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Iraq Could Complicate OPEC Extension

Oil

Oil prices are refusing to budge this Friday, despite a large increase in the U.S. rig count and some bearish noises from OPEC.

 

(Click to enlarge)

(Click to enlarge)

Friday, March 17, 2017

Oil prices are set to close out the week unchanged from a week earlier, having moved up and down over the past few days. The latest report from the EIA was a merciful one for crude, showing a small but all-important drawdown in crude inventories. Had crude stocks jumped again last week, oil prices surely would have dropped significantly. Still, there is a weak case for much higher oil prices in the near-term, given that U.S. inventories are still at a record high and oil production is rising.

Saudi Arabia prepared to extend cuts if inventories remain high. Saudi Arabia’s energy minister Khalid al-Falih said in a Bloomberg interview that OPEC would be prepared to extend the production cuts “if it’s needed.” He said that if inventories are still above the five-year average by June, or if the markets are still not confident, then an extension would be warranted. “We would signal to them that we are going to do what it takes to bring the industry back to a healthy situation.” OPEC will meet in May to assess market conditions and discuss their plans. Al-Falih also said that the market shouldn’t “pass judgement” on non-OPEC countries like Russia and Kazakhstan who have not yet reduced their output to their targeted levels. He said they are “fully committed” to living up to their end of the deal. His comments provided more assurance to the market after recent reports suggested he has become “fed up” with non-compliance from Iraq and Russia, in particular. In short, al-Falih’s comments provided further evidence that OPEC is willing to extend its deal through the end of the year. Related: Saudi Arabia Undermines The OPEC Deal By Increasing Production

Analysts confident in OPEC extension. Six out of 10 oil analysts polled by Reuters believe that OPEC will extend its deal for another six months. "If OPEC is genuinely pursuing an inventory target, then an extension to current supply restraint is needed," BNP Paribas analyst Harry Tchilinguirian said.

Iraq could complicate extension. Iraq’s oil minister said that his country plans on boosting oil production capacity to 5 million barrels per day this year, up from around 4.5 mb/d. The comments could confound OPEC’s ability to rollover the production cuts.

Oil industry to increase spending by $25 billion. Wood Mackenzie analyzed 119 oil and gas firms that have laid out their capital budgets for 2017, and the companies are planning on spending $25 billion more this year. 99 of the 119 surveyed will step up spending. About $15 billion of the $25 billion will be focused on the Lower 48, with the Permian Basin capturing a large amount of that.

U.S. gasoline demand growing slowly. American motorists consumed much more gasoline when prices crashed in 2015 and 2016, but the recent uptick in oil prices have caused demand to stall out. "Don’t expect the U.S. driver to save the market this year -- he cares about the price now," Kevin Book, managing director of ClearView Energy Partners, told Bloomberg. "There’s now a strong correlation between price and gasoline demand." The American auto fleet is becoming ever more efficient, as newer models today use less gasoline than older ones. That is true even for trucks and SUVs, which saw record sales last year. “This is likely to lead to a flattening or even decline of U.S. demand as early as late this year,” said Kevin Book. Gasoline consumption is down 1.6 percent this year compared to the same period in 2016. That has pushed up gasoline inventories and is weighing on crude prices.

Eni considering Arctic drilling. After several years of quiet activity, Eni (NYSE: E) is considering drilling an exploration well north of Alaska. Former President Obama closed the door on future Arctic drilling at the end of his term, a move that will be difficult for the Trump administration to reverse. But Eni holds an existing permit to drill in the Beaufort Sea, a lease that it acquired years earlier, which means it is not subjected to the drilling ban put in place by President Obama. However, the permit expires at the end of 2017 so Eni is trying to move quickly, hoping to obtain permission from President Trump’s Department of Interior. The oil industry has soured on the Arctic, but recent onshore discoveries on Alaska’s North Slope have sparked more interest. Related: Has OPEC Underestimated U.S. Shale Once Again?

Asia awash in oil. Reuters reports that crude oil flows to Asia are up 3 percent since December, pushing prices down 10 percent in recent months. The higher oil flows come even as OPEC has cut production, and the excess could keep a lid on oil prices. More than 30 oil supertankers are sitting off the coast of Singapore, Reuters says, despite the fact that storing oil is no longer profitable. "Cuts are not enough to re-absorb the world's excess supply. So, unless oil demand growth rebounds to record levels in 2017, oil prices could head for another substantial fall," Leonardo Maugeri, senior fellow at the Harvard Kennedy School's Belfer Center for Science and International Affairs, told Reuters.

Trump’s budget guts energy programs. President Trump’s budget proposal lays waste to a long list of non-defense programs in order to ramp up military spending by $54 billion. He wants to cut spending on the Department of Energy by 5.6 percent, the Department of Interior by 12 percent, the EPA by 31 percent, and the State Department by 28 percent. The cuts will hit energy R&D, climate research, and many other programs. However, the budget is just a proposal and will surely be heavily revised in Congress. 

By Tom Kool of Oilprice.com

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