At the beginning of the week oil prices continued to rise, nearing to $50/bbl. The advance was mainly supported by supply disruptions in Canada and Nigeria. U.S. bank Goldman Sachs said the market had flipped into a deficit. However, on Thursday oil prices fell on the back of rising U.S. crude inventories and a stronger dollar. Oil production in the US continued to drop in line with the oil rig count. According to analysts, oil is likely to hover around $50 per barrel over the rest of 2016. Most market experts expect market to be more balanced in the second half of the year and in the 2017.
Crude prices started the week, hitting new highs for the 2016 amid supply disruptions around the world. In Canada, more than 1 million barrels per day (mb/d) of supply is still offline due to oiled wildfire. The outage is temporary, but companies still cannot restart operations. This weekwildfire shifted north, prolonging oil sands shutdown.
In Nigeria, attacks against oil infrastructure in the Niger Delta forced oil companies to stop the production in the region, which caused more than 1 mb/d output cut. According to Energy Aspects, crude oil output in Nigeria is at a million barrels per day, hitting a more than 20-year low.Usually the country pumps 2.2 mb/d.
Bullish sentiment was supported by Goldman Sachs report. On Monday, the bank, famous for its bearish forecasts, said that in May oil market had flipped into a deficitdriven by both sustained strong demand as well as sharply declining production. Goldman Sachs also said it expects U.S. crude to trade as high as $50/bbl in the second half of 2016, although it cautioned that price rises would be modest in 2017 as the market would return to surplus.
However, oil prices fell on Thursday on the back of rising U.S. crude inventories and a stronger dollar. According to the U.S. Energy Information Administration (EIA), US crude oil stockpiles rose by 1.31 million barrel to 541.29 million barrelsin the week to May 13, compared with analysts' expectations for a decrease of 2.8 million barrels and a 1.1 million-barrel drawdown reported on Tuesday by the American Petroleum Institute.
Meanwhile, the US dollar strengthenedfollowing the release of Federal Reserve meeting minutes that showed policymakers could raise interest rates in June. A stronger greenback makes dollar commodities including oil more expensive for holders of other currencies.
Oil production in the US continued to drop in line with the oil rig count. As shale oil producers go bankrupt, U.S. crude output falls to 8.79 mb/d, down from a peak of over 9.6 mb/d last year. in the meantime,US oil rig count dropped by 10 to 318, a new multi-year low, driller Baker Hughes reported last Friday.
Most market analysts expect market to be more balanced in the second half of this year and in 2017. According to the forecasts, oil glut is likely to narrow as demand is steady and supply drops off. The International Energy Agency estimates that the world is dealing with a supply surplus of 1.3 mb/d right now, which should last through the end of the second quarter. By the third and fourth quarters, however, the surplus shrinks to just 0.2 mb/d. The U.S. EIA said oil supplies will exceed demand by 0.2 mb/d on average through 2017. At the same time, the EIA expects oil prices to rise to only $50/bbl next year.
Asia Market News
India became a hot spot.The Oil Market Report for May recently released by International Energy Agency underlines India as a star performer. Oil demand in the first quarter of 2016 in India was 400,000 bpd higher year on year, representing nearly 30% of the global increase. This provides further support for the argument that India is taking over from China as the main growth market for oil.
Meanwhile, Iraq has overtaken Saudi Arabia as India's largest oil supplier.In April, Iraq shipped to India some 960,700 b/d against Saudi Arabia's 787,700 b/d. That makes Iraq the largest crude supplier to the world's fastest growing economy. Iraq's oil exports to India rose by 41% in April and by 79% compared to a year ago. At the same time, Saudi Arabia's exports to India were down 14% in April over the same time last year.
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Headline crude prices for the week beginning 13 May 2019 – Brent: US$70/b; WTI: US$61/b
Headlines of the week
Midstream & Downstream
The world’s largest oil & gas companies have generally reported a mixed set of results in Q1 2019. Industry turmoil over new US sanctions on Venezuela, production woes in Canada and the ebb-and-flow between OPEC+’s supply deal and rising American production have created a shaky environment at the start of the year, with more ongoing as the oil world grapples with the removal of waivers on Iranian crude and Iran’s retaliation.
The results were particularly disappointing for ExxonMobil and Chevron, the two US supermajors. Both firms cited weak downstream performance as a drag on their financial performance, with ExxonMobil posting its first loss in its refining business since 2009. Chevron, too, reported a 65% drop in the refining and chemicals profit. Weak refining margins, particularly on gasoline, were blamed for the underperformance, exacerbating a set of weaker upstream numbers impaired by lower crude pricing even though production climbed. ExxonMobil was hit particularly hard, as its net profit fell below Chevron’s for the first time in nine years. Both supermajors did highlight growing output in the American Permian Basin as a future highlight, with ExxonMobil saying it was on track to produce 1 million barrels per day in the Permian by 2024. The Permian is also the focus of Chevron, which agreed to a US$33 billion takeover of Anadarko Petroleum (and its Permian Basin assets), only for the deal to be derailed by a rival bid from Occidental Petroleum with the backing of billionaire investor guru Warren Buffet. Chevron has now decided to opt out of the deal – a development that would put paid to Chevron’s ambitions to match or exceed ExxonMobil in shale.
