In this week's oil industry insider report, we will be looking at some of the most important oil market movers and how they influence oil prices. We will also have a look at the recent changes in the oil market fundamentals, and how they point toward oil market balance.
We will then look at the current events and developments taking place in the oil industry and we will end the report with an answer to the question "is there still any hope for a successful meeting in Doha?"
Oil prices fell sharply to one-month low this Monday as investors doubted the possibility of a successful output freeze meeting in Doha, Qatar following the comments from Prince Mohammed Bin Salman that Saudi Arabia will not freeze output without Iran and other major producers doing so. Another factor that has contributed to the sharp fall in oil prices this week was a stronger than expected U.S. jobs report which raises the prospects of interest rate rise. Brent crude fell 2.5 percent to $37.69 a barrel, and U.S. crude settled down $1.09 or nearly 3 percent, at $35.70 a barrel.
Fortunately, the fall in oil prices didn’t continue further through the week. And despite the decision of Saudi Arabia to freeze oil output only if Iran does too, on Tuesday, oil prices edged up on Kuwait's insistence that major oil producers will agree to freeze output with or without Iran's participation. While the gains in crude prices were limited at first as traders awaited U.S. oil inventories data which analysts polled by Reuters expected to have risen by 3.2 million barrels, it then jumped 5 percent on Wednesday as a result of a surprise decrease in U.S. crude stockpiles.
According to the Energy Information Administration, U.S. crude oil inventories decreased by 4.9 million barrels from the previous week at At 529.9. While the EIA report contained some bearish data such as a sudden increase in gasoline stockpiles, traders -who are looking for any spark of hope- chose to focus on the bullish side of the report. This is an important point that we should be looking at, which represents the current emotional state in the oil market.
A state where traders are more focused on the positive aspects of the oil market despite some bearish sentiments. It is an emotional state where hope is more dominant than desperation and depression. Understating the current emotional state of market analysts, traders and speculators helps to understand what influence their decisions and better figure out the near term trends in the oil market.
Technically, the unexpected fall in U.S. stockpiles signaled an important shift in the fundamentals of oil market. Supported by a continuous fall in U.S. oil production and rig count, the fall in U.S. stockpiles if continued, it will not only prevent the market from going lower in the near term but also it will sustain the oil prices rally and gives it a momentum.
Based on Baker Hughes rig count data, it is definitely obvious that U.S. rig count roller-coaster is still on the run. U.S. rig count was down 14 at 450 for the week of April 1, 2016. The number of rotary rigs for oil was down 10 at 362 and the number of rig count for gas was down 4 at 88. U.S. rig count is at its lowest level since Baker Hughes started its rig count service in 1944. In a similar trend, the international rig count was down 33 at 985 on March 2016 according to the Baker Hughes rig count service.
The number of rig count will still experience a falling trend at least for a few weeks from now as the oil market is in a critical time in which more decrease in rig count and oil production is needed to create the balance in supply and demand. While rig count has decreased sharply in the past months, the use of new and advanced technology and improved efficiency enabled oil companies to offset the impact of falling rig count on oil production.
Oil Supply & Demand
In terms of oil supply, a notable addition of oil into the international market came from Iran. According to its oil minister, Iran increased its oil and condensate exports by 250,000 barrels per day in March. The country is determined not to participate in the coming oil output freeze deal until its exports reach to pre-sanctions levels. This means adding around 1 million barrel per day to its export total.
While such news could drive oil prices down giving the fact that the oil market is still oversupplied, we don’t see much negative impact for it in the oil market. This is happening due to three reasons.
First of all, Iran is trying to gain back its own position in the oi market. A position that was filled by other producers who are supposed to cut back their outputs after the return of Iran into the international oil market. The second reason lays on the fact that the oil market is more concerned and focused on Doha's meeting to the point that other events taking place in the oil market are not given much attention. The last and most important reason is the fact that the intensity of fundamentals pointing toward oil market balance is increasing as shale oil production continues to fall, and signs of growing demand are becoming more obvious.
In the demand side, more positive signs of growing oil demand are appearing. A bullish outlook for the oil markets that was issued by the investment bank Credit Suisse which stated that oil demand is alive and well. In general, oil demand is correlated with the industrial demand. As industrial demand is slow and global economy is very fragile, demand for oil is less. But Credit Suisse pointed out to emerging market middle classes that are well and consequently fueling consumption of oil as they buy new vehicles.
Based on the Credit Suisse outlook, oil demand should continue to outperform the long existed historic correlation with industrial production. They expect oil prices to hit $50 as soon as May and demand continues to grow at more than 2 percent on an annual basis.
