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Friday, June 14th, 2019

Oil prices spiked in early trading on Thursday by more than 4 percent on news from the Gulf of Oman of a tanker attack, but benchmark prices gave up some of those gains as the day wore on. In early trading on Friday, crude oil was mostly flat, as traders seemed to return to focus on fundamentals. A falling rig count then caused prices to climb.

Tensions skyrocket on tanker attacks. Two oil tankers were attacked on Thursday in the Gulf of Oman, and the U.S. government says Iran is to blame. Iran denies the charges, saying that the U.S. is waging a war of disinformation. U.S. Central Command released a video that apparently showed an Iranian patrol boat removing an unexploded mine from one of the tankers. But some experts say it is not enough evidence to jump to conclusions. Still, with tensions on the rise, the possibility of an all-out military conflict is higher than at any point in recent memory. At the same time, officials in both Tehran and Washington said that they want to avoid war. Oil prices have mostly shrugged off the news, as fears of an economic recession and cratering demand are offsetting what would normally be a major upside risk to prices.

Tanker insurance costs to rise. The risks to shipping in the Persian Gulf could lead to ballooning costs for insurance for oil tankers. “Owners that currently have their vessels in the area are checking and trying to find out more about security, crewing, insurance and legal aspects,” a London-based broker told the FT. Related: Saudi Arabia Vows To Prevent Oil Crash

IEA and OPEC cut demand forecasts. In its latest Oil Market Report, the IEA lowered its demand forecast by 0.1 mb/d compared to last month’s report. For its part, OPEC revealed that it lowered its production to just 29.876 mb/d in May, down 236,000 bpd from a month earlier and down to a five-year low. The cartel also slightly cut its demand growth forecast to 1.14 mb/d this year, a downward revision of 0.07 mb/d.

Recession fears dominate. Oil traders have become panicked over fears of sinking oil demand. Prices plunged by 4 percent on Wednesday. Several investment banks have slashed their demand forecasts. Barclays says demand may only grow by 1 mb/d this year.

U.S. gas flaring spiked by 48 percent in 2018. The rate of gas flaring in the U.S. rose by 48 percent last year, according to the Global Gas Flaring Reduction Partnership, managed by the World Bank. The world flared 145 billion cubic meters of gas in 2018, equivalent to the entire gas consumption of Central and South America.

China hikes steel tariffs. China raised its tariffs on U.S. and European steel imports.

Exxon and Sabic start construction on $10 billion petrochem plant. ExxonMobil (NYSE: XOM) and Sabic said that they would begin construction on a $10 billion petrochemical plant in Corpus Christi. “Building the world's largest steam cracker, with state-of-the-art technology, on the doorstep of rapidly growing Permian production gives this project significant scale and feedstock advantages,” said Darren W. Woods, CEO of ExxonMobil.

Oil titans head to the Vatican. Pope Francis told oil executives on Friday that a “radical energy transition” to clean energy is needed. The Pope met with the CEOs from BP (NYSE: BP) and Eni (NYSE: E).

Saudi Aramco earned $111.1 billion in 2018. Saudi Aramco revealed earnings of $111.1 billion last year, up from $75.9 billion in 2017.

West Virginia court rulings affect shale industry. A series of rulings from the West Virginia Supreme Court could affect the shale industry. In one ruling, the court said that drilling from one property beneath an adjacent property is trespassing. The decision was a win for property owners and a setback for shale drillers. However, the industry prevailed on a separate lawsuit that shot down claims that dust, traffic and noise from gas operations were creating a nuisance.

Musk eyes 400-mile EV. Tesla’s (NASDAQ: TSLA) Elon Musk said that “it won’t be long before we have a 400-mile range car.” Tesla continues to struggle with production issues and a high cash burn rate.

Canada to ban plastic bags and straws. Canada plans on banning some single-use plastics such as bags and straws by 2021. Related: OPEC’s Struggle To Avoid $40 Oil

UK to be net zero by 2050. In a first for a G7 nation, the UK said it would adopt laws to zero out carbon emissions by 2050. Notably, the effort has support across the political spectrum.

U.S.-China LNG relationship hinges on trade deal. If the U.S. and China can hash out a trade deal, it would lead to a wave of LNG exports from the U.S. to China. With a deal, the U.S. could account for 21 percent of China’s gas imports by 2025, according to Morgan Stanley. If the standoff continues, the U.S. would only capture 5 percent of the market.

