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Last Updated: April 11, 2016
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By Alahdal A. Hussein


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 Market

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.

 

Rig Count 

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

Is there still any hope for a successful meeting in Doha?

 

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.

oil industry insider report output freeze oil prices oil market shale oil OPEC
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Libya & OPEC’s Quota

The constant domestic fighting in Libya – a civil war, to call a spade a spade, has taken a toll on the once-prolific oil production in the North African country. After nearly a decade of turmoil, it appears now that the violent clash between the UN-recognised government in Tripoli and the upstart insurgent Libyan National Army (LNA) forces could be ameliorating into something less destructive with the announcement of a pact between the two sides that would to some normalisation of oil production and exports.

A quick recap. Since the 2011 uprising that ended the rule of dictator Muammar Gaddafi, Libya has been in a state of perpetual turmoil. Led by General Khalifa Haftar and the remnants of loyalists that fought under Gaddafi’s full-green flag, the Libyan National Army stands in direct opposition to the UN-backed Government of National Accord (GNA) that was formed in 2015. Caught between the two sides are the Libyan people and Libya’s oilfields. Access to key oilfields and key port facilities has changed hands constantly over the past few years, resulting in a start-stop rhythm that has sapped productivity and, more than once, forced Libya’s National Oil Corporation (NOC) to issue force majeure on its exports. Libya’s largest producing field, El Sharara, has had to stop production because of Haftar’s militia aggression no fewer than four times in the past four years. At one point, all seven of Libya’s oil ports – including Zawiyah (350 kb/d), Es Sider (360 kb/d) and Ras Lanuf (230 kb/d) were blockaded as pipelines ran dry. For a country that used to produce an average of 1.2 mmb/d of crude oil, currently output stands at only 80,000 b/d and exports considerably less. Gaddafi might have been an abhorrent strongman, but political stability can have its pros.

This mutually-destructive impasse, economically, at least might be lifted, at least partially, if the GNA and LNA follow through with their agreement to let Libyan oil flow again. The deal, brokered in Moscow between the warlord Haftar and Vice President of the Libyan Presidential Council Ahmed Maiteeq calls for the ‘unrestrained’ resumption of crude oil production that has been at a near standstill since January 2020. The caveat because there always is one, is that Haftar demanded that oil revenues be ‘distributed fairly’ in order to lift the blockade he has initiated across most of the country’s upstream infrastructure.

Shortly after the announcement of the deal, the NOC announced that it would kick off restarting oil production and exports, lifting an 8-month force majeure situation, but only at ‘secure terminals and facilities’. ‘Secure’ in this cases means facilities and fields where NOC has full control, but will exclude areas and assets that the LNA rebels still have control. That’s a significant limitation, since the LNA, which includes support from local tribal groups and Russian mercenaries still controls key oilfields and terminals. But it is also a softening from the NOC, which had previously stated that it would only return to operations when all rebels had left all facilities, citing safety of its staff.

If the deal moves forward, it would certainly be an improvement to the major economic crisis faced by Libya, where cash flow has dried up and basic utilities face severe cutbacks. But it is still an ‘if’. Many within the GNA sphere are critical of the deal struck by Maiteeq, claiming that it did not involve the consultation or input of his allies. The current GNA leader, Prime Minister Fayyaz al Sarraj is also stepping down at the end of October, ushering in another political sea change that could affect the deal. Haftar is a mercurial beast, so predictions are difficult, but what is certain is that depriving a country of its chief moneymaker is a recipe for disaster on all sides. Which is why the deal will probably go ahead.

Which is bad news for the OPEC+ club. Because of its precarious situation, Libya has been exempt for the current OPEC+ supply deal. Even the best case scenarios within OPEC+ had factored out Libya, given the severe uncertainty of the situation there. But if the deal goes through and holds, it could potentially add a significant amount of restored crude supply to global markets at a time when OPEC+ itself is struggling to manage the quotas within its own, from recalcitrant members like Iraq to surprising flouters like the UAE.

Mathematically at least, the ceiling for restored Libyan production is likely in the 300-400,000 b/d range, given that Haftar is still in control of the main fields and ports. That does not seem like much, but it will give cause for dissent within OPEC on the exemption of Libya from the supply deal. Libya will resist being roped into the supply deal, and it has justification to do so. But freeing those Libyan volumes into a world market that is already suffering from oversupply and weak prices will be undermining in nature. The equation has changed, and the Libyan situation can no longer be taken for granted.

Market Outlook:

  •  Crude price trading range: Brent – US$41-43/b, WTI – US$39-41/b
  • While a resurgence in Covid-19 cases globally is undermining faith that the ongoing oil demand recovery will continue unabated, crude markets have been buoyed by a show of force by Saudi Arabia and US supply disruptions from Tropical Storm Sally
  • In a week when Iraq’s OPEC+ commitments seem even more distant with signs of its crude exports rising and key Saudi ally the UAE admitting it had ‘pumped too much recently’, the Saudi Energy Minister issued a force condemnation on breaking quotas
  • On the demand side, the IEA revised its forecast for oil demand in 2020 to an annual decline of 8.4 mmb/d, up from 8.1 mmb/d in August, citing Covid resurgences
  • In a possible preview of the future, BP issued a report stating that the ‘relentless growth of oil demand is over’, offering its own vision of future energy requirements that splits the oil world into the pro-clean lobby led by Europeans and the prevailing oil/gas orthodoxy that remains in place across North America and the rest of the world

END OF ARTICLE

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September, 22 2020
Average U.S. construction costs for solar and wind generation continue to fall

According to 2018 data from the U.S. Energy Information Administration (EIA) for newly constructed utility-scale electric generators in the United States, annual capacity-weighted average construction costs for solar photovoltaic systems and onshore wind turbines have continued to decrease. Natural gas generator costs also decreased slightly in 2018.