Answer to Question of The Week
The bad luck of the oil industry lays on the fact that politics and immature politicians still play a huge role in setting the direction of the industry. Doha's OPEC and non-OPEC producers meeting is a simple example. The outcomes of the meeting and hence the end of the oil market downturn depends entirely on the decision of few producers who may or may not agree depending on what they see fit their geopolitical agenda.
While many have seen the recent decision of Saudi Arabia not to freeze oil production unless does too as a move against Iran, I don’t see it that way. In fact, if Saudi Arabia meant that move against Iran, it would have done it during February's meeting.
Saudi Arabia's main aim is squeezing shale oil producers out of the market. When it agreed to freeze its oil output during February's meeting, it was to prevent oil prices from falling further. And when it did, oil prices rebounded to $40 a barrel level, and many in the oil market expected more. But that is not what Saudi Arabia wants, because their market share war against shale oil producers didn’t really achieve its goals. Shale oil producers are still producing and their production is not decreasing as Saudi Arabia expected.
If Saudi Arabia agreed on freezing output on April 17's meeting, it would give a positive push to oil prices to go up to $50 a barrel, and that will give shale oil producers something to hold on for as it means the worse is over. That is not what Saudi Arabia wants.
I don’t expect the meeting to be successful and even if it did and Saudi Arabia changed its mind, I don’t expect the producers to hold on to the agreement. There will be some disturbance in order to keep oil prices at low levels at least above $35 a barrel for the near term in order to force many more of shale oil producers out of the market.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
At first, it seemed like a done deal. Chevron made a US$33 billion offer to take over US-based upstream independent Anadarko Petroleum. It was a 39% premium to Anadarko’s last traded price at the time and would have been the largest industry deal since Shell’s US$61 billion takeover of the BG Group in 2015. The deal would have given Chevron significant and synergistic acreage in the Permian Basin along with new potential in US midstream, as well as Anadarko’s high potential projects in Africa. Then Occidental Petroleum swooped in at the eleventh hour, making the delicious new bid and pulling the carpet out from under Chevron.
We can thank Warren Buffet for this. Occidental Petroleum, or Oxy, had previously made several quiet approaches to purchase Anadarko. These were rebuffed in favour of Chevron’s. Then Oxy’s CEO Vicki Hollub took the company jet to meet with Buffet. Playing to his reported desire to buy into shale, Hollub returned with a US$10 billion cash infusion from Buffet’s Berkshire Hathaway – which was contingent on Oxy’s successful purchase of Anadarko. Hollub also secured a US$8.8 billion commitment from France’s Total to sell off Anadarko’s African assets. With these aces, she then re-approached Anadarko with a new deal – for US$38 billion.
This could have sparked off a price war. After all, the Chevron-Anadarko deal made a lot of sense – securing premium spots in the prolific Permian, creating a 120 sq.km corridor in the sweet spot of the shale basin, the Delaware. But the risk-adverse appetite of Chevron’s CEO Michael Wirth returned, and Chevron declined to increase its offer. By bowing out of the bid, Wirth said ‘Cost and capital discipline always matters…. winning in any environment doesn’t mean winning at any cost… for the sake for doing a deal.” Chevron walks away with a termination fee of US$1 billion and the scuppered dreams of matching ExxonMobil in size.
And so Oxy was victorious, capping off a two-year pursuit by Hollub for Anadarko – which only went public after the Chevron bid. This new ‘global energy leader’ has a combined 1.3 mmb/d boe production, but instead of leveraging Anadarko’s more international spread of operations, Oxy is looking for a future that is significantly more domestic.
The Oxy-Anadarko marriage will make Occidental the undisputed top producer in the Permian Basin, the hottest of all current oil and gas hotspots. Oxy was once a more international player, under former CEO Armand Hammer, who took Occidental to Libya, Peru, Venezuela, Bolivia, the Congo and other developing markets. A downturn in the 1990s led to a refocusing of operations on the US, with Oxy being one of the first companies to research extracting shale oil. And so, as the deal was done, Anadarko’s promising projects in Africa – Area 1 and the Mozambique LNG project, as well as interest in Ghana, Algeria and South Africa – go to Total, which has plenty of synergies to exploit. The retreat back to the US makes sense; Anadarko’s 600,000 acres in the Permian are reportedly the most ‘potentially profitable’ and it also has a major presence in Gulf of Mexico deepwater. Occidental has already identified 10,000 drilling locations in Anadarko areas that are near existing Oxy operations.
