d and most of them using Singapore/Malaysia as a stop-over before ending up in China.

4. Europe Eyes Subsea Power Grid to Allocate Wind Energy

- According to media reports, Northern European countries are looking into ways to create a common subsea power grid that would connect their prospective offshore wind farms.

- The governments of the Netherlands, Denmark, Germany, and Belgium agreed to increase their offshore wind capacity tenfold by 2050, bringing it to a total of 150 GW.

- The wind farms would connect into so-called energy islands, hubs that would interconnect the nations’ power grids and serve as temporary storage sites to avoid grid overloading in times of high generation.

- Despite political will in place, it is still undecided who will pay for the project – early estimates that it will cost more than a double-digit billion-dollar amount.

5. Permian Basin Remains Core Growth Engine of US Production

- The Permian Basin alone will contribute more to global crude supply this year than any country globally, with production levels only below those of Saudi Arabia and Russia.

- According to Rystad Energy estimates, production in the Permian will increase by almost 1 million b/d this year, jumping to 5.6 million b/d, buoyed by still-high rates of investment.

- In 2023, Permian is on track to account for half of all US crude production, continuing the strong growth and climbing further to 6.5 million b/d.

- Other major US basins such as the Bakken, Eagle Ford, and DJ Niobrara are all expected to bounce back from the production declines seen in 2021, but the increases are set to be only marginal.

6. UK Windfall Tax Might End Up Shooting Oil Industry in the Foot

- Oil and gas companies that are active in the UK North Sea will lose billions of dollars of cash as a result of the UK Government slapping a 25% windfall tax on energy firms, Bloomberg concludes.

- The windfall tax comes with one potential escape route for companies – 80% of the presumed payment can be avoided if they commit to new capital expenditure in the UK Continental Shelf.

- Shares of UK-focused independents like Harbour Energy (LON:HBR) or EnQuest (LON:ENQ) have seen their value plummet over the past week, dropping by 15-20% w-o-w.

- Inspired by the British example, the Biden Administration is now considering levying a windfall tax on oil and gas profits, according to National Economic Council deputy director Bharat Ramamurti.

7. Chinese Metals Inventories Depleted Amid Weak Demand Prospects

- Chinese smelters and traders have started to run down metal inventories amid lockdown-triggered demand losses.

- Metals futures have been in steady backwardation since March, with the general slowdown in the construction sector – a key outlet for steel and aluminium – forcing stock owners to sell below their purchasing costs.

- Along with dropping Chinese metals smelting, the conversion of metals like nickel or aluminum has simultaneously been upended by the ramifications of the Russia-Ukraine war.

- China’s official economic growth target for this year still stands at 5.5%, whilst most Western rating agencies and investment banks downgrading their 2022 GDP growth estimates closer to 4%.