According to a growing number of analysts, OPEC may end its oil output cut deal with Russia before December 2018. Recent developments have been unequivocally bullish, but they may have gotten to a level where they have become too bullish for OPEC, Russia, and their smaller partners in the deal.
With Brent at $70 a barrel, OPEC’s and Russia’s oil is becoming less competitive while U.S. producers continue to ramp up their own production, enjoying the discount of WTI to the international benchmark as well as to Russia’s Urals and the OPEC basket. In other words, the danger of the partners in the deal losing further market share to U.S. producers is growing.
The situation is aggravated—at least from the cartel’s perspective—by indications of stronger global oil demand as economic growth accelerates.
According to analysts including Citigroup’s Ed Morse and commodity analysts from Societe Generale and Deutsche Bank, this means that the deal could end as soon as June – an option favored by Russia since the last extension of the deal that was agreed last November.
OPEC is already working on its exit strategy and it might want to accelerate this work, so it has something ready for the June meeting of the partners in the deal, when they will discuss progress and further steps.
Not everyone agrees with this scenario, however, and a number of banks have either already upped their oil price targets for Brent and WTI for this year or, like Goldman Sachs, are preparing to do so. The months until June will probably be filled with more speculation on what OPEC will do and how patient Saudi Arabia will be since it has had to shoulder more than its fair share of the burden of cuts to compensate for cheaters like Iraq, which has still not hit its production cut quota. OPEC's MOMR, released Thursday, has non-OPEC supplies increasing by 1.15 million bpd in 2018 (last MoMR had this estimated at 900,000 bpd). That's nearly equal to OPEC's 1.2-million bpd cut.
Deals, Mergers & Acquisitions
• Troubled commodity trader Noble Group has finalized the sale of its U.S. oil business to Vitol. The proceeds from the divestment of Noble Americas Corp were lower than initially estimated, however, at about $400 million versus an initial estimate of $580 million after loan repayments. Noble Group suffered a blow it never recovered from after a financial fraud exposing blog, Iceberg Research, said in early 2015 it had cooked its books. This added to pressure from the ongoing commodity crunch that shrunk the company’s worth from $6 billion to $200 million.
• Shell will buy a 44% interest in Silicon Ranch – a Tennessee-based solar power capacity developer and operator. The value of the deal is $217 million and will add to Shell’s growing portfolio of renewable energy assets. Silicon Ranch has an operating portfolio of some 800 MW with another 1 GW in the pipeline.
Tenders, Auctions & Contracts
• Anadarko is in talks with a number of Chinese companies to supply them with LNG from its offshore gas project in the African country, which is pending its final investment decision. Chinese demand for LNG is growing quickly but Anadarko says it needs to ink more sales and purchase agreements to justify the FID. Among the parties interested in Anadarko LNG supplies are both state energy companies and independent LNG buyers from China.
• Morocco is preparing to launch a tender for a gas processing project worth $4.6 billion. The gas processing facility will supply fuel to power generation plants and industrial consumers. The North African country depends on imports to satisfy almost all of its energy needs but has plans to reduce this dependency by leaning on renewable energy.
• Algeria’s state oil and gas company Sonatrach has inked a contract with Vitol for the shipment of crude oil to Italy to be refined and then returning it for sale in Algeria. The aim is to reduce the North African country’s dependence on expensive refined petroleum products, which cost it an annual $2 billion. The deal has a term of three years and by its expiry, Algeria will no longer need to import fuels as its Hassi Messaoud refinery, with a daily capacity of 100,000 barrels of crude, will be completed.
• Shell and BP have struck deals to buy Libyan crude in the latest sign that the war-torn country’s oil industry is gradually recovering. Libya’s 2017 oil production was the highest in four years despite outages and pipeline blockades. Still, this production, at around 1 million bpd, is well below its pre-war levels and boosting it may prove challenging as the political environment is still unstable.
Discovery & Development
• PetroChina is planning an aggressive expansion in Indonesia’s oil and gas sector, eyeing daily output of 100,000 barrels this year. The company said it has received an unlimited investment mandate from the government to that end. The company, which is a subsidiary of CNPC, announced the plans amid a resource nationalization drive in Indonesia that has pushed out international supermajors, making life more difficult for local state energy company Pertamina by cutting its access to technology and know-how.
• Shell has decided to expand production at its Penguins field in the UK section of the North Sea. This is the first North Sea project the supermajor has undertaken in six years. The news is significant as it comes after Shell sold half of its North Sea assets last year, leading some observers to speculate it was planning to eventually exit the mature oil-producing region. The expansion will take the form of a new floating production, storage, and offloading vessel that will extract up to 45,000 barrels of oil equivalent daily. At the same time, the company quit Iraq’s West Qurna 1 field, selling its stake there to Japan’s Itochu.
• Exxon announced it had struck hydrocarbons in an onshore field in Papua New Guinea. The company is at present evaluating the results from the drilling but said the find will add to its growing portfolio of low-cost natural gas reserves in Papua New Guinea.
• Woodside Petroleum expects its production this year to increase by 6.6% from the 2017 total of 84.4 million barrels of oil equivalent. The projected output range is between 85 and 90 million barrels of oil equivalent, Australia’s largest oil and gas operator said. Some of the output increase will come from a planned expansion of the Pluto LNG project that should raise its annual production capacity by up to 1.5 million tons of liquefied gas.
• TransCanada Corp. has enough customer interest to go forward with the Keystone XL oil pipeline, if the company decides to build it. The Calgary-based company now has approximately 500,000 barrels per day of firm, 20-year commitments. TransCanada was previously unsure whether it would continue with its plan to build the Keystone XL pipeline due to concern about lacking customer interest in the oil. But the yearlong study rendered the fear obsolete.
Politics, Geopolitics & Conflict
• Protests in the Democratic Republic of Congo are persisting and the political situation in the African nation has quickly deteriorated since President Joseph Kabila last year refused to step down after the expiry of his mandate. The world's biggest cobalt producer is a very unstable place at the moment and the situation will likely continue deteriorating just as demand for cobalt is rising.
• The Syrian Foreign Ministry said the presence of U.S. troops on Syrian soil was an act of aggression and the Syrian government would free the country of any “illegitimate” foreign presence.
• Jack Gerard, the head of the main lobbying group for the oil and natural gas industry, announced he is stepping down in August. Gerard has been running the API for 10 years, a period in which crude oil prices have lurched from less than $30 a barrel to $140 a barrel and back down again.
• Baghdad and Erbil have agreed to re-open the two airports in the Kurdistan autonomous region, closed after the central Iraqi government sent the army against the Kurds following an independence referendum that sought to divorce the autonomous region from Iraq. Also, Iraq’s parliament voted to ban Kurdish engineering firm Kar Group from operating Kirkuk’s oil fields, following Iraq’s recapture of the Kurdish-held oil region in October. The Kurds have withdrawn from most Kirkuk oil fields since October, but the vote came after lawmakers said the Kar Group refused to cooperate with Iraq’s state-run North Oil Co. (NOC) and hand back the Khurmala oil field. The Kurds claim Khurmala is located inside the official boundaries of the KRG.