When looking at this week's key data of the oil and energy industry, we see that prices have stabilized in the mid $40 range as global outages continue to disrupt oil supply.
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Chart of the Week
• The type of oil produced in the U.S. has becoming increasingly different from the type of oil that is imported. More than 70 percent of the oil produced in the Lower 48 has an API gravity of 35 degrees or higher, which is a lighter form of oil. Related: Russian Oil Executives Not Optimistic About Oil Prices
• But 90 percent of the oil that is imported into the U.S. has an API gravity below 35 degrees, which means the oil is much heavier and more viscous.
• Many refineries process heavy crude, so the surge in light oil means refiners have all the light oil that they need. Therefore, they have shifted their imports to heavier types of crude. As a result, imports of light oil (from, say, West Africa) have declined, while imports of heavy oil (Canada) have increased.
• Royal Dutch Shell (NYSE: RDS.A) evacuated staff from an offshore oil field in Nigeria after a militant group, known as the Niger Delta Avengers, has stepped up attacks on oil infrastructure. Shell left behind essential personnel but reportedly evacuated 100 employees from a facility that produces 90,000 barrels per day.
• Chevron (NYSE: CVX) announced last week that its Okan offshore facility in Nigeria was also shut down after militant attacks. The outage affected 35,000 barrels per day.
• Kosmos Energy (NYSE: KOS) announced that it has made a “significant” natural gas discovery off of the coast of Senegal. The well marks the fifth successful well drilled in the Mauritania-Senegal Fairway. The company’s share price was still down nearly 12 percent after reporting a net loss of $59 million for the quarter.
Tuesday May 10, 2016
Oil traders have largely dismissed the massive wildfires in Canada, which caused the outage of more than 1 million barrels of oil production per day. Instead, the markets saw that the wildfires might not spread as much as was previously thought over the weekend, and the fires remained at a distance from some major sources of production. Again, as we said last week, the supply disruptions, for now, have more to do with the evacuation of personnel, and not lasting damage to facilities. The outage is very substantial, but unless it lasts much longer than expected, the oil markets should not be affected by the events too much.
Meanwhile, reports from Genscape suggest that oil storage levels continue to climb, a bearish signal for oil. Crude prices shot up in early trading on May 9 but WTI lost more than 2 percent by Monday’s close and Brent dropped by nearly 4 percent.
Saudi oil minister dismissed. The big news from the weekend came from Riyadh, where long-time oil minister Ali al-Naimi was removed in favor of the former chief of Saudi Aramco, Khalid al-Falih. The 80-year old Naimi was expected to eventually leave power, but the move came somewhat as a surprise. The reshuffling caused some uncertainty in the oil markets, as the loss of Naimi’s steady hand makes interpreting Saudi oil policy a bit more tricky. On the other hand, the move ensures that Saudi Arabia will continue to pursue its current strategy of elevated production and fighting for market share. Coordinated action within or outside of OPEC is unlikely. Ultimately, little changes in terms of supply and demand for oil.
Saudi Aramco IPO. New details surfaced over the planned IPO of Aramco over the weekend. The Telegraph reported that Aramco is looking at a three-way listing in New York, London, and Hong Kong. The listing of 5 percent of the company, which could raise $100 to $150 billion (although some analysts believe it will be less), would allow the Saudi government to invest in other sectors of its economy. The IPO could come as soon as next year. Related: Global Rig Count Continues To Fall
Aramco to boost production. Lost amid the eye-raising government reshuffle were comments made by Aramco’s CEO on Tuesday that the state-owned firm would increase oil production this year to meet rising demand. “We’re seeing a global increase in demand,” said Amin Nasser, Aramco’s CEO. “We are meeting that call on us." Saudi Arabia typically ratchets up output to meet summer demand, when the country burns oil domestically to meet a spike in electricity demand, but the company is also eyeing higher demand elsewhere, including the United States. Specifics were not mentioned but Nasser cited the Shaybah field, which will add 250,000 barrels per day within “a couple of weeks.” Aramco also wants to double natural gas production and nearly double refining capacity over the next 10 years.
Brazil in political crisis, economy worsens. The Brazilian president continues to fight for her survival. Meanwhile, the state-owned oil company Petrobras is looking to take a $1 billion loan from China in order to service its debt, credit that it needs much sooner than expected. The loan was originally scheduled for 2017, but Petrobras is in need of cash. Also, in a sign of a deteriorating Brazilian economy, Reuters reports that gasoline and diesel consumption is falling. GDP contracted by 3.8 percent in 2015, and in the 12 months ending in March 2016, both gasoline and diesel consumption declined by 6 percent, compared to the same period a year earlier. That compares to an average annual increase of almost 7 percent for gasoline and 4 percent for diesel between 2004 and 2014.
Oil discoveries at 60-year low. New oil and gas discoveries dropped to their lowest level in six decades as companies cut exploration budgets. According to IHS, the oil industry only found 2.8 billion barrels of oil and petroleum liquids in 2015, the lowest total since 1954. The dismal result is largely due to low oil prices, which has forced draconian cuts in spending on exploration. Industry wide expenditures on exploration have fallen from $95 billion in 2014 to an expected $41 billion in 2016, with more cuts coming next year. But some of the largest companies also saw discoveries start to slow in the years leading up to the crash in oil prices. The low levels of new discoveries, which mostly come from offshore fields that would require large-scale development, will not be felt for many years. Wood Mackenzie estimates that the world could see a supply shortfall of 4.5 million barrels per day by 2035 if the industry does not pick up the pace of new discoveries. Related: A Glimpse Into What Saudi Arabia’s New Oil Policy Will Look Like
18 bankruptcies in March and April. According to Fuel Fix, 18 North American oil and gas companies filed for bankruptcy protection in March and April as creditors began to cut off lending. The bankruptcies accounted for a combined $8.9 billion in debt. That takes the total bankruptcy list to 69 companies since early 2015.
Libya’s oil exports fall further. As we discussed last week, the standoff between Libya’s eastern and western governments is threatening the nation’s oil supply. The Eastern government blocked exports from a major terminal in an effort to wrestle control of the port away from the western Tripoli-based National Oil Corporation. But that has merely cut off much of Libya’s oil exports. Reuters says that oil production at some oil fields in the southeast have been slashed by one-third because of the port disruption, taking Libya’s output down by about 150,000 barrels per day to just 212,000 barrels per day. Before the fall of former dictator Muammar Qaddafi, Libya produced 1.6 mb/d. Production will have to be throttle back even further in the near future – the National Oil Corp. says that the storage tanks at the Hariga port will fill up in less than three weeks. If that occurs, more production cuts will be necessary.
By Evan Kelly of Oilprice.com
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