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IEA Bearish On Oil, Bullish On Gas, Fatalistic On Coal

IEA Bearish On Oil, Bullish On Gas, Fatalistic On Coal

The North American rig count continues to drop slowly and steadily while U.S. natural gas inventories have tied with a previous record set back in November 2012. 

 

Related: Political Climate Shifting Against The Oil And Gas Industry

• At the end of October, natural gas storage levels tied a record level at 3,929 billion cubic feet, which was previously set back in November 2012.

• 2015 has been the second largest gas storage build up season, second only to 2014.

• High natural gas production is behind the rapid increase in storage levels, with August 2015 marking a record high for the U.S. in monthly gas production at 81.3 billion cubic feet per day.

• Another way to look at this is that supply is outstripping demand, with excess diverted into storage. High natural gas production and high levels of storage explain the collapse in prices recently.

• Forecasts for mild winter temperatures may do little to alleviate the excess supply

Market Movers

• Chevron (NYSE: CVX) announced that it will lay off 1,000 workers at its site in the neutral territorial zone between Saudi Arabia and Kuwait. The two countries jointly oversee oil production in the zone, but have been at odds for quite some time, halting drilling activity for months. Chevron has lost 80,000 barrels per day in production since May after Kuwait failed to issue the appropriate work permits.

• ExxonMobil (NYSE: XOM) acquired a 35 percent stake in an oil block off the coast of Uruguay. It will work with Total (NYSE: TOT) to spud the first well. The two oil companies expect to invest $200 million and will drill in the first half of 2016.

• Arch Coal (NYSE: ACI) reported a $2 billion quarterly loss this week, and hinted that it could face bankruptcy in the next few months, even as it is engaging in talks to restructure debt. Chapter 11 bankruptcy could be waiting for the large coal producer as soon as December. A bankruptcy for Arch Coal will be another in a string of bankruptcies as the coal markets remain depressed.

• The UK’s National Grid Plc (NYSE: NGG) is looking to sell off its $8.5 billion gas distribution business as it shifts its sights to better performing assets. Related: Fusion Energy Facing A Major Test This Month

Tuesday November 10, 2015

The International Energy Agency released its annual World Energy Outlook (WEO), a highly anticipated report that lays down benchmarks on supply, demand, and prices for the next few decades. Obviously a lot has happened since November 2014 when the IEA released its last WEO, but the IEA flags a few very critical trends that are emerging: A phase out of fossil fuel subsidies in many parts of the world because of low oil prices; signs of a decoupling between economic growth and carbon emissions; China’s suddenly reduced role as a driver of energy demand as it transitions to a less energy-intensive model of growth; India taking the baton from China as the most important source of energy demand; the return of Iran to oil markets; and of course, a look at oil prices.

The IEA predicts that the oil market “rebalances at $80/bbl in 2020, with further increases in price thereafter.” At the same time, the Paris-based energy agency says that a prolonged period of low oil prices cannot be ruled out. In this more pessimistic scenario, the IEA sees oil prices hovering around $50 per barrel through the remainder of this decade, while only gradually moving up to $85 per barrel through 2040. A dark outlook indeed, but investors should not take these long-term figures too seriously as these projections are notoriously inaccurate.

The IEA also sees rough waters for coal markets ahead. After predicting strong growth for coal as recently as last year, the IEA declares a “reversal of fortune” for coal. Plummeting prices and a glut of supply have done little to stoke demand, and there appears to be little prospect for improvement. Over the past decade coal captured 45 percent of the increase in global energy demand, but that share falls to just 10 percent through 2040.

Moreover, while faring much better than coal, the IEA sees large growth opportunities for natural gas, but also several big question marks. The largest market for natural gas will be in the Middle East and Asia, but it also faces competition from renewables and energy efficiency. Plus, LNG export terminals must reduce costs in order to thrive. Related: Venezuela Liquidating Assets As Economic Crisis Worsens

Meanwhile, the oil minister of Oman argued on November 9 that current global oil production levels are “irresponsible,” and he pointed the finger at OPEC (Oman is not a member of OPEC). “This is a commodity that if you have one million barrels a day extra in the market, you just destroy the market,” said Mohammed Bin Hamad Al Rumhy at a conference in Abu Dhabi. “We are hurting, we are feeling the pain and we’re taking it like a God-driven crisis. Sorry I don’t buy this, I think we’ve created it ourselves.”

Needless to say, despite the ongoing pleas for OPEC to cut back on production, the cartel probably won’t alter its strategy. Suhail al Mazrouei, the top oil official of the UAE, argued that OPEC should not be the one to cut back. “When you are the least expensive oil, you should be the base producer,” said Mr. Mazrouei. And the latest comments from Saudi officials indicate that OPEC’s most important member is content with the current strategy. “Supply and demand patterns indicate that the long-term fundamentals of the oil complex remain robust,” vice oil minister Prince Abdulaziz bin Salman said in Doha on November 9. Saudi Arabia sees falling oil production in North America as a sign that the markets are balancing. OPEC meets again on December 4.

Despite the confidence, Saudi Arabia is not immune to low oil prices either. The oil kingdom has plans to turn to the bond markets to ease the fiscal burden on the country. In fact, it could see debt rise to 50 percent of GDP within five years, according to the FT, up from the mere 6.7 percent projected in 2015 and the 17.3 percent expected for 2016. Saudi Arabia wants to take on more debt to ease the rate at which it is burning through foreign cash reserves – foreign reserves have declined from $737 billion in 2014 to just $647 billion as of September. S&P cut Saudi Arabia’s credit rating in October because of its fiscal deficit, and raised the prospect of further cuts unless the deficit was reduced.

Finally, Marathon Oil (NYSE: MRO) announced its decision to sell off assets in the Gulf of Mexico with the intention of focusing more on onshore shale assets. Marathon hopes to raise $205 million for some oil-producing assets that are aging. The company produced more than 17,000 barrels of oil per day from the Gulf, but will reduce its exposure there in order to marshal resources. The move comes after ConocoPhillips (NYSE: COP) announced a similar strategy of shedding offshore assets in order to double down on shale.

By Evan Kelly of Oilprice.com

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