As output in Nigeria and Libya rebound, markets seem unimpressed with OPEC’s announcement of a possible 9-month extension of the production cut agreement.
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• The IEA says that a second natural gas revolution is underway. The first was in shale gas and the one currently unfolding is the ramp up in LNG export capacity.
• The U.S. was the driving force in the first and will play a crucial role in the second with a wave of LNG export terminals under construction.
• The glut of LNG will persist in the 2020s, but the market will tighten in the late 2020s.
• BP (NYSE: BP) and Kosmos Energy (NYSE: KOS) announced a major natural gas discovery off of the coast of Senegal this week. That expands the expected reserves off the Senegalese coast and bolsters the case to create an LNG export hub in West Africa. Kosmos saw its share price rocket by nearly 20 percent on Monday.
• EOG Resources (NYSE: EOG) said that its Whirling Wind wells in the Permian Basin “shattered” industry records, breaking new highs for 30-day initial production.
• Kinder Morgan (NYSE: KMI) and Malaysia’s Petronas have a lot on the line in a Tuesday election in British Columbia. The opposition candidate for the province’s Premier has vowed to block KMI’s Trans Mountain pipeline expansion and force Petronas to find a new site for its major LNG export terminal.
Tuesday May 9, 2017
Oil prices stabilized on Monday after a week of sharp declines on the news that OPEC might be open to extending its production cuts into 2018.
OPEC hints at 9-month extension. Fearing further losses, Saudi energy minister Khalid al-Falih stated very firmly that the six-month extension is all but a done deal and he even suggested that the group is looking at extending the cuts “beyond” the end of 2017. In fact, an OPEC source told Reuters that the group is considering an extension until the end of the first quarter of 2018, a move that would provide a much stronger jolt to the oil market if implemented.
OPEC influence appears on the wane. OPEC seems to have backed itself into a corner regarding its production cuts. The initial agreement was supposed to end in June, but the inability to bring down inventories have forced them into (likely) agreeing to a six-month extension. Now, analysts are billing the extension through the end of 2017 as insufficient, so OPEC might push the cuts to the end of the first quarter of 2018. All the while oil prices have not appreciably moved in months and U.S. shale is taking market share. The ultimate fear for OPEC is that non-OPEC countries continue to be successful at bringing new supply online even with oil prices at $50 per barrel. In the meantime, the rhetorical power of OPEC is diminishing, judging by the relatively muted price response after hinting at a 9-month extension.
Hedge funds most bearish since November. The latest trading data shows that hedge funds and other money managers have sold off their bullish bets, taking their net-long positions to the narrowest point since the OPEC deal was announced last year. That has led to a stampede of negative sentiment, which threatens to drag oil lower. But the counterargument is that the newfound bearishness opens up buying possibilities that could spark a price rebound. Related: OPEC Confident In U.S. Shale’s Lack Of Longevity
Nigeria’s Forcados terminal nearing restart. Royal Dutch Shell (NYSE: RDS.A) is testing its Trans Forcados crude export line for a possible restart after being offline for more than a year due to damage. The potential restart is bearish for crude oil as it is one of Nigeria’s largest export terminals, accounting for 200,000 to 240,000 bpd. Nigeria is desperately trying to increase production and exports as its economy has been hammered by the oil market downturn.
Libya output rebounds. Libya could also add to global supply woes as the latest reports suggest that output from the North African OPEC member recently hit its highest level in two years. Production jumped to 796,000 bpd, according to Libya’s National Oil Corp. Earlier this year production dropped below 500,000 bpd because of outages, but with oil flows on the upswing again, it could weigh on global prices.
China’s oil imports drop, analysts see demand weakness. China’s oil imports dropped from a record high in April as refinery demand slumped. China is the world’s largest oil importer, so its drop off in imports of more than 8 percent in April raised some alarm bells. The story could be one of a broader economic slowdown in China. The oil price rout last week was driven in part by the wider selloff in commodities, which was sparked by poor economic data from China.
Suncor bucks trend, considers new oil sands projects. More than a few oil majors have sold off their oil sands assets and pulled out of Canada, a sign that greenlighting new projects in Alberta are a tough proposition. But Suncor (NYSE: SU) said that it would submit an application to regulators for a new 160,000 bpd thermal oil sands project and if all goes according to plan construction could begin by 2024. The project has not been officially sanctioned, but Suncor’s interest suggests that Canada’s oil sands are not dead yet.
Gazprom starts construction on Turkish Stream. Russia’s Gazprom has initiated construction of its Turkish Stream pipeline, which would carry Russian gas to Turkey via the Black Sea. The pipeline would then send the gas onto Europe. The project has been controversial. For Russia, the pipeline offers a new conduit to send gas to Europe while cutting out Ukraine. Gazprom says it could be completed by 2019.
European oil companies step up cooperation with Russian firms. A handful of European based oil companies are going back into Russia after several years of sanctions, the WSJ reports. American firms such as ExxonMobil (NYSE: XOM) remain frozen out of Russia, but European companies do not face such a prohibition. Eni (NYSE: E) has plans to drill a well in the Black Sea with Rosneft this year. Statoil (NYSE: STO) has various plans in the Arctic as well as Siberia. Total (NYSE: TOT) is cooperating with an LNG export facility. And BP (NYSE: BP) obviously has a nearly 20 percent stake in Rosneft so its activity in Russia has been ongoing. Related: Four Charts That Explain OPEC’s Fall From Power
Citi: no supply crunch coming. In the FT, Citi’s Ed Morse goes against the emerging consensus from the IEA and OPEC that there will be a shortage of oil supply by 2020 because of the lack of investment today. Citi argues that U.S. shale and other non-OPEC countries will ramp up supply and falling production costs extend to offshore and other unconventional areas. At the same time, efficiency will slow demand growth. Citi sees oil prices staying below $65 per barrel for the next five years.
Venezuela protests spread. The government of Venezuelan President Nicolas Maduro appears to be losing control of the country as protests bring the nation to a standstill. A retired Venezuelan general told the WSJ that the country is on the brink of civil war. Oil production has been sliding for years, but output could decline in a more dramatic fashion if Venezuela’s economy continues to meltdown.
By Tom Kool for Oilprice.com
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