Norway’s sovereign wealth fund eliminates ConocoPhillips. After a review, Norway’s sovereign wealth fund needs to cut out ConocoPhillips (NYSE: COP) and Hess (NYSE: HES) from its holdings. The fund aims to divest from oil exploration companies, although it still maintains holdings in integrated oil majors. “It makes sense that the Norwegian Oil Fund divests from oil majors like ConocoPhillips, which have become increasingly speculative with a weak future outlook,” Kathy Hipple, a financial analyst at the Institute for Energy Economics and Financial Analysis, said, according to Reuters.

Interest fades for SCOOP and STACK. Inconsistent production results and higher-than-expected costs has led to waning interest from shale drillers in Oklahoma’s SCOOP and STACK plays, according to Reuters. Some companies are trimming spending and pivoting to other regions.

Green groups step up litigation on public lands. According to Reuters, environmental groups have increased litigation against parcels offered by the U.S. federal government to the oil and gas industry. The strategy is an attempt to slow offerings and development.

Shell to spend $2.4 billion in Mexico. Mexico’s oil regulator approved Royal Dutch Shell’s (NYSE: RDS.A) offshore exploration plans. Taken together, Shell could invest as much as $2.4 billion.

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

  • Mamdouh Salameh - 15th Jun 2019 at 12:13pm:
    While geopolitics plays a role in the determination of oil prices, economics always trumps geopolitics. That is why oil prices were virtually flat despite the attack on two oil tankers in the Gulf of Oman.

    The recent attacks on two oil tankers: one Japanese-owned and the other Norwegian in the Gulf of Oman on the 13th of June could be a deliberate attempt by hawks in the Trump administration, Israel or Saudi Arabia to scuttle mediation efforts by the Japanese Prime Minister who was visiting Tehran at the time of the attacks carrying a letter from President Trump to Iran’s Supreme leader, Ayatollah Ali Khamenei who refused to receive it.

    US Central Command released a video purporting to show what looked like a patrol boat of the Iranian Revolutionary Guard approaching one of the tankers and removing what the video claimed to be an unexploded limpet mine from the Japanese-owned tanker. The Iranians emphatically denied the accusation saying that the Iranian boat was merely helping to rescue sailors of one of the stricken tankers. Meanwhile, the owner of the Japanese tanker that was hit contradicted the American video by reporting that their tanker was hit by flying objects and not by a mine.

    Iran is not seeking a war with the United States but it will retaliate if its crude oil exports were prevented from passing through the Strait of Hormuz.

    Still, war with Iran is not an option for the United States either because the damage to US national interests in the Middle East and economy will be unimaginable causing oil prices to surge to more than $130 a barrel. That would exacerbate US budget deficit and add significantly to the $22 trillion of US outstanding debts. It could also cost President Trump the election for a second term in office.

    President Trump has a far bigger war to worry about, namely the trade war with China.

    The trade war between the two superpowers is principally not about China’s trade surplus and alleged Chinese malpractices. It is about the petro-yuan undermining the supremacy of the petrodollar and by extension the US financial system, Taiwan, refusal by China to comply with US sanctions against Iran, China’s overwhelming dominance in the Asia-Pacific region and its sovereignty claim over 90% of the South China Sea, the new order in the 21st century and above all fear of the US losing its unipolar status.

    If President Trump continues to escalate the trade war and tries to push China into a corner, he will find that China has very powerful weapons in its arsenal capable of inflicting real harm on the US economy and the dollar.

    Some of these weapons have been described as China’s nuclear options. The first is for China to offload its holdings of US Treasury bills estimated at $1.3 trillion. That would immediately cause a steep devaluation of the dollar leading to a serious exacerbation of both the US budget and US outstanding debts.

    The other weapon is for China to impose an embargo on the supply of rare earth minerals to the United States. That could potentially cripple large swathes of US industry from smartphones, turbines, lasers, missiles, advanced weapon sensors, stealth technology and jamming technology to name but a few. By the time the United States finds alternative supplies, the damage would have been done.

    Eventually President Trump will have to back down and end the trade war because the war is already costing the US economy far more than China’s. China’s economy is 28% bigger and far more integrated in the global trade system than the United States thus being able to withstand the strains of the war far more than the United States’.

    An end to the trade war could easily send oil prices surging beyond $80 a barrel bolstered by robust oil market fundamentals and indications that OPEC+ is leaning towards extending the production cuts until the end of the year or until the global oil market is irrevocably balanced.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
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