Both Saudi Arabia and its partners from the Vienna meeting have been fighting to halt the recent oil price slide.
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Friday, December 21st, 2018
Global financial turmoil. Stocks fell yet again on Thursday, following the Federal Reserve's decision to hike interest rates and maintain a rate tightening course in 2019. The S&P 500 fell 1.6 percent and the Dow Jones Industrial Average was off 2 percent. The Euro Stoxx 50 fell by 1.4 percent on Friday, and the index is set to enter a bear market after falling 20 percent from its November 2017 peak. The global financial upheaval, which could presage a growing economic slowdown, presents a major threat to oil prices.
U.S. government shutdown. At the time of this writing, the U.S. was hurtling towards a government shutdown over budget disagreements, with a midnight deadline Friday. An agreement is still possible, but the potential shutdown was seen as another contributor to financial turmoil this week.
Saudi Arabia increases production cuts. Saudi Arabia could increase the size of its production cut after watching oil prices spiral downwards. According to the Wall Street Journal, Saudi Arabia will cut by 322,000 bpd from October levels, rather than 250,000 bpd. That would limit output to 10.311 mb/d for six months. The report offers a mixed message, however, since Saudi Arabia has already signaled that it could lower output to 10.2 mb/d in January.
OPEC+ to release country quotas. OPEC+ is set to release country-specific production quotas, recognizing that the lack of detail in Vienna earlier this month has hurt its efforts to convince the market. "In the interests of openness and transparency, and to support market sentiment and confidence, it is vital to make these production adjustments publicly available," OPEC Secretary-General Mohammad Barkindo told OPEC members in a letter. Related: Aramco Fights To Protect Asian Market Share Ahead Of Cuts
Trump admin cuts deal with Iraq. The Wall Street Journal reported that the Trump administration has granted Iraq a waiver extension, allowing it to continue to import natural gas from Iran for another three months. In return, Iraq has seemingly pledged to allow American energy companies greater access in the country, including GE (NYSE: GE) and Orion Gas Processors LLC for power generation, and ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) for oil production.
OPEC members suffering from low oil prices. With Brent in the mid-$50s, the budgets for OPEC members will come under strain, and perhaps only Kuwait can see its budget breakeven. Low prices could sow unrest in several OPEC member states. "At current prices, too much attention on shale, not enough on OPEC," Olivier Jakob, managing director at Swiss consultant Petromatrix GmbH, told Bloomberg. Libya and Algeria, for instance, need oil prices above $100 per barrel. Even Saudi Arabia needs oil north of $80 per barrel for its budget to breakeven.
North Sea oil emerges from downturn. Many obituaries were written for the North Sea during the 2014-2016 oil market downturn, but the region is starting to see a bit of rebound. A series of M&A deals this year have led to an injection of new investment. There are still formidable hurdles in the medium- and long-term, but S&P Global Platts reports on signs of hope for the aging oil basin.
China avoids U.S. oil. China is still holding off on buying much American oil, despite the three-month trade truce between the two countries. "Chinese companies have little incentive to buy U.S. crude due to the wide availability of crude supplies today from Iran and Russia," Seng Yick Tee, an analyst at Beijing-based consultancy SIA Energy, told Reuters. "Even though the trade tension between China and the U.S. had been defused recently, the executives from the national oil companies hesitate to procure U.S. crude unless they are told to do so."
ExxonMobil shelves Canada LNG project. ExxonMobil (NYSE: XOM) has scrapped its plan for its WCC LNG export terminal in Canada. The move comes shortly after Royal Dutch Shell (NYSE: RDS.A) gave the greenlight for its massive LNG export project on Canada's coast. Exxon's project was further behind, and the oil major is instead focusing on a handful of LNG projects in Papua New Guinea, East Africa and with Qatar.
Related: $50 Oil Won't Kill U.S. Shale
Poland signs 20-year LNG deal with U.S. company. Poland's state-owned natural gas company inked a 20-year agreement to import LNG from the U.S., a business decision that also affects geopolitics in Europe. Polish Oil & Gas Company, or PGNiG, signed a deal with Sempra Energy's (NYSE: SRE) Port Arthur LNG facility, importing 2 million metric tons of LNG per year. The project has not received an FID yet, but the agreement with Poland could move it forward. The U.S. government has long pushed LNG exports as a vehicle to pry away Eastern Europe from dependence on Russia.