From 2013 to 2018, costs for solar fell 50%, costs for wind fell 27%, and costs for natural gas fell 13%. Together, these three generation technologies accounted for more than 98% of total capacity added to the electricity grid in the United States in 2018. Investment in U.S. electric-generating capacity in 2018 increased by 9.3% from 2017, driven by natural gas capacity additions.

Solar
The average construction cost for solar photovoltaic generators is higher than wind and natural gas generators on a dollar-per-kilowatt basis, although the gap is narrowing as the cost of solar falls rapidly. From 2017 to 2018, the average construction cost of solar in the United States fell 21% to $1,848 per kilowatt (kW). The decrease was driven by falling costs for crystalline silicon fixed-tilt panels, which were at their lowest average construction cost of $1,767 per kW in 2018.

Crystalline silicon fixed-tilt panels—which accounted for more than one-third of the solar capacity added in the United States in 2018, at 1.7 gigawatts (GW)—had the second-highest share of solar capacity additions by technology. Crystalline silicon axis-based tracking panels had the highest share, with 2.0 GW (41% of total solar capacity additions) of added generating capacity at an average cost of $1,834 per kW.

average construction costs for solar photovoltaic electricity generators

Source: U.S. Energy Information Administration, Electric Generator Construction Costs and Annual Electric Generator Inventory

Wind
Total U.S. wind capacity additions increased 18% from 2017 to 2018 as the average construction cost for wind turbines dropped 16% to $1,382 per kW. All wind farm size classes had lower average construction costs in 2018. The largest decreases were at wind farms with 1 megawatt (MW) to 25 MW of capacity; construction costs at these farms decreased by 22.6% to $1,790 per kW.

average construction costs for wind farms

Source: U.S. Energy Information Administration, Electric Generator Construction Costs and Annual Electric Generator Inventory

Natural gas
Compared with other generation technologies, natural gas technologies received the highest U.S. investment in 2018, accounting for 46% of total capacity additions for all energy sources. Growth in natural gas electric-generating capacity was led by significant additions in new capacity from combined-cycle facilities, which almost doubled the previous year’s additions for that technology. Combined-cycle technology construction costs dropped by 4% in 2018 to $858 per kW.

average construction costs for natural gas-fired electricity generators

Source: U.S. Energy Information Administration, Electric Generator Construction Costs and Annual Electric Generator Inventory

September, 17 2020
Fossil fuels account for the largest share of U.S. energy production and consumption

Fossil fuels, or energy sources formed in the Earth’s crust from decayed organic material, including petroleum, natural gas, and coal, continue to account for the largest share of energy production and consumption in the United States. In 2019, 80% of domestic energy production was from fossil fuels, and 80% of domestic energy consumption originated from fossil fuels.

The U.S. Energy Information Administration (EIA) publishes the U.S. total energy flow diagram to visualize U.S. energy from primary energy supply (production and imports) to disposition (consumption, exports, and net stock additions). In this diagram, losses that take place when primary energy sources are converted into electricity are allocated proportionally to the end-use sectors. The result is a visualization that associates the primary energy consumed to generate electricity with the end-use sectors of the retail electricity sales customers, even though the amount of electric energy end users directly consumed was significantly less.

U.S. primary energy production by source

Source: U.S. Energy Information Administration, Monthly Energy Review

The share of U.S. total energy production from fossil fuels peaked in 1966 at 93%. Total fossil fuel production has continued to rise, but production has also risen for non-fossil fuel sources such as nuclear power and renewables. As a result, fossil fuels have accounted for about 80% of U.S. energy production in the past decade.

Since 2008, U.S. production of crude oil, dry natural gas, and natural gas plant liquids (NGPL) has increased by 15 quadrillion British thermal units (quads), 14 quads, and 4 quads, respectively. These increases have more than offset decreasing coal production, which has fallen 10 quads since its peak in 2008.

U.S. primary energy overview and net imports share of consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

In 2019, U.S. energy production exceeded energy consumption for the first time since 1957, and U.S. energy exports exceeded energy imports for the first time since 1952. U.S. energy net imports as a share of consumption peaked in 2005 at 30%. Although energy net imports fell below zero in 2019, many regions of the United States still import significant amounts of energy.

Most U.S. energy trade is from petroleum (crude oil and petroleum products), which accounted for 69% of energy exports and 86% of energy imports in 2019. Much of the imported crude oil is processed by U.S. refineries and is then exported as petroleum products. Petroleum products accounted for 42% of total U.S. energy exports in 2019.

U.S. primary energy consumption by source

Source: U.S. Energy Information Administration, Monthly Energy Review

The share of U.S. total energy consumption that originated from fossil fuels has fallen from its peak of 94% in 1966 to 80% in 2019. The total amount of fossil fuels consumed in the United States has also fallen from its peak of 86 quads in 2007. Since then, coal consumption has decreased by 11 quads. In 2019, renewable energy consumption in the United States surpassed coal consumption for the first time. The decrease in coal consumption, along with a 3-quad decrease in petroleum consumption, more than offset an 8-quad increase in natural gas consumption.

EIA previously published articles explaining the energy flows of petroleum, natural gas, coal, and electricity. More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.

Principal contributor: Bill Sanchez

September, 15 2020