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Evan Kelly

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Oil Back On Track As Markets Dismiss Doha

first we'll take a quick look at some of the critical figures and data in the energy markets this week.

(Click to enlarge)

(Click to enlarge) 

Chart of the Week

(Click to enlarge) Related: Half Of Kuwaiti Oil Production Offline After Massive Strike

• U.S. natural gas production hit another record in 2015, topping 79 billion cubic feet per day, which was an increase of 5 percent over 2014.
• Most of the growth came from five states, which account for 35 percent of the country’s natural gas production – Pennsylvania, Ohio, West Virginia, Oklahoma and North Dakota.
• The top three states sit on the Marcellus and Utica shales. The Marcellus is the most prolific shale gas basin in the United States, but drillers have shifted their sights more recently to the less developed Utica shale. Marcellus production is down while Utica’s is rising.

Market Movers

Goodrich Petroleum filed for chapter 11 bankruptcy last week, which it hope will help it eliminate $400 million in debt from its balance sheet. Goodrich is a driller in Louisiana and Mississippi.
Eni (NYSE: E) says that it will invest 20 billion euros ($22.5 billion) in Africa over the next four years to develop the continent’s oil and gas. That would account for 60 percent of the company’s investments.
• Kuwait’s state-owned oil company said that a workers strike cut the company’s oil production in half over the weekend. It is unclear how long the outage could take place, but the disruption of 1 to 2 million barrels per day (mb/d) of output could send shockwaves around the world if it lasts for any lengthy period of time.

Tuesday April 19, 2016

The Doha talks collapsed over the weekend as Saudi Arabia refused to sign on to the production freeze agreement without Iran. The events were bizarre and completely defied everyone’s expectations for the summit. OPEC would have been better off if it had never agreed to stage the negotiations to begin with.

Saudi Arabia backed away from the Doha talks after Iran refused to sign on. But Iran was never going to agree, so it seemed odd that Saudi Arabia tentatively agreed to a production freeze deal heading into the Doha negotiations, only to back out at the last second. Other participants, including Russia and Venezuela, had thought they were traveling to Doha to sign a deal that would be merely a formality not a debate. They certainly did not think that the meeting would end in failure. Related: Saudi Arabia Kills Doha Deal, Talks Fall Apart

Saudi Arabia’s hostility towards Iran was in full view as it appears that the Saudi government was willing to scuttle a very weak agreement that would involve almost no sacrifice simply to avoid handing Iran a victory through modestly higher oil prices. OPEC’s official announcement was that they needed more time to discuss the agreement and would reconvene at its normally scheduled meeting in Vienna in June.

A failure or a victory for Saudi Arabia? The collapse of the talks illustrate the discord within the cartel, and it is hard to imagine the group taking any controversial decisions together. With Saudi Arabia once again sticking to its strategy of pursuing market share, all OPEC members are more or less left to fend for themselves. On the one hand, this leaves OPEC’s credibility in tatters. On the other, since 2014, the Saudis have put a much higher priority on the strategy to fight for market share and push out high-cost oil production around the world. OPEC’s credibility has been less important. In that sense, Saudi Arabia is not exactly upset to see Doha fall apart. While all OPEC members could be hurt from low oil prices in the interim, the real victims will be U.S. shale companies will continue to bear the brunt of the market “rebalancing,” a process that is gradual but already well underway. Why save U.S. shale now? Saudi Arabia will emerge from the oil bust with its market share intact.

Shift in balance of power in Riyadh. One other interesting wrinkle is that the young Deputy Crown Prince Mohammed bin Salman seems to have impressed his will upon Saudi policy. For years, Saudi Arabia’s oil minister Ali al-Naimi orchestrated Saudi oil strategy. Diplomatic and well-liked in western circles, al-Naimi rarely sprung surprises during negotiations. But Saudi Arabia’s actions over the past few days suggest that the Deputy Crown Prince now has more power, and his hostility towards Iran trumped his country’s oil strategy.

Kuwait oil offline. The markets largely shrugged off the Doha failure because more important events were transpiring in Kuwait. A strike by the country’s oil workers knocked nearly 2 million barrels of daily oil production offline, erasing the entire global glut in crude oil production in an instant. Kuwait’s state-owned company said that production fell from its normal 3 mb/d to just 1.1 mb/d over the weekend. That is a massive drop off, and will have an infinitely larger impact on the oil markets than any OPEC production freeze. The government has ordered the company to replace its striking workers, but it remains to be seen how quickly production can come back. Related: 200M Barrels Of Oil Sit In Idle Tankers Waiting To Unload At Chinese Ports

Brazil’s lower house votes to impeach President Rousseff. On Sunday, Brazil’s Chamber of Deputies voted 367 to 137 to proceed with impeachment charges for President Dilma Rousseff. The Senate will vote in the next few days on whether to proceed, which could result in the President standing trial. The President is now hugely unpopular, but the issue is complex. The politicians leading the impeachment proceedings, led by House Speaker Eduardo Cunha, are also implicated in corruption. Cunha has already been hit with corruption charges, pocketing millions of dollars as part of the Petrobras scandal. He and the opposition are exploiting discontent within Brazil, and despite his own baggage, the opposition looks increasingly likely to prevail over the president. The Brazilian stock market moved up on the news.

Citigroup says bottom of commodity cycle has passed. “There is growing evidence that virtually all commodities have stared at a price bottom and are groping for a return to normal,” wrote Citi analysts in a new report, including Ed Morse. Led by a resurgence in market sentiment on China’s growth, prices for a range of commodities are showing a bit of life.

Saudi Arabia threatens U.S. on 9/11 bill. Saudi Arabia said that it would sell off $750 billion in U.S. treasuries and other American assets if the U.S. Congress passes a bill under consideration that would allow the Saudi government to be held responsible for any role it might have played in the 9/11 attacks. But economists argue that Saudi Arabia probably couldn’t pull off such sale of assets, which could cripple the Saudi economy. Al the same, the White House has pressed Congress to kill the bill. President Obama is set to visit Saudi Arabia this week.

By Evan Kelly of Oilprice.com

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  • RussianJew on April 19 2016 said:
    it's not markets dismiss Doha - it's Doha dismisses market "experts'.

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