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Tom majored in International Business at Amsterdam’s Higher School of Economics, he is Oilprice.com's Head of Operations

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Oil Prices Under Pressure As U.S. Shale Supply Soars

The big story in oil markets this week has been the escalating tension between the United States and Saudi Arabia, with many analysts suggesting that crude prices could head even higher if the fued reaches a boiling point. 

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- U.S. nuclear plant outages were relatively low throughout the summer, but spiked last month. Nuclear plants tend to go offline for maintenance, often during spring and winter months and often to coincide with the refueling cycle, but the 14.5 GW that went offline in September was larger and earlier than usual.

- The temporary shutdown of a plant related to Hurricane Florence magnified the disruptions.

- The outages put more pressure on natural gas to pick up the slack, and with natural gas inventories already at their lowest levels since 2005 heading into winter, the nuclear outages helped tighten the gas market and push up prices.

Market Movers

• Energy Transfer Partners (NYSE: ETP) said its West Texas Gulf pipeline will resume operations this weekend after the pipeline spilled water with non-toxic green dye and residual fuel oil in Abilene, TX. The pipeline runs from Colorado City, TX to Longview, TX.

• Electrobras, the state-owned Brazilian utility, could be privatized under Jair Bolsonaro, should he win Brazil’s upcoming second round presidential election. Bolsonaro’s top economic advisor favors selling off the company.

• Occidental Petroleum (NYSE: OXY) saw its shares plunge on Monday after reports that Qatar Petroleum would take over management and operation of the Idd El-Shargi North Dome offshore oil field after the production sharing agreement expires next year.

Tuesday October 16, 2018

Ongoing production gains in the U.S. are putting some downward pressure on oil prices. The EIA said that it expects large gains from the shale patch next month (more below). “Shale oil production continues unabated in the United States,” said Carsten Fritsch, commodities analyst at Commerzbank. “Rising U.S. oil production is one key reason why the global oil market is likely to be amply supplied next year.”

Saudi threatens oil weapon against U.S., but both sides eager to tamp down tension. Saudi Arabia shocked the oil world by seeming to threaten to engineer a price spike if the U.S. took action against Riyadh over the apparent murder of Saudi journalist Jamal Khashoggi. However, President Trump does not appear interested in taking action over the incident, taking Saudi assurances at face value. Sec. of State Mike Pompeo traveled to Riyadh to meet with the Saudi king, and all signs suggest that both sides are eager to put the issue behind them. Related: High Prices Benefit Iran Despite Lost Oil Exports

Iran says “bullying” won’t bring oil prices down. Iran’s oil minister Bijan Zanganeh said that the U.S. won’t bring global oil prices down by “bullying” other nations. “The oil market is suffering from short supply and this cannot be resolved by words. Trump thinks he can bring the oil prices down by bullying,” Zanganeh said. He added that the rise of oil prices was a “self-inflicted pain” caused by U.S. sanctions and that the U.S. “has done most of the things it could do, and there is not much left to do against Iran.”

Iran exports falling in October. In the first two weeks of October, Iran’s oil exports averaged 1.3 million barrels per day (mb/d), down sharply from the 1.6 mb/d it averaged in October, and down from the recent peak of 2.5 mb/d in April. Sanctions on Iran take effect on November 4, and most analysts see exports falling further over the next few weeks.

Signs of Permian overheating. Bloomberg reported on the signs that the Permian basin is overheating, including high costs for frac sand, six-figure salaries for truck drivers, and clogged roads from truck traffic make West Texas one of the deadliest places to drive in the country. Output is still growing, but pipeline bottlenecks have cut the monthly growth rate down by three-quarters. Schlumberger (NYSE: SLB) has warned producers that drilling wells too closely together has led to lower productivity, raising the prospect that drilling efficiencies are bumping up against their limits.

U.S. to add 98,000 bpd in November. The latest Drilling Productivity Report from the EIA shows strong gains expected for next month. The EIA predicts the U.S. will add 98,000 bpd in November compared to a month earlier. Unsurprisingly, the Permian leads the way with 53,000 bpd in growth, followed by the Eagle Ford (+15,000 bpd), the Bakken (+13,000 bpd) and smaller contributions from the Anadarko, Appalachia and Niobrara.

DOE’s coal bailout put on ice. The U.S. Department of Energy has gone to great lengths to bail out aging coal and nuclear power plants, digging up obscure statutes related to national security to justify subsidizing them. But the DOE proposal has apparently “run aground” at the White House, according to Politico. The White House does not think the proposal is on solid legal ground, and perhaps more importantly, intervening in electricity markets to prop up coal has angered the oil and gas industry, as well as environmentalists, consumer advocacy groups and free market proponents. For now, the initiative appears dead.

AMLO tells oil companies to show results. Incoming Mexican President Andres Manuel Lopez Obrador has reiterated his support for existing oil contracts with foreign companies, but pressed them to hurry up and show results, according to Reuters. “We know we have to exceed expectations and we’re trying to make sure we do that,” Talos Energy (NYSE: TALO) CEO Tim Duncan, one of the executives who attended a September meeting with AMLO, told Reuters.

Nigeria shut key oil pipeline. Nigerian National Petroleum Corp. shut down a key oil pipeline network, the NNPC System 2E, due to an explosion triggered by oil thieves. The outage has interrupted operations at the 210,000-bpd Port Harcourt refineries, according to S&P Global Platts.

Oil companies pursue augmented reality technologies. The Houston Chronicle reports on how the oil industry is using new technologies, such as augmented reality, in order to cut costs. Maintenance and management decisions can be made remotely, speeding up decision-making and defraying expenses. It’s somewhat of a merger between Silicon Valley and Big Oil. “We have some experts that travel a half-million miles a year,” Ed Moore, Chevron’s enterprise architecture and strategy manager, told the Houston Chronicle. “There’s a lot of opportunity to make savings.”

Related: Are Natural Gas Prices Set To Spike?

U.S. oil exports to China fall to zero. Chinese companies are cutting back in the midst of the U.S.-China trade war, scrambling the flow of oil around the world. In August, China’s purchases of oil from the U.S. fell to zero, after China had been the largest buyer of American crude in the first half of the year. U.S. producers are still finding buyers, but are having to look elsewhere. Meanwhile, Russia and Saudi Arabia are replacing the U.S. as the main suppliers to China.

Venezuela has $949 million bond payment due. Venezuela has a $949 million bond payment due on October 27, and analysts believe it will meet the payment schedule since the bond is backed by a majority stake in Citgo Holdings. Instead of letting creditors lay claim to Citgo, Venezuela will likely pull out all stops in order to meet the payment, analysts believe. Venezuela is already late on some $7 billion in bond payments and is dangerously low on funds.

Oil sands companies scrambling amid $50-per-barrel discount. Canadian oil companies are hedging production, booking oil-by-rail shipments and otherwise scrambling to find storage as Western Canada Select (WCS) suffers from a price discount as large as $50 per barrel below WTI. The pipelines out of Alberta are full and those without pricing protection are getting slammed.

By Tom Kool for Oilprice.com

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  • Clyde Boyd on October 17 2018 said:
    The great thing about oilprice.com is that for every article decrying the upcoming disaster of less oil and higher prices there is a contrary article on higher supply and lower prices. Usually one day after the next, and sometimes even the same day.

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