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The Dangers Of A Bullish Oil Market

Geopolitical tensions continue to threaten…

Tom Kool

Tom Kool

Tom majored in International Business at Amsterdam’s Higher School of Economics, he is now working as news editor for Oilprice.com.

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Bearish Backlash Drives Oil Prices Down

Evacuation

As Hurricane Irma approaches Florida, oil prices have fallen again while the WTI/Brent spread has grown wider. 

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Friday, September 8, 2017

Oil prices collapsed again on Friday as China aims to reduce the capacity of its teapot refineries and Hurricane Irma zeros in on Florida. This dramatic drop in oil prices has ended several days of strong gains and created the largest spread between WTI and Brent in two years.

Harvey recovery continues. More refineries are trickling online. Crude is getting loaded on tankers in the ports of Corpus Christi for export. According to IHS Markit, Galveston Bay is operational, and the Houston shipping channel is mostly open. Three refineries in Lake Charles are finally receiving crude oil. Railroads are mostly back up and running. IHS Markit says that 8 of the 20 refineries impacted by Harvey are running at “normal” rates, while all but one of the other 12 are moving towards, or are in the process of, restarting.

EIA: massive fall in crude oil production, refining runs. There is nothing surprising about the EIA data release, but it is still eye-opening to see the hard numbers. On Thursday, the first government data since Harvey hit showed a plunge in U.S. crude oil production by about 750,000 bpd for the week ending on September 1. IHS Markit says the Eagle Ford is quickly restoring lost production and the offshore sector is also getting back to normal. Refining runs were obviously down sharply, while imports also fell. Gasoline prices jumped to a national average of $2.679 per gallon, up from just $2.399 a week earlier.

Gasoline prices fall, crude rises as Gulf Coast recovers. The quick restart to so many Gulf Coast refineries has led to a quick fallback of gasoline futures. WTI swiftly rebounded as well, with fears of major disruptions subsiding as the Texas’ energy industry gets back on its feet. Related: Will Hydrogen Break The Battery Market?

Brent-WTI spread largest in two years. The spread between Brent and WTI jumped to its largest disparity in two years at over $6 per barrel. But that will likely ease as Gulf Coast refineries ramp up and U.S. crude is exported. There is a line of tankers sitting in the Gulf waiting to receive crude, so U.S. oil exports should rebound quickly.

Irma bears down on Florida. The Category 4 hurricane threatens historic destruction up and down Florida. Next week it will move up through Georgia and possibly South Carolina. The hurricane will almost certainly spare the Gulf of Mexico, allowing the energy industry to dodge this one, although BP (NYSE: BP) did evacuate an oil platform as a precaution. Florida is reporting gasoline shortages at more than 1,500 retail locations as millions of people stock up and head north. “I do believe that the peninsula is going to be direly short of gasoline for the evacuations,“ Tom Kloza, global head of energy analysis at the Oil Price Information Service, told the WSJ. But, unlike Harvey, there won’t be huge energy industry assets in the line of fire. The main energy infrastructure concerns will simply be on crude oil and product storage facilities. The Bahamas are home to a sizable storage facility holding 26 million barrels. Florida’s nuclear reactors at Turkey Point and St. Lucie are shutting down in anticipation of the storm. Right now the impacts on demand are unknown, but natural gas demand in Florida is expected to take a sizable, if temporary, hit.

Saudi Arabia delays/reworks plan for economic transformation. The FT reported that the highly-touted national economic reform plan for Saudi Arabia, spearheaded by crown prince Mohammed bin Salman, is getting watered-down and reworked. The overhaul is seen as an acknowledgment that the plans for radical economic transformation were too ambitious. The partial IPO of Saudi Aramco, slated for next year, does not appear to be affected.

Qatar opens seaport to undercut blockade. Saudi Arabia, the UAE, Bahrain and Egypt initiated a blockade on Qatar in June, causing Qatar’s imports to plunge 35 percent on the year. But Qatar has tried to maneuver around the blockade, using Iranian airspace and Omani ports. Now Qatar has setup a seaport to increase trade access. The port had previously been constructed but largely not operational. Qatar hopes to undercut the efficacy of its rivals’ efforts to pin it in.

Wave of LNG projects start coming online. A huge backlog of major LNG export terminals – planned years ago when spot prices were much higher – are starting to reach completion. Royal Dutch Shell’s (NYSE: RDS.A) Prelude, a one-of-a-kind floating LNG terminal the size of four football fields, is gearing up for operation off of Australia’s northwestern coast. Prelude will produce offshore gas, liquefy it, and export it. The project cost $14 billion and will last for 25 years at least. Chevron’s (NYSE: CVX) Wheatstone LNG project in Australia is also set to come online this month. Wheatstone, combined with Chevron’s Gorgon LNG that came online in 2016, cost the oil major upwards of $88 billion. The projects are coming online at an inauspicious time for LNG, with abundant supplies and low prices. LNG supplies could expand by 50 percent between 2014 and 2021.

Schlumberger buying upstream assets. The largest oilfield services firm, Schlumberger (NYSE: SLB), is no longer content merely offering services to oil producers. It wants to produce oil itself. Schlumberger is spending billions of dollars to take ownership stakes in upstream oil and gas projects. The strategy grants Schlumberger much greater leverage in sealing contracts for drilling services, allowing it to box out competitors. According to Reuters, it could upend the model for oilfield drilling services, offering much greater potential for profits, but also more risk. Related: Can Putin Bring Peace To The Korean Peninsula?

TransCanada pulls review of Energy East. TransCanada (NYSE: TRP) asked federal regulators to halt the review of the company’s proposed $15.7 billion Energy East pipeline that would carry Alberta oil to Canada’s east coast. The request for a temporary suspension comes after the federal government said it would include the project’s effect on greenhouse gas emissions as part of its review. TransCanada said it needs time to conduct a “careful review” of how the new regulations will impact the project, but the move raises the possibility that the entire project could be scrapped.

France to phase out all oil and gas exploration by 2040. France said it would pass legislation to ban oil and gas exploration on its mainland by 2040, the first country to make such a move. To be sure, it is symbolic, as France hardly produces any oil and gas at all. There is shale gas potential, but the government has already refused to issue permits for exploration to date; the draft legislation would codify the shale gas ban.

By Tom Kool for Oilprice.com

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