While a promise from Saudi Arabia to keep oil exports below 7 million bpd has given oil markets some hope, overall sentiment appears to be very bearish
The main news today comes from the IEA, which called global oil demand “fragile” amid signs of a slowing economy. “The situation is becoming even more uncertain: the U.S.-China trade dispute remains unresolved and in September new tariffs are due to be imposed,” the Paris-based agency said in its monthly report. “The outlook is fragile with a greater likelihood of a downward revision than an upward one.” While Saudi Arabia’s promise to keep oil exports below 7 million bpd has given oil prices a boost, sentiment remains undeniably bearish.
IEA cuts oil demand again. The IEA’s latest Oil Market Report shows some worrying numbers on oil demand. Consumption declined in May by 160,000 bpd year-on-year. Between January and May, demand was only up by 520,000 bpd, the weakest increase since 2008. Overall, the agency cut global demand growth for 2019 to 1.1 mb/d. The data offers further evidence of an economic slowdown.
OPEC eyes deeper cuts. Reports suggest that Saudi Arabia called other producers to explore deeper action in response to sliding prices. The report alone helped spark a rebound in prices. The Oil Kingdom also announced that it would keep oil exports below 7 million bpd.
New Permian pipelines bring relief. Permian oil producers could see not only expanded midstream capacity, but also lower fees as new pipelines bring competition. As much as 1.6 mb/d of capacity is coming online in the next few months, with another 900,000 bpd set to be operational before the end of the year. The midstream bottleneck will quickly transform into a surplus. “There’s no way another 2.5 million bpd are waiting to get sent to Corpus Christi (Texas),” Sandy Fielden, an analyst at Morningstar, told Reuters. “Clearly, there’s going to be too much capacity ... There will be buying up of barrels in Midland like it’s going out of style.”
U.S.-Saudi cooperation on Gulf Security. U.S. Secretary of Energy Rick Perry met with Saudi oil minister Khalid al-Falih on Tuesday, where the two pledged to cooperate on the security of oil flows. Related: Saudis Scramble To Arrest Oil Price Slide
Rystad: Oil outlook going from “gloomy to gloomier.” The potential for economic recession combined with ongoing increases in supply growth pose a rather gloomy recipe for oil prices heading into next year. Recent developments have “sent cold shivers” through the oil team at Rystad Energy, the consultancy said in a release.
UK sees GDP contraction. In the second quarter, the UK’s economy shrank for the first time since 2012. Analysts are also raising the odds of a no-deal Brexit later this year. “There is ... little doubt that the economy is stalling, regardless of the volatility in the data,” PwC senior economist Mike Jakeman said.
U.S. natural gas demand at record high, but prices fall. Demand for natural gas in the U.S. continues to climb to record highs, but prices keep falling. The reason is that production continues to climb. Spot prices at the Henry Hub NG-W-HH-SNL benchmark in Louisiana were nearing a 20-year low, according to Reuters. “All the bulls are gone,” Kyle Cooper, consultant at ION Energy in Houston, told Reuters.
Argentina heads to polls. Argentina is holding an August 11 vote in the presidential primary, and due to the lack of reliable polling, the vote is viewed as a crucial barometer ahead of the general election later this year. Analysts say the reelection of President Mauricio Macri would provide certainty for the Vaca Muerta, where shale drilling is on the rise. However, analysts say that the opposition ticket, which includes former president Cristina Fernandez de Kirchner as the vice presidential candidate, would still support Vaca Muerta development, although it would bring more uncertainty.
Nigerian oil struggling to find a home. According to Reuters, Nigeria’s light sweet oil is having trouble finding buyers, displaced by U.S. shale oil of similar quality. Rising U.S. exports have forced Nigerian oil not only out of U.S. markets, but also increasingly overseas. Reuters said that as many as forty cargoes of oil from Nigeria for August lacked buyers as late as July 18.
Big investors starting to divest from Big Oil. Bloomberg reports on a growing trend of major investors starting to divest from oil companies over climate concerns. “You cannot have the same conversation for 15 years with no results,” one investor told Bloomberg.
