Oil prices took a noticable hit on Tuesday morning, as markets adjusted to the "new normal" of U.S. sanctions on Iran.
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- U.S. monthly oil production jumped to 11.3 million barrels per day in August, a new all-time record high. Production in Texas topped 4.6 mb/d in August.
- The jump was enough to make the U.S. the largest oil producer in the world, overtaking Russia’s 11.2 mb/d.
- Pipeline constraints and other bottlenecks were expected to slow development. “However, industry efficiencies in pipeline utilization and increased trucking and rail transport in the region have allowed crude oil production to continue to grow at a higher rate than EIA expected,” the EIA wrote in a report.
• Magellan Midstream Partners (NYSE: MMP) and Navigator Energy Services launched an open season to gauge customer interest in a pipeline that would ship oil from Cushing to Houston. The pipeline would have a capacity of 250,000 bpd.
• Chevron (NYSE: CVX) saw its share price jump on Monday after Credit Suisse upgraded the company’s share price from Neutral to Outperform, with a $138 price target. The investment bank said that Chevron’s free cash flow and valuation are “compelling.”
• Carrizo Oil & Gas (NASDAQ: CRZO) was up more than 2 percent in after-hours trading on Monday after beating quarterly expectations. Third quarter production was up 17 percent year-on-year, above the high end of its guidance.
Tuesday November 6, 2018
Oil prices rose a bit on Monday, but fell hard in early trading on Tuesday. The market is looking for some direction now that Iran sanctions are in place.
Iran sanctions waivers to eight countries. The U.S. confirmed that it granted waivers to eight countries, allowing them to continue to import oil from Iran for the next six months. The countries include South Korea, Japan, India, China, Turkey, Taiwan, Italy and Greece. That ensures that Iran will continue to import oil, although there is a great deal of disagreement among analysts over how much Iran’s exports will fall. “This is bad news for oil prices, as it means that the supply situation on the oil market is set to ease further,” Commerzbank said in a note. The investment bank predicts that Iran’s oil exports will stabilize at around 1 million barrels per day, and “could even increase again in the coming months because Japan and South Korea have hardly been buying any Iranian oil,” and they were given waivers to allow them to continue buying. To be sure, not everyone agrees on this point, and some see the hawkish government in Washington tightening the screws in the months ahead.
U.S. vows to continue “maximum pressure” on Iran. The U.S. agreed to grant waivers to eight countries importing Iranian oil, seemingly backtracking a policy to cut Iran’s oil exports to zero. However, Secretary of State Mike Pompeo said that the “maximum pressure” campaign will continue and that the administration hopes to get to zero. The waivers were granted to countries that “need a little bit more time,” he said.
Investors continue to cut bets on crude futures. Hedge funds and other money managers continued to reduce their bullish bets on crude oil last week. As it became clear that the U.S. would be offering waivers on secondary sanctions last week, investors turned bearish. The net-length in the six months important oil futures contracts declined for the fifth consecutive time in the last week of October.
Democrats could investigate energy deregulation. Polls suggest that the Democrats have a good chance to retake control of the U.S. House of Representatives on Tuesday, which could open up some actions by the Trump administration on energy deregulation to scrutiny. In the majority, the Democrats could begin investigations into the regulatory process involving the watering down of methane emissions rules for oil and gas, as well as auctions for oil and gas drilling on federal lands. The scrutiny could focus on the relationship between the White House, the EPA and the energy industry.
Citi: Oil prices “biased to upside.” The recent price correction for oil leaves a lot of room for a rebound, and Citigroup said that because refineries will end maintenance season and begin ramping up operations again, oil prices are “biased to the upside” for the rest of 2018. Brent could average $80 per barrel in the fourth quarter, Citi’s Ed Morse said, and might even temporarily spike as high as $90 or $100 per barrel. Iran will be central to this scenario, while outages are possible in Nigeria as elections loom. However, 2019 could be a bit softer, as the global economy slows. “Longer term, there are lots of road blocks to demand,” Morse said. “I think demand at stake is maybe 500,000 barrels a day lower next year than this year.”
Morgan Stanley cuts oil price forecast. Morgan Stanley, typically a more bullish forecaster, cut its prediction for fourth quarter Brent prices to $77.5 per barrel, down from its previous forecast of $85 per barrel.
Bonanza for Midwestern refiners. The bottleneck for Canadian oil, which has opened up regional pricing discounts by around $40 to $50 per barrel, has produced a windfall for U.S. refiners buying oil from their northern neighbors. HollyFrontier Corp. (NYSE: HFC) and Phillips 66 (NYSE: PSX) are two refiners enjoying incredibly cheap oil. Phillips 66, for instance, earned about $26 per barrel on its refined products in the third quarter compared to a year earlier, boosting profits by 81 percent.
ADNOC aims to boost production to 5 mb/d by 2030. The Abu Dhabi National Oil Company (ADNOC) announced new oil and gas discoveries, which could help it ramp up oil production to 4 mb/d by 2020 and 5 mb/d by 2030, up from 3 mb/d today. More exploratory drilling will be needed to prove the potential of the new discoveries.
LNG shipping rates soar. The burgeoning trade for LNG, which is soaring as China gobbles up more cargoes, is pushing up the rental rates of the specialized ships capable of handling liquefied gas. “Shipping rates are higher than post-Fukushima levels, driven by additional LNG export volumes,” Kwok Wan, lead LNG analyst at Clarksons, a shipping broker, told the FT. Spot rates for ships are at $170,000 per day, up more than four times the rate seen earlier this year. The shortage of ships could hamper the growth of the LNG trade.
Halliburton: Permian bottlenecks gone by end of 2019. Halliburton’s CEO Jeff Miller told Bloomberg TV that the bottlenecks in the Permian will be resolved by the end of next year, paving the way for more production growth. He also said that once companies put together their spending plans in early 2019, they could step up drilling. “It will be a series of events throughout 2019 that occur,” Miller said. “But it’d be easy to see, as we finish the year, things being perfectly normal.”
By Tom Kool for Oilprice.com
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