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Oil Up As Saudis Consider Deeper Output Cuts


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Chart of the Week:

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•    The EIA forecasts that retail gasoline prices will average $2.38 per gallon in the U.S. between April and September, the second lowest average price since 2005. However, prices will be slightly up from the 2016 average of just $2.23/gallon.

•    The EIA lowered its forecasted Brent oil price for the summer from $54 down to just $50 per barrel in its latest outlook.

•    The lowering of its forecast by $4 per barrel for crude translates to a decline of 10 cents per gallon of gasoline, although because of wholesale margins and taxes, the price at the pump will be 8 cents/gallon lower than it would have been in the previous forecast. 

Market Movers

•    ExxonMobil (NYSE:XOM) and its partners Hess Corp (NYSE:HES) and Statoil (NYSE:STO) signed a production sharing contract with the national oil company of Suriname. The move comes as the companies are investing large sums on developing a giant oil field in neighboring Guyana. 

•    Eni (NYSE:E) received approval by the U.S. government for its drilling plans off the coast of Alaska in the Beaufort Sea. Eni plans on drilling before the end of the year on an artificial island, before its leases expire.

•    Total SA (NYSE:TOT) is a top pick among the oil majors by Goldman Sachs. The investment bank says the French oil giant offers the best combination of cash flow and high return on investment opportunities. 

Tuesday July 18, 2017

Oil prices continued to ratchet upwards, with WTI above $46 per barrel during midday trading on Tuesday. The latest gains come on rumors that Saudi Arabia could be considering deeper cuts to its supply. Bloomberg reported that Saudi Arabia is mulling cuts on the order of 1 million barrels per day (mb/d), or nearly twice its required commitment under the OPEC deal. More aggressive action might be needed as the most recent data shows OPEC compliance slipping, while at the same time the first member decided to pull out of the deal this week (see below). 

Ecuador pulls out of OPEC deal. Ecuador said that it could no longer adhere to the OPEC cuts because it has financial pressure and needs to export more. The government said that it would gradually raise output. Ecuador is a small producer and was already not complying fully with its promised cuts so the additional barrels that the South American nation will put onto the market won’t be a game-changer. But the real concern is that overall compliance within the cartel starts to slip. 

World’s Biggest Oil Traders Zero In On Shale Hot Spots

UAE: Qatar-Saudi crisis could take months. UAE’s foreign minister told Bloomberg that his country is not interested in a quick fix to the standoff between several gulf nations and Qatar. He said that the blockade could last “weeks, months” to come to a resolution. “We want to take away Qatar’s huge, huge support for this extremism and terrorism that we are seeing everywhere,” the minister said. 

Trump admin begrudgingly recertifies Iran deal. The U.S. government recertified the 2015 nuclear deal with Iran, although some within the White House were reportedly pushing against the move. President Trump called it a “terrible deal” during his campaign of for the presidency, raising fears that the administration would scrap the agreement. The White House recertified the deal this week, although at the same time it plans on slapping new sanctions on Iran for the latter’s ballistic missile program. “Iran is unquestionably in default of the spirit of the JCPOA,” a senior administration official said Monday, referring to the nuclear deal. 

IEA: U.S. to be top natural gas producer. The U.S. will account for 40 percent of all new gas production through 2022, according to a new report from the IEA. The U.S. will account for one-fifth of total gas production. By 2022, the U.S. will also rival Qatar and Australia as the world’s largest LNG exporter. Meanwhile, the global gas market is evolving with a growing portion of gas demand coming from the industrial sector, as opposed to power generation. 

EIA: Shale to grow by 113,000 bpd in August. The EIA’s new Drilling Productivity Report estimates the U.S. shale industry will continue to expand output, growing by 113,000 bpd next month. That gains will be led by the Permian (+64,000 bpd), the Eagle Ford (+27,000 bpd), the Niobrara (+15,000 bpd), plus smaller contributions from elsewhere. The estimate throws cold water on the notion that the shale industry is slowing down following the dip of oil prices into the $40s per barrel. 

China economy solid, refinery demand high. China’s latest GDP figures beat expectations, with economic growth of 6.9 percent in the second quarter, which exceeded the expected 6.8 percent GDP growth rate. Meanwhile, demand for crude oil from Chinese refiners was the second highest on record in June, a sign that Chinese oil demand is not slowing down. 

Long-term U.S. gasoline demand slips on more efficient trucks and SUVs. While analysts focus on electric vehicles and hybrids when gauging demand destruction for gasoline, the real low-hanging fruit comes from more efficient SUVs and light-duty trucks. New research from Rice University says the more efficient Ford F150 plays an important role. Ford has increased the fuel efficiency of the F150 to 20-21 miles per gallon (mpg), up from 16-17 mpg five years ago. The gain may not seem like much, but played an outsized impact on flat gasoline demand in the U.S. even as motorists have increased driving.   Related: The Biggest Obstacles For China’s $900 Billion Silk Road

Mexico to announce details of next deep water auction. Building on its recent success, the Mexican government will soon publish details about its next deep water auction scheduled for January. The auction is expected to hold areas in the Cordilleras Mexicanas basin, off the coast of Veracruz. The announcement will come on the heels of the recent discovery in shallow water by Premier Oil (LON: PMO), and growing interest in Mexico’s offshore sector. 

Oil industry struggles to attract millennials. The oil industry will be hit with a wave of retirements in the coming years and the more environmentally-conscious millennial generation is less interested in working for oil and gas companies. “Oil and gas companies may need more profound changes to meet demands for meaningful work and social responsibility to attract the next generation of top engineering and leadership talent,” McKinsey & Co. wrote in a September 2016 report. McKinsey said an estimated 14 percent of millennials would reject working for the oil industry because of its image, the highest rate for any sector polled. 

Big Oil bets on gas, a potentially risky move. The oil majors have increasingly pivoted towards natural gas, a long-term bet that gas will prevail in a world seeking to gradually decarbonize. “In 20 years, we will not be known as oil and gas companies, but as gas and oil companies,” Patrick Pouyanne, CEO Total SA (NYSE: TOT), said at an industry conference last month. But Bloomberg New Energy Finance says the move could be risky, and there is a chance of “peak gas demand” as renewables continue to get cheaper. BNEF says natural gas’ market share in the electric power sector will decline from 23 percent in 2016 to just 16 percent by 2040. 

By Tom Kool for Oilprice.com 

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