Occidental sells $13 billion in debt. Occidental Petroleum (NYSE: OXY) sold $13 billion in debt to help finance its takeover of Anadarko Petroleum. The result was successful, demonstrating there is still a strong appetite for debt from some investors. Related: US: Iran Ships Pose As US Warhips To Jam Oil Tankers’ GPS
PDC Energy in talks to combine with SRC Energy. PDC Energy (NASDAQ: PDCE) is in talks with SRC Energy (NYSEAMERICAN: SRCI) on a merger. If it goes through, the companies would combine to create a larger Colorado driller. The talks are also a sign of the pressure to consolidate as the industry goes through a rough patch.
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Hamm sees little value in public listing. Continental Resources (NYSE: CLR) CEO Harold Hamm was asked about the value of listing his company publicly. “In today’s market, we don’t see a lot of value in it,” Hamm said. The company has lost $15 billion in market capitalization since late last year.
Berkeley gas ban could spread to other cities. The city of Berkeley, CA recently banned natural gas hookups for certain types of new buildings, which could be the beginning of a broader trend. “Wow. Can you imagine if every local municipality takes up this issue? It's death by a 1,000 cuts,” Catherine Reheis-Boyd, the president of the Western States Petroleum Association said Wednesday. Some 50 other municipalities are weighing similar measures, according to S&P Global Platts.
Texas approves flaring permit in closely-watched case. The Texas Railroad Commission approved a closely-watched permit for flaring on Tuesday, siding with drillers over the pipeline industry.
Aramco IPO could be back. Saudi Aramco is expected to hold its first ever investor call on Monday, and there is now speculation that the company could move forward with a public offering as soon as next year. Reuters reported that there is a rather large gap between the $2 trillion valuation the company wants and the roughly $1.5 trillion that some bankers think the company is worth.
By Tom Kool of Oilprice.com
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While the OPEC+ production cut agreement in force since January this year was successful in putting a floor under oil prices, it didn’t manage to arrest the rise in the glut in the market because what is adversely impacting the glut is beyond their remit and capability. Only the US and China can put an end to this raging trade war between them.
However, the escalating trade war is not principally about oil or 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 uni-polar status.
President Trump and his advisers already know that they lost the trade war with China and are finding it hugely difficult to admit defeat, hence the prolonging of a futile war.
President Trump has backed himself into a corner, leaving himself few face-saving ways to exit the trade war. Only one option is open to him now, namely to call off his trade war against China and negotiate an end to the war on China’s terms.
And with the trade war escalating rapidly, the hawks in Washington might see their chance to convince President Trump to abrogate the time-honoured agreement the Nixon administration reached with China on the status of Taiwan. Were he to be foolhardy to take such action, he would have crossed a red line after which anything could happen between China and the US.
One can already suspect the United States’ involvement in the political turmoil which has been taking place in Hong Kong for the last nine weeks. This has been highlighted when China published a photo of an American diplomat meeting members of the Hong Kong opposition. I wouldn’t be surprised if a pro-independence campaign will follow soon in Taiwan with US instigation and blessing.
Only an end to the trade war could invigorate the global economy, stimulate the global demand for oil, help absorb the glut in the market and push oil prices upwards.
The other topic in the news was the announcement that Saudi Aramco could be listed on a stock market during 2020. Even if Saudi Aramco were to be listed, the original Initial Public Offering (IPO) of Saudi Aramco will never see the light of day. The IPO is dead and buried. Saudi King Salman ordered its withdrawal because of risk of American litigation related to the 9/11 destruction of the World Trade Centre in New York and question marks about the true size of Saudi proven oil reserves.
It is, however, possible that a petrochemical IPO (a downstream one) could go ahead. The reasoning is that investors could see in their own eyes petrochemical assets but they can’t see reserves and therefore they can’t ascertain how much actual reserves are underground without a fully independent audit.
The original IPO can never be resurrected because Saudi Arabia will never submit its reserves to an independent audit.
Based on my research, I estimate Saudi remaining proven reserves at no more than 55 billion barrels.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London