U.S. southwest explores gas pipeline. The governors of Arizona, New Mexico and Mexico's state of Sonora signed an agreement on Wednesday to explore a potential natural gas pipeline to move Permian gas to the Gulf of California. The non-binding agreement encourages the states to explore and promote investment for a pipeline and possible LNG export terminal in the Gulf. "Asia's burgeoning demand, New Mexico's abundant supply, and Arizona and Sonora's strategic location and transport networks all combine to present an opportunity for continued regional growth," the agreement says.
Colorado drillers could see stiffer regulation. Democrats tightened their grip in Colorado in the mid-term elections, which could usher in a period of stricter regulation on oil and gas. Even though voters rejected a public referendum on greater setback distances for shale drilling, the legislature could aim for greater local control, handing towns and cities the ability to put restrictions on drilling. Just this week, the state's regulator expanded setback distances near school properties to include playgrounds and not just the school buildings, a modest change, but one that foreshadows other restrictions.
Shell spends $175 million to develop offshore wind. Royal Dutch Shell (NYSE: RDS.A) spent $175 million on the rights to develop offshore wind projects on the U.S. Atlantic Coast. The Anglo-Dutch oil major said that its offshore expertise from oil and gas can be translatable to offshore wind.
By Tom Kool for Oilprice.com
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Tom majored in International Business at Amsterdam’s Higher School of Economics, he is Oilprice.com's Head of Operations More
Comments
Today’s OPEC, even more than in the past, is really about Saudi Arabia. Decision-making inside OPEC is quite complicated most of the time. This is because the policies of its de facto leader Saudi Arabia sometimes differ radically from other OPEC members’ in relation to prices and supplies as was the case in 2014 when Saudi Arabia decided for purely political reasons to flood the global oil market in defiance of OPEC’s time-honoured and agreed policy of cutting production to bolster oil prices.
Saudi Arabia committed another mistake in June this year when it succumbed to intense pressure from President Trump and added jointly with Russia some 650,000 barrels a day (b/d) to the market thus enlarging an already-existing small glut in the market. Saudi Arabia should realize by now after so many mistakes that its acquiescence to US policies not only runs counter to its national interests but also to the interests of the other OPEC members. To atone for its mistakes, Saudi Arabia should undertake the bulk of the recently-agreed cuts by OPEC+. Saudi Arabia has no alternative but cut its production by at least 500,000 b/d in order push prices significantly up since it needs an oil price far above $80 a barrel to balance its budget. The alternative is a huge damage to the Saudi economy worse than in 2014 and a devaluation of the Saudi Rial.
The recent slump in oil prices could be attributed to three major factors. The first is the realization by the global oil market that US sanctions have failed completely so far to cost Iran a single barrel of oil and consequently the risk of supply shortage has not materialized.
The second factor is US manipulation of global oil prices by falsifying claims about rising US oil production and significant build-up in US crude and products inventories and hiking the value of the US dollar opposite other currencies.
A third factor is that there is still a small glut in the global oil market. This glut was augmented in June when Saudi Arabia and Russia added 650,000 barrels a day (b/d) to the market.
There is a growing feeling that the truce in the trade war between the United States and China will not result in an end to the trade war between them. The root of the problems has less to do with China’s trade surplus with the United States and alleged manipulations of its currency to get trade advantages at the expense of the US and far more to do with China’s meteoric rise and the growing importance of the petro-yuan in the global oil trade.
Almost nine months since its launch, the Chinese crude oil futures contract (the petro-yuan) has already taken a 6% market share from the world’s top benchmarks and most active contracts, Brent and WTI. This achievement is the more impressive given the fact that when Brent futures contract started trading in 1988, it only took a 3.1% share from the then-dominant WTI contract. It is probable that the Chinese yuan will emerge as the world’s top reserve currency within the next decade with the petro-yuan dominating global oil trade.
And while the trade rift between the United States and China has created turmoil and uncertainty in the global oil market, it hasn’t dampened in any way China’s insatiable thirst for oil. China’s oil imports have now exceeded 10 mbd and could even hit 11 mbd before the end of the year.
One last comment is that if Poland and other Baltic countries are idiotic enough to pay through the nose for the far more expensive US LNG in preference for the much cheaper Russian piped gas just to spite Russia, that is their affair. It doesn’t make sense economically but they may benefit geopolitically for a short while.
Still, I have no doubt whatsoever that that bullish factors in the global oil market will prevail in 2019 enabling prices to resume their surge upwards.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London