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Tom Kool

Tom Kool

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 Slides As Middle East Tensions Fade

Crude oil prices fell on news that Saudi Arabia has declared a partial cease-fire in Yemen, a move that could significantly ease tensions across the region.

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(Click to enlarge) Friday, September 27th, 2019

Oil is set to close out the week with the largest weekly loss in months. Crude fell on news that Saudi Arabia has declared a partial cease-fire in Yemen, raising hopes that several years of war could come to an end. It would also dial down tension with Iran.

Saudi Arabia insists on Abqaiq timeline, but analysts remain skeptical. Saudi Aramco has promised to restore production at the Abqaiq and Khurais facilities by Monday, but oil traders are not so sure. “I would like to see real evidence that they are going to resume [production] in the coming weeks,” a Middle East oil company official, told S&P Global Platts. Middle East-based petroleum engineer Einstein Millan Arcia added: “I seriously doubt Saudi Aramco's capability to recommission such facilities [by September 30] considering the depth of the damage and all the associated testing protocol needed prior to restart.”

Aramco accelerates IPO preparations. After some reports suggested that Saudi officials were considering delaying the IPO of Aramco, it now appears that the government is pressing forward and even accelerating the effort. The offering could come as soon as November.

Related: The Largest Trading Busts In The History Of Oil

Saudi exports plunge. Despite assurances that there would be little interruption in exports, a report from Petro-Logistics, reported on by Reuters, estimates that Saudi oil exports averaged 5.875 mb/d in the 10 days after the Abqaiq attack, down 1.494 mb/d from prior.

Return on capital falling for oil majors. Low oil prices and a slow but unfolding energy transition is cutting into the returns for the oil industry. ExxonMobil’s (NYSE: XOM) return on invested capital (ROIC) was 25 percent in 2011, but was less than 10 percent last year, according to the Wall Street Journal. Meanwhile, the ROIC for Vestas Wind Systems (CPH: VWS) was negative 5 percent in 2011, but averaged 22 percent over the last five years.

U.S. and China make goodwill gestures. The atmosphere between the U.S. and China is thawing just a bit after a series of back-and-forth goodwill gestures. On Thursday, China said that it was willing to buy more U.S. products after Washington waived tariffs on some Chinese products. Talks are scheduled to restart in early October.

Halcon Resources restructures $750 million in debt. Halcon Resources (OTCMKTS: HKRSQ) shed $750 million from its balance sheet in a debt restructuring. That could allow the company to exit bankruptcy in the coming weeks, the company’s second time in bankruptcy. Halcon blamed unforeseen operational issues, according to the Wall Street Journal, including poor well performance and falling oil prices.

IEA may cut oil demand forecast on souring economy. The head of the IEA said that the agency may slash its oil demand growth forecast once again if the global economy continues to deteriorate. “It will depend on the global economy. If the global economy weakens, for which there are already some signs we may lower oil demand expectations,” Fatih Birol told Reuters. “But at the same time, we shouldn’t forget low oil prices also (put) upward pressure on the demand.”

Biofuels groups fear impeachment inquiry could delay agreement. Biofuels groups are concerned that the impeachment inquiry into President Trump could delay a pending deal on biofuels policy. The battle between ethanol and oil refineries has been fierce and ongoing, but Trump was poised to hash out an agreement that could boost biofuels demand in 2020. “It seems his interest has waned,” one industry source told Reuters. Another source said that he would not be surprised if the deal was put on hold indefinitely.

Shareholders push to breakup Marathon. Two large shareholders in Marathon Petroleum (NYSE: MPC) are calling for the removal of the company’s CEO and the breakup of the company into three parts. The push comes from Elliott Management Corp. and former board members of Andeavor, a refiner that was acquired by Marathon last year. “This experience, combined with Marathon’s stagnation and destruction of value, causes us great concern with your decision to ignore our perspectives and insights,” the group of shareholders wrote in a letter to the company.

Tanker costs soar on sanctions. Oil tanker costs are rising sharply after the U.S. put sanctions on Chinese companies accused of handling Iranian oil.

Tesla’s stock up on delivery figures. Tesla (NASDAQ: TSLA) saw its stock price jump by more than 6 percent on Thursday after Elon Musk said that the company would deliver more than 100,000 Model 3 vehicles this quarter, a new high.

U.S. oil exports could hit 4 mb/d. U.S. oil exports could top 4 mb/d for the first time by the end of the year thanks to new Permian pipeline capacity and the outage in Saudi Arabia. The “market call on the U.S. will increase because the U.S. is effectively the marginal supplier,” Sandy Fielden, oil research director at Morningstar, told Platts.

Related: Millennials Really Do Ruin Everything, And Big Oil Is Next

Total to hike dividend. Total SA (NYSE: TOT) said that it would accelerate its dividend growth “in the coming years” as it looks to return more cash to shareholders. The group will increase its “dividend by 5 to 6 percent per year instead of the 3 percent per year as previously announced,” Total said.

Refinery disruptions could push California gasoline over $4. An outage at a Valero (NYSE: VLO) refinery and a failed restart at a Chevron (NYSE: CVX) refinery could temporarily push California gasoline prices over $4 per gallon.

Venezuela production falls. Venezuela’s Orinoco Belt saw production fall to 246,000 bpd on Tuesday, down from 370,000 bpd from earlier in the month, according to Platts. Lack of tankers and depleted storage has forced production curtailments.

LNG glut now, shortage later. Because of long lead times for LNG projects, there is often imbalance between supply and demand. A wave of projects came online this year, pushing prices down to decade-lows. But by 2021, very few new projects will hit the market, a legacy of the shortfall in investment from several years ago during the market downturn. That could lead to market tightness in the early- to mid-2020s. “The supply outlook is very much a feast-to-famine situation,” Nicholas Browne, Asia gas and LNG director at Wood Mackenzie, told the WSJ.

By Tom Kool for Oilprice.com 

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