While Chevron licks its wounds, it can comfort itself with the fact that it is still the largest current supermajor presence in the Permian, with output there surging 70% in 2018 y-o-y. There could be other targets for acquisitions – Pioneer Natural Resources, Concho Resources or Diamondback Energy – but Chevron’s hunger for takeover seems to have diminished. And with it, the promises of an M&A bonanza in the Permian over 2019.
The Occidental-Anadarko deal:
Source: U.S. Energy Information Administration, Short-Term Energy Outlook
In April 2019, Venezuela's crude oil production averaged 830,000 barrels per day (b/d), down from 1.2 million b/d at the beginning of the year, according to EIA’s May 2019 Short-Term Energy Outlook. This average is the lowest level since January 2003, when a nationwide strike and civil unrest largely brought the operations of Venezuela's state oil company, Petróleos de Venezuela, S.A. (PdVSA), to a halt. Widespread power outages, mismanagement of the country's oil industry, and U.S. sanctions directed at Venezuela's energy sector and PdVSA have all contributed to the recent declines.
Source: U.S. Energy Information Administration, based on Baker Hughes
Venezuela’s oil production has decreased significantly over the last three years. Production declines accelerated in 2018, decreasing by an average of 33,000 b/d each month in 2018, and the rate of decline increased to an average of over 135,000 b/d per month in the first quarter of 2019. The number of active oil rigs—an indicator of future oil production—also fell from nearly 70 rigs in the first quarter of 2016 to 24 rigs in the first quarter of 2019. The declines in Venezuelan crude oil production will have limited effects on the United States, as U.S. imports of Venezuelan crude oil have decreased over the last several years. EIA estimates that U.S. crude oil imports from Venezuela in 2018 averaged 505,000 b/d and were the lowest since 1989.
EIA expects Venezuela's crude oil production to continue decreasing in 2019, and declines may accelerate as sanctions-related deadlines pass. These deadlines include provisions that third-party entities using the U.S. financial system stop transactions with PdVSA by April 28 and that U.S. companies, including oil service companies, involved in the oil sector must cease operations in Venezuela by July 27. Venezuela's chronic shortage of workers across the industry and the departure of U.S. oilfield service companies, among other factors, will contribute to a further decrease in production.
Additionally, U.S. sanctions, as outlined in the January 25, 2019 Executive Order 13857, immediately banned U.S. exports of petroleum products—including unfinished oils that are blended with Venezuela's heavy crude oil for processing—to Venezuela. The Executive Order also required payments for PdVSA-owned petroleum and petroleum products to be placed into an escrow account inaccessible by the company. Preliminary weekly estimates indicate a significant decline in U.S. crude oil imports from Venezuela in February and March, as without direct access to cash payments, PdVSA had little reason to export crude oil to the United States.
India, China, and some European countries continued to receive Venezuela's crude oil, according to data published by ClipperData Inc. Venezuela is likely keeping some crude oil cargoes intended for exports in floating storageuntil it finds buyers for the cargoes.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, and Clipper Data Inc.
A series of ongoing nationwide power outages in Venezuela that began on March 7 cut electricity to the country's oil-producing areas, likely damaging the reservoirs and associated infrastructure. In the Orinoco Oil Belt area, Venezuela produces extra-heavy crude oil that requires dilution with condensate or other light oils before the oil is sent by pipeline to domestic refineries or export terminals. Venezuela’s upgraders, complex processing units that upgrade the extra-heavy crude oil to help facilitate transport, were shut down in March during the power outages.
If Venezuelan crude or upgraded oil cannot flow as a result of a lack of power to the pumping infrastructure, heavier molecules sink and form a tar-like layer in the pipelines that can hinder the flow from resuming even after the power outages are resolved. However, according to tanker tracking data, Venezuela's main export terminal at Puerto José was apparently able to load crude oil onto vessels between power outages, possibly indicating that the loaded crude oil was taken from onshore storage. For this reason, EIA estimates that Venezuela's production fell at a faster rate than its exports.
EIA forecasts that Venezuela's crude oil production will continue to fall through at least the end of 2020, reflecting further declines in crude oil production capacity. Although EIA does not publish forecasts for individual OPEC countries, it does publish total OPEC crude oil and other liquids production. Further disruptions to Venezuela's production beyond what EIA currently assumes would change this forecast.
Headline crude prices for the week beginning 13 May 2019 – Brent: US$70/b; WTI: US$61/b
Headlines of the week
Midstream & Downstream