The U.S. Has Become A Net Oil Exporter

Friday June 28, 2019

1. Africa the new hot spot for LNG

- Greenfield investment in LNG could hit a record high this year, and Africa will surprisingly lead the way.

- Investment will top $103 billion this year, according to Rystad Energy, and Mozambique stands out as a hot spot. "Last week's final investment decision by Anadarko for its Area 1 LNG project marks the beginning of a new phase for not only Mozambique and the African continent, but for the industry as a whole," Pranav Joshi, analyst on Rystad Energy's Upstream team, said in a June 27 statement.

- Anadarko's project could see more than $15 billion in investment, on par with some of the largest LNG investments worldwide.

- At the same time, ExxonMobil (NYSE: XOM) is expected to give the go-ahead for another LNG export project in Mozambique later this year, perhaps adding another $14.7 billion in investment.

- Taken together, Mozambique is about to leap into an exclusive category of major LNG exporters.

2. U.S. becomes net oil exporter

- The U.S. exported a record high 3.8 million barrels per day last week, pushing the total trade balance into positive territory.

- "Because net exports of refined products were higher than net crude oil imports, the US was also a net oil exporter last week," Commerzbank said in a note. "Thus US President Trump's latest remark that the US is not really reliant on the Strait of Hormuz and that other countries need to pay for the US presence there is not entirely unfounded."

- While weekly figures seesaw, the long-term trend is expected to continue. Domestic consumption is mostly flat, while production continues to rise. Also, a wave of investment in pipelines and export terminals will debottleneck the Permian-to-Gulf Coast route, allowing steadily higher volumes of oil and refined products to be shipped overseas.

- As a result, the U.S. may soon become a net exporter on an ongoing basis.

3. Permian returns peaked in 2017

- The return on investment in oil and gas wells in the Delaware basin (within the Permian basin) peaked in 2017, according to Rystad Energy.

- "At first glance, these Delaware wells seem like a sure bet for investors, providing over 20% net return on average," Rystad said. "However, the corporate-level financials don't tell investors the whole story, which is why Rystad Energy has begun analyzing wells by their "vintage" - an aggregate sum of the wells that were brought into production in a single year."

- After factoring in midstream costs, service costs and overhead, return on investment in Delaware wells peaked at 27 percent in 2017. In 2018, returns were crimped by rising service costs and the fall of prices in the latter half of the year.

- For 2018 wells to outperform their 2017 counterparts, oil would need to average $80 per barrel, which seems to be an unlikely possibility at this point.

- Finally, these returns on investment do not take into account land costs, and "do not correspond to fully-burdened returns," Rystad cautioned.

4. Bitcoin soars…and crashes

- Bitcoin staged a spectacular rally over the past two weeks, soaring more than 80 percent between June 10 and June 26.

- Some analysts have argued that Facebook's (NASDAQ: FB) decision to launch a cryptocurrency may have spared renewed interest in the sector.

- However, Bitcoin crashed on Wednesday and Thursday, down more than 20 percent. Of course, a technical analysis suggests that such a meteoric rise, as seen in recent weeks, only increased the odds of a selloff.

- "Even the most optimistic crypto bulls would tell you that a 50%+ move in a week is too much too fast," Genesis Global Trading CEO Michael Moro, told CNBC.

- "The presence of leverage exacerbates the moves in both directions and affects the speed dramatically," Moro told CNBC. "Of course bitcoin has a history of doing this (both upward and downward), but it's hard to call the magnitude of the move healthy."

5. Gold surges to multi-year highs

- Gold recently surpassed $1,400 per troy ounce, the highest price since 2013.

- "Gold bulls are back in control," Edward Moya, senior market analyst at Oanda Corp., said in recent a note. "The question is no longer will the Fed ease, but by how much? The Fed historically likes to kick on an easing cycle with a bang and a 50 basis point cut should become the base case."

- Gold prices still have plenty of room to run, Russ Koesterich, a portfolio manager at the $27 billion BlackRock Global Allocation Fund, told Bloomberg.

- Still, U.S. Fed Chairman Jerome Powell warned against "excessive rate cut speculation."

- "This appears to have prompted some investors to jettison their positions in gold," Commerzbank wrote on June 27.

6. Oil stocks down…oilfield services down more

- Wall Street has lost patience with the oil and gas sector, and a wide selection of oil stocks have been decimated over the past year. The U.S. shale sector is mostly unprofitable.

- But as Liam Denning points out, oilfield services have fared far worse. Service companies make their money by drilling activity, which has slowed down significantly in recent months. As shale E&Ps make cutbacks amid shareholder pressure, oilfield services feel the brunt of the contraction.

- According to a survey from the Dallas Fed, an index tracking capital expenditures in the Permian fell from a positive 5.0 reading in the first quarter to -6.1 in the second quarter. A negative reading signals contraction.

- Among oilfield services firms, "equipment utilization" fell to just 3.4 in the second quarter, down from 16.4 in the first quarter. Worse, operating margins fell from -6.6 to -32.8, "indicating notably lower margins for oilfield services firms during the second quarter," the Dallas Fed said.

- "Today's service price levels cannot continue much longer before something cracks: quality, reliability, safety, etc. If that means pulling back on capital expenditures, then that's what needs to happen," one anonymous executive from an oilfield services company said in the Dallas Fed survey.

7. OPEC+ to rescue oil prices?

- OPEC+ is widely expected to extend the production cuts when participants meet in Vienna on Monday and Tuesday.

- While Russia has been anxious to leave the deal, it is expected to go along with an extension. Algeria has pushed for deeper cuts, but that too may not come to pass. A rollover of the 1.2 mb/d cuts is the most likely outcome.

- On average, oil prices climb significantly when OPEC takes action. According to S&P Global Platts, in the past Brent has gained nearly $12 per barrel on average six months after OPEC has agreed to curtail output.

- Recent history bears this out. The original OPEC+ deal in 2017 took time to have an impact. At the start of 2017, prices bounced around, but over the course of the year they rose more significantly.

- At the start of 2019, prices rose steadily through May, before crashing on demand fears.

- To be sure, OPEC+'s decision next week likely won't include a fresh cut, but merely an extension of existing curtailments. As a result, few analysts expect a profound jump in prices.