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Oil Markets Fear An OPEC Compliance Collapse


Brent prices have pulled back from its recent high of $58 per barrel, but hope is not lost from the market's bulls. 

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- Natural gas inventories are down significantly compared to 2016 levels, which helps explain the prices around $3/MMBtu compared to prices much lower than that last year.

- Inventories are still a bit above the five-year average, but the surplus has narrowed substantially. Soon storage levels could dip below that average level.

- The EIA forecasts inventories “in the Lower 48 states to reach 3,755 Bcf by the end of October 2017, about 48 Bcf lower than the previous five-year average and 222 Bcf lower than at the end of October 2016.”

Market Movers

- Dominion Energy (NYSE: D) is considering a major expansion of its Atlantic Coast natural gas pipeline, according to the AP, which could extend the project into South Carolina, connecting more Marcellus Shale gas to the U.S. Southeast.

- Hess (NYSE: HES) says that the oil industry needs to increase investment in offshore oil production in order to avoid a shortage by 2020. “The world is going to have to invest in more than shale,” Hess COO Greg Hill said at a conference in Houston.

- Total SA (NYSE: TOT) said that it was sticking with its plan to invest in Iran’s South Pars gasfield, the world’s largest, despite threats of new sanctions from the U.S.

Tuesday October 3, 2017

Oil prices have retreated in recent days, with Brent pulling back after hitting $58 per barrel. By midday trading on Tuesday, Brent was hovering around $55 per barrel and WTI had fallen back to $50.

Reuters survey shows slipping OPEC compliance. Last week Reuters reported that OPEC’s production likely ticked up in September above the group’s production target, rising to 32.86 million barrels per day. Oil prices likely suffered some downward pressure from the report. “One can only conclude that unless OPEC approaches the original production target of its 14 members of just below 32 million barrels per day, rebalancing will suffer a major and possibly prolonged setback,” Tamas Varga, analyst at brokerage PVM, told the WSJ.

Related: This Giant Oil Trader Sees Upside For Oil Prices

Investment banks slash oil price forecasts. A Wall Street Journal poll in September of 15 major investment banks found another dip in expectations for oil prices. The average price in the forecasts for Brent crude in 2018 fell to just $53 per barrel, down $1 from a month earlier. It was the fifth consecutive month that the banks lowered their forecasts. They expect WTI to average just $50 per barrel in 2018. “We think the demand forecasts are, perhaps, a little too optimistic and as a result we are left with all the bearish factors that come from the supply side,” Harry Tchilinguirian, head of commodity strategy at BNP Paribas, told the WSJ. Many of the banks see the recent run up in prices as potentially self-defeating if it brings more shale supply online.

Moody’s: Shale industry needs higher than $50 to make more money. Moody’s Investors Service says that even as the finances of much of the shale industry have improved over the past year, any further progress will likely only come from higher oil prices. In other words, the “efficiency gains” are bumping up against their limits, and for shale companies to post meaningful returns on capital invested, they will need oil prices to move higher than $50 per barrel. The report offers some warnings to investors expecting huge profits from shale.

Investors want to separate CEO pay from drilling. According to Reuters, a group of activists investors are trying to change the incentives for shale companies, separating out CEO compensation from aggressively drilling. As Reuters notes, U.S. oil production is surging, aided by a 50 percent increase in capital spending. While shale executives rake in hefty bonuses, shareholders are only earning a pittance on this model because it is not one that prioritizes profitability.

Saudi GDP contracts again. Saudi Arabia’s economy shrank in the second quarter by 1 percent, compared to a year earlier, the first time since the global financial crisis that the oil producer has seen its GDP shrink in two consecutive quarters. Oil production cuts have worsened the situation, something that cannot be made up by the non-oil economy. “There is very little capital spending going on in Saudi Arabia at the moment,” Mohamad Al Hajj, an equities strategist at the research arm of EFG-Hermes in Dubai, told Bloomberg TV.

Saudi Arabia looks at deals in Russia. Saudi Arabia is looking to acquire oil and gas assets in Russia, a move that could deepen the ties between two of the world’s largest oil producers. Saudi Arabia could invest in Eurasia Drilling Co., Russia’s largest oil drilling contractor. Saudi King Salman is set to visit Moscow this week. The tighter relationship could also bolster the cooperation between the two countries on the OPEC/non-OPEC production cuts.

DOE pushing to aid coal and nuclear power plants. U.S. Secretary of Energy Rick Perry sent a recommendation to FERC, calling for a rule change for electricity markets that would give an advantage to coal and nuclear power plants. The logic is that “dependable” sources of electricity should earn a “fair rate of return,” and the proposal would make eligible power plants that have 90 days of fuel stored on site – which means coal and nuclear. The move flies in the face of market realities, which have seen a significant deterioration of the competitiveness of coal and nuclear power, as cheap natural gas and renewables take larger market share. “It would be a huge departure from FERC’s predominately pro-market pro-competition approach to governing,” said William Nelson, an analyst at Bloomberg New Energy Finance. He argued the rule change would prevent coal and nuclear power plants from shutting down even if they are not economical to run. The legal authority has not been invoked in over two decades. 

Statoil to lead carbon capture project with fellow oil majors. Statoil (NYSE: STO) said that it will lead a project to develop a carbon capture and sequestration project on the Norwegian continental shelf along with Royal Dutch Shell (NYSE: RDS.A), and Total (NYSE: TOT). The project will store CO2 captured from onshore industrial facilities in Norway and the objective for the project is to help advance carbon capture technology.

Related: Next Week Could Be A Turning Point For The OPEC Output Deal

GM plans to unveil 20 new electric vehicle models. GM announced on Monday plans to introduce 20 new EV models by 2023, including two in the next year and a half. Ford also announced plans to introduce 13 new EV models in the coming years. New proposed bans on fossil fuel vehicles in the UK, France, China and perhaps even California are forcing automakers to plan their transition to an all-electric future.

Tesla misses production target. Tesla (NYSE: TSLA) aimed to build 1,500 Model 3 EVs in the third quarter, but missed that level sharply, producing only 260. Tesla blamed “production bottlenecks,” but insisted that the issue would be resolved in the near-term. Tesla aims to produce 5,000 per week by the end of the year.

China’s coal to gas switch is taking place at rapid pace. China is in the midst of a herculean effort to cut coal consumption, building natural gas pipelines and installing residential heating systems that run on gas. The effort is intended to cut air pollution, but it will lead to a staggering level of demand growth for natural gas. China’s gas demand for the upcoming winter is set to jump by 10 billion cubic meters, or equivalent to the total consumption in Vietnam, according to Wood Mackenzie.

By Tom Kool for Oilprice.com

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