Markets are reacting favorably as OPEC hints at a 9-month extension of its production cut deal with the May 25 meeting just around the corner.
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• OPEC brought in $433 billion in net oil export revenues last year, the lowest figure since 2004, according to the EIA.
• That total is also 15 percent lower than 2015 levels, in real dollar terms.
• The EIA projects that OPEC's total net export revenues from oil will rise to $539 billion (nominal) this year.
Market Movers
• Eni (NYSE: E) started first production from an offshore project in Ghana, three months ahead of schedule. It is another record time-to-market for the Italian oil company. The natural gas produced from the project will supply the domestic market in Ghana.
• BP (NYSE: BP) is starting production at Quad 204, ramping up production to 130,000 bpd, doubling its output in the UK. The expansion is one of the largest redevelopments in North Sea history.
• ExxonMobil (NYSE:XOM) signed a preliminary agreement with Saudi chemicals company SABIC, part of a raft of deals announced during U.S. President Donald Trump's visit. The deal covers a $10 billion petrochemical plant in Corpus Christi, TX.
Tuesday May 23, 2017
Oil prices continued to rebound on growing optimism over the likelihood of a nine-month extension of OPEC's production cuts.
Saudi energy minister gets Iraq on board. Saudi energy minister Khalid al-Falih flew to Baghdad for some last-minute diplomacy. Iraq seemed resistant to a nine-month extension, but al-Falih's efforts appeared to have paid off. Iraq's oil minister said that his country would support a nine-month extension at the May 25 OPEC meeting, paving the way for a likely extension. Nevertheless, Iraq has fallen short of compliance and remains a question mark even if the nine-month extension is sealed.
Goldman: OPEC deal to balance market, but another glut coming in 2018. Goldman Sachs says that the nine-month extension should normalize oil inventories, but risks loom for the second half of next year. "A nine-month extension would normalize OECD inventories by early 2018, in our view, but we see risks for a renewed surplus later next year if OPEC and Russia's production rises to their expanding capacity and shale grows at an unbridled rate," Goldman wrote in a recent report. Essentially, the OPEC cuts will only work so long as they are in place. Once OPEC members ratchet up production, the surplus reappears because U.S. shale is expected to rise in the interim. The one way to prevent too much shale from coming online, Goldman says, is a state of backwardation - shifting the futures curve so that near-term oil is more expensive than futures for next year. That could potentially scare away new shale drilling.
China seeks private investment in national oil companies. The Chinese government unveiled a plan to radically transform its state-owned oil companies with the aim to have them perform more like their market-oriented peers. The plan seeks to allow state-owned giants like PetroChina to "lose weight and be fit," a likely reference to job cuts. The reforms would also open up the state-owned companies to more private sector investment, echoing the opening up of Sinopec in 2014. Related: OPEC Optimism Lifts Oil Prices To One-Month High
Iranian President wins reelection. Iran's incumbent President Hassan Rouhani easily won reelection last week, and the victory bolsters his efforts to continue reforming the Iranian economy. The victory rewards the President, who took a great political risk by thawing relations with the United States and agreeing to the 2015 nuclear agreement. Ironically, his reelection comes as the U.S. administration is taking a harder line towards Tehran.
Trump proposes to sell off half of U.S. SPR. The White House released its official budget proposal, and among savage cuts to many areas of government, President Trump also proposed slashing the strategic petroleum reserve by half. The U.S. holds the world's largest SPR at 688 million barrels, crude oil that is held in salt caverns in Louisiana and Texas. The selloff would generate some $500 million initially in 2018, with sales spread out over the next decade. Energy security analysts have long warned against such a move, arguing that today's supply glut is likely a fleeting phenomenon. The U.S. remains a massive importer of crude oil and any potential supply shortage would have deleterious effects on the U.S. economy. To be sure, the budget proposal is just a proposal and is almost certainly subject to dramatic change once Congress begins work on it.
Trump's other proposals. Trump also proposed opening up the Arctic National Wildlife Refuge (ANWR) in Alaska for drilling, which has long been off limits. He is also calling for a 31 percent cut to funding for the EPA, an 11 percent cut to the Interior Department, and a 6 percent cut to the Energy Department - the three main agencies that affect the oil and gas industry. Meanwhile, he wants a $54 billion increase for defense spending. Related: Kuwait: Deeper Cuts Are On The Table
Shell rejects shareholders' climate resolution. Occidental Petroleum (NYSE: OXY) recently saw a shareholder resolution pass that called on the company to assess its vulnerabilities to climate regulation, the first of its kind. Royal Dutch Shell (NYSE: RDS.A) just beat back a more aggressive shareholder resolution, which asked the company to publish annual carbon emissions targets that fall over time. The company said such a resolution would be "tying its hands," and 94 percent of shareholders voted against it. Shareholders of ExxonMobil (NYSE: XOM) will vote on a climate resolution next week.
China plans EV push, but drivers want SUVs. China has an ambitious plan to scale up the adoption of electric vehicles, aiming for 40 percent of annual auto sales by 2030 to come from EVs. According to Bernstein Research, that will mean a cumulative total of 30 million EVs will be on Chinese roads by 2025. But that pales in comparison to the 150 million SUVs that will be on the roads by then. Consumer tastes are shifting towards heavier SUVs over sedans, presenting a major challenge to the country's efforts at reducing oil demand.
U.S. states call for stricter oil-by-rail safety. Attorneys General from six states called on the federal government to tighten safety standards for rail cars carrying crude oil. After a series of derailments and explosions that killed dozens of people in Quebec in 2013, among other high-profile incidents, the AGs say that especially flammable crude oil should not be allowed to be transported by rail.
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