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Tom Kool

Tom Kool

Tom majored in International Business at Amsterdam’s Higher School of Economics, he is now working as news editor for Oilprice.com.

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OPEC Back “In the Driver’s Seat”

Oil markets are on edge as OPEC’s June 22 meeting in Vienna quickly approaches. 

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Oil prices bounced around over the past few days as the markets await OPEC’s decision in a week’s time. While the meeting is shaping up to be a contentious one, the hype also demonstrates OPEC’s clout years after the group’s obituary was written. “With unplanned outages escalating, geopolitical risks rising, and U.S. shale production facing infrastructure bottlenecks, Saudi Arabia is once again back in the driver's seat exerting significant influence over the oil market in 2018,” Helima Croft, the global head of commodity strategy at RBC Capital Markets, said Thursday. “All eyes are on what course of action it will call for at the June 22 OPEC meeting in Vienna.”

IEA: Venezuela and Iran could leave supply deficit. The IEA said in its latest Oil Market Report that robust U.S. shale growth will underpin 2.0 million barrels per day (mb/d) of non-OPEC supply growth this year, plus 1.7 mb/d of non-OPEC output gains in 2019. That should more than meet demand growth…in theory, at least. The agency warned that significant losses in Venezuela and Iran could leave a supply gap. “Even if the Iran-Venezuela supply gap is plugged, the market will be finely balanced next year, and vulnerable to prices rising higher in the event of further disruption,” the IEA said. “It is possible that the very small number of countries with spare capacity beyond what can be activated quickly will have to go the extra mile.”

Libyan export terminals knocked offline. Libya’s two largest oil export terminals suffered disruptions this week due to clashes between rival groups. The outages at the Es Sider and Ras Lanuf terminals disrupted some 240,000 bpd of supply, Libya’s National Oil Corp. said on Thursday. The two facilities account for 40 percent of Libya’s oil exports. If the losses are sustained for any lengthy period of time, it will put more pressure on the OPEC+ group to increase output at its meeting on June 22. Related: 240,000 Bpd Offline Following Clashes In Libya

OPEC+ production increases to cut into spare capacity. Any increase in the volume of output from OPEC and Russia will necessarily cut into spare capacity levels, which analysts say could drop to the lowest level in decades. “You would essentially be taking 3.2 million barrels per day (bpd) of spare capacity down to approximately 2 million bpd,” Jefferies analyst Jason Gammel told Reuters, assuming around 1 mb/d increase in output. Periods of low spare capacity have historically been associated with times of high and volatile prices.

Floating storage rising in European waters. More crude oil is being stored on ships at sea in European waters than at any time in the past 18 months, according to Reuters. A quarter of global floating storage is now located in European waters, compared to just 10 percent in March and April. The sudden increase in oil stashed at sea is the result of Asian buyers scooping up cargoes from the U.S., rather than from Nigeria, Angola and the Middle East. The premium for Brent relative to WTI has made U.S. oil cheap compared to oil linked to Brent. “It is possible that U.S. crude is displacing some lighter end North Sea (and non-North Sea) grades that have traditionally managed to find a home in Northern European refineries,” Kpler economic analyst Reid I’Anson told Reuters.                                                                    

Saudi Aramco eyes investments in petrochemicals and refining. Saudi Aramco plans to increase investment in petrochemicals and refining as a way of securing markets for its crude oil sales. The strategy is also a way of diversifying investments as a hedge against future oil demand.

Austin Chalk to see uptick in interest. The Austin Chalk, a rock formation that stretches along the Gulf Coast, is starting to see a revival in interest from oil and gas companies, according to Bloomberg, more than two decades after being largely left for dead. “It is a play that I think is going to have a lot of legs," Bernadette Johnson, a vice-president for researcher DrillingInfo Inc., told Bloomberg. A series of deals so far this year indicate a sudden uptick in activity for acreage in the Austin Chalk.

Alaska taps oil fund. The state of Alaska will tap into its oil wealth fund to help plug budget gaps for the first time since the 1970s. The state has socked away $65 billion in oil funds, which helps finance annual dividend checks to every state resident each year. However, declining production has depleted oil revenues and has put a strain on the budget.

Related: Can Saudi Arabia Prevent The Next Oil Shock?

BP: Permian productivity growth coming to an end. BP’s chief economist Spencer Dale said that the productivity gains in the Permian are likely coming to an end. Such a surge in drilling has forced companies to move out away from top tier acreage. Output per lateral foot fell last year even as overall production grew, the consequence of a spectacular increase in drilling activity. "It does perhaps suggest that the very rapid increases in tight oil productivity that characterized much of the initial phase of the shale revolution may be beginning to fade," Dale said. The Permian is now at the center of global supply growth forecasts, so any slowdown would have global ramifications.

With everyone selling, no one is buying. U.S. shale companies have announced a wave of divestment plans under pressure from investors, and companies that signaled an intent to focus on capital restraint and asset disposals have been rewarded by Wall Street. However, even as shale drillers look to sell off less desirable acreage, they are having trouble finding willing buyers because many other companies are pursuing the same strategy, according to Reuters. “If these companies cannot execute the divestiture(s) that gave investors’ confidence on their future leverage profile, you would likely see less risk-tolerant investors trim or sell their positions,” said Tim Dumois, portfolio manager at BP Capital Fund Advisors. In other words, shale drillers will see their stocks take a hit if they can’t find buyers for their unwanted assets.

By Tom Kool for Safehaven.com

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  • CorvetteKid on June 15 2018 said:
    Tom, great article. I want to focus on your section where you imply that everybody is looking to sell off their Tier 2 and Tier 3 acreage in the Permian (and other shale areas). If everyone is selling -- no buyers.

    My investment mentor once said there are no bad assets, just bad prices. So what I would like to know is what are the break-evens for Tier 2 and Tier 3 acreage in the Permian. We know Tier 1 is profitable down to about $35/bbl. or so, give-or-take. But if Tier 2 needs $50/bbl. and Tier 3 needs $65/bbl. then you are going to have to sell very very cheap.

    Would love to see OilPrice.com get a databank going on the various shale basin break-evens by Tier 1, 2, and 3 acreage.

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