Performance was better across the pond. Much better, in fact, for Royal Dutch Shell, which provided a positive end to a variable earnings season. Net profit for the Anglo-Dutch firm may have been down 2% y-o-y to US$5.3 billion, but that was still well ahead of even the highest analyst estimates of US$4.52 billion. Weaker refining margins and lower crude prices were cited as a slight drag on performance, but Shell’s acquisition of BG Group is paying dividends as strong natural gas performance contributed to the strong profits. Unlike ExxonMobil and Chevron, Shell has only dipped its toes in the Permian, preferring to maintain a strong global portfolio mixed between oil, gas and shale assets.
For the other European supermajors, BP and Total largely matched earning estimates. BP’s net profits of US$2.36 billion hit the target of analyst estimates. The addition of BHP Group’s US shale oil assets contributed to increased performance, while BP’s downstream performance was surprisingly resilient as its in-house supply and trading arm showed a strong performance – a business division that ExxonMobil lacks. France’s Total also hit the mark of expectations, with US$2.8 billion in net profit as lower crude prices offset the group’s record oil and gas output. Total’s upstream performance has been particularly notable – with start-ups in Angola, Brazil, the UK and Norway – with growth expected at 9% for the year.
All in all, the volatile environment over the first quarter of 2019 has seen some shift among the supermajors. Shell has eclipsed ExxonMobil once again – in both revenue and earnings – while Chevron’s failed bid for Anadarko won’t vault it up the rankings. Almost ten years after the Deepwater Horizon oil spill, BP is now reclaiming its place after being overtaken by Total over the past few years. With Q219 looking to be quite volatile as well, brace yourselves for an interesting earnings season.
Supermajor Financials: Q1 2019
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January, April, and May 2019 editions
In its May 2019 edition of the Short-Term Energy Outlook (STEO), EIA revised its price forecast for Brent crude oil upward, reflecting price increases in recent months, more recent data, and changing expectations of global oil markets. Several supply constraints have caused oil markets to be generally tighter and oil prices to be higher so far in 2019 than previous STEOs expected.
Members of the Organization of the Petroleum Exporting Countries (OPEC) had agreed at a December 2018 meeting to cut crude oil production in the first six months of 2019; compliance with these cuts has been more effective than EIA initially expected. In the January STEO, OPEC’s crude oil and petroleum liquids production was expected to decline by 1.0 million b/d in 2019 compared with the 2018 level, but EIA now forecasts OPEC production to decline by 1.9 million b/d in the May STEO.
Within OPEC, EIA expects Iran’s liquid fuels production and exports to also decline. On April 22, 2019, the United States issued a statement indicating that it would not reissue waivers, which previously allowed eight countries to continue importing crude oil and condensate from Iran after their waivers expired on May 2. Although EIA’s previous forecasts had assumed that the United States would not reissue waivers, the increased certainty regarding waiver policy and enforcement led to lower forecasts of Iran’s crude oil production.
Venezuela—another OPEC member—has experienced declines in production and exports as a result of recurring power outages, political instability, and U.S. sanctions. In addition to supply constraints that have already materialized in 2019, political instability in Libya may further affect global supply. Any further escalation in conflict may damage crude oil infrastructure or result in a security environment where oil fields are shut in. Either situation could reduce global supply by more than EIA currently forecasts.
In the May STEO, total OPEC crude oil and other liquids supply was estimated at 37.3 million b/d in 2018, and EIA forecasts that it will average 35.4 million b/d in 2019. EIA assumes that the December 2018 agreement among OPEC members to limit production will expire following the June 2019 OPEC meeting.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January, April, and May 2019 editions
U.S. crude oil and other liquids production is sensitive to changes in crude oil prices, taking into account a lag of several months for drilling operations to adjust. As crude oil prices have increased in recent months, so too have EIA’s domestic liquid fuels production forecasts for the remaining months of 2019.
U.S. crude oil and other liquids production, which grew by 2.2 million b/d in 2018, is forecast in EIA’s May STEO to grow by 2.0 million b/d in 2019, an increase of 310,000 b/d more than anticipated in the January STEO. In 2019, EIA expects overall U.S. crude oil and liquids production to average 19.9 million b/d, with crude oil production alone forecast to average 12.4 million b/d.
Relative to these changes in forecasted supply, EIA’s changes in forecasted demand were relatively minor. EIA expects that global oil markets will be tightest in the second and third quarters of 2019, resulting in draws in global inventories. By the fourth quarter of 2019, EIA expects that inventories will build again, and Brent crude oil prices will fall slightly.
More information about changes in STEO expectations for crude oil prices, supply, demand, and inventories is available in This Week in Petroleum.