Could a production rebound suppress crude’s recovery? The oil market lies in wait of the outcome as the U.S. sends more of its rigs back to work after an increase to $50 per barrel.
On Monday, Morgan Stanley commented that “all eyes” are on the response from the US and the trend in rig numbers for the rest of the year. Last week, drillers put nine machines back into operation. Baker Hughes, which has recorded this data since 1944, reports that this is the biggest gain since December and only the second addition this year.
Angus Nicholson, market analyst at IG Ltd. In Melbourne, said in a phone interview, “The biggest concern for prices going forward is whether the rig count will continue to pick up over the next few weeks,” he continued, “if we start to see a trend—three to four weeks of increases—there will be heightened concerns in the market.” He also said there might be a pullback to $40 or lower per barrel.
Oil has risen from a 12-year low earlier in the year. This increase has brought it to the “sweet spot” for shale output which Citigroup Inc. puts between $50 and $70 per barrel. Prices have grown despite some disruptions to the global supply. A decrease in U.S. production has 500,000 barrels cut from the market each day, and the rig count has reached the lowest level since 2009.
Adam Longson, a Morgan Stanley analyst, said in a note Monday that the rig count doesn’t answer to price signals immediately and that there is usually a delay of anywhere from three to four months. The Morgan Stanley report also mentioned that there is some proof drilling will return to the best acreage, but that more than just an increase in drilling is needed to alter the outlook.
If the market sees an improvement in shale supply, it could help upend the drop in U.S. production for 2016. In April, Richard Westerdale said that drilled, uncompleted wells could very well bring 500,000 barrels to the market each day. Westerdale is a director of policy analysis with the U.S. State Department’s Bureau of Energy Resources.
Just last week in Vienna, the oil minister of Saudi Arabia said that prices need to exceed $50 per barrel for crude supplies to make a return. Minister Khalid Al-Falih made this statement at the semiannual meeting of the Organization of Petroleum Exporting Countries (OPEC). He went on to say that the Kingdom of Saudi Arabia does not oppose shale production and in fact, hopes to see more. However, Al-Falih said that production would have to be conducted at levels that don’t disturb the market’s stability.
It is estimated by the Energy Information Administration that U.S. production will average 8.6 million barrels per day in 2016. This is down from the 9.4 million barrels that were produced daily in 2015. Through May 27, output has decreased to 8.74 million barrels per day. Weekly EIA data reports that this is the lowest output since September 2014.Article written by HEI contributor Briana Steptoe.
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According to the Nigeria National Petroleum Corporation (NNPC), Nigeria has the world’s 9th largest natural gas reserves (192 TCF of gas reserves). As at 2018, Nigeria exported over 1tcf of gas as Liquefied Natural Gas (LNG) to several countries. However domestically, we produce less than 4,000MW of power for over 180million people.
Think about this – imagine every Nigerian holding a 20W light bulb, that’s how much power we generate in Nigeria. In comparison, South Africa generates 42,000MW of power for a population of 57 million. We have the capacity to produce over 2 million Metric Tonnes of fertilizer (primarily urea) per year but we still import fertilizer. The Federal Government’s initiative to rejuvenate the agriculture sector is definitely the right thing to do for our economy, but fertilizer must be readily available to support the industry. Why do we import fertilizer when we have so much gas?
I could go on and on with these statistics, but you can see where I’m going with this so I won’t belabor the point. I will leave you with this mental image: imagine a man that lives with his family on the banks of a river that has fresh, clean water. Rather than collect and use this water directly from the river, he treks over 20km each day to buy bottled water from a company that collects the same water, bottles it and sells to him at a profit. This is the tragedy on Nigeria and it should make us all very sad.
Several indigenous companies like Nestoil were born and grown by the opportunities created by the local and international oil majors – NNPC and its subsidiaries – NGC, NAPIMS, Shell, Mobil, Agip, NDPHC. Nestoil’s main focus is the Engineering Procurement Construction and Commissioning of oil and gas pipelines and flowstations, essentially, infrastructure that supports upstream companies to produce and transport oil and natural gas, as well as and downstream companies to store and move their product. In our 28 years of doing business, we have built over 300km of pipelines of various sizes through the harshest terrain, ranging from dry land to seasonal swamp, to pure swamps, as well as some of the toughest and most volatile and hostile communities in Nigeria. I would be remiss if I do not use this opportunity to say a big thank you to those companies that gave us the opportunity to serve you. The over 2,000 direct staff and over 50,000 indirect staff we employ thank you. We are very grateful for the past opportunities given to us, and look forward to future opportunities that we can get.
Headline crude prices for the week beginning 15 July 2019 – Brent: US$66/b; WTI: US$59/b
Headlines of the week
Unplanned crude oil production outages for the Organization of the Petroleum Exporting Countries (OPEC) averaged 2.5 million barrels per day (b/d) in the first half of 2019, the highest six-month average since the end of 2015. EIA estimates that in June, Iran alone accounted for more than 60% (1.7 million b/d) of all OPEC unplanned outages.
EIA differentiates among declines in production resulting from unplanned production outages, permanent losses of production capacity, and voluntary production cutbacks for OPEC members. Only the first of those categories is included in the historical unplanned production outage estimates that EIA publishes in its monthly Short-Term Energy Outlook (STEO).
Unplanned production outages include, but are not limited to, sanctions, armed conflicts, political disputes, labor actions, natural disasters, and unplanned maintenance. Unplanned outages can be short-lived or last for a number of years, but as long as the production capacity is not lost, EIA tracks these disruptions as outages rather than lost capacity.
Loss of production capacity includes natural capacity declines and declines resulting from irreparable damage that are unlikely to return within one year. This lost capacity cannot contribute to global supply without significant investment and lead time.
Voluntary cutbacks are associated with OPEC production agreements and only apply to OPEC members. Voluntary cutbacks count toward the country’s spare capacity but are not counted as unplanned production outages.
EIA defines spare crude oil production capacity—which only applies to OPEC members adhering to OPEC production agreements—as potential oil production that could be brought online within 30 days and sustained for at least 90 days, consistent with sound business practices. EIA does not include unplanned crude oil production outages in its assessment of spare production capacity.
As an example, EIA considers Iranian production declines that result from U.S. sanctions to be unplanned production outages, making Iran a significant contributor to the total OPEC unplanned crude oil production outages. During the fourth quarter of 2015, before the Joint Comprehensive Plan of Action became effective in January 2016, EIA estimated that an average 800,000 b/d of Iranian production was disrupted. In the first quarter of 2019, the first full quarter since U.S. sanctions on Iran were re-imposed in November 2018, Iranian disruptions averaged 1.2 million b/d.
Another long-term contributor to EIA’s estimate of OPEC unplanned crude oil production outages is the Partitioned Neutral Zone (PNZ) between Kuwait and Saudi Arabia. Production halted there in 2014 because of a political dispute between the two countries. EIA attributes half of the PNZ’s estimated 500,000 b/d production capacity to each country.
In the July 2019 STEO, EIA only considered about 100,000 b/d of Venezuela’s 130,000 b/d production decline from January to February as an unplanned crude oil production outage. After a series of ongoing nationwide power outages in Venezuela that began on March 7 and cut electricity to the country's oil-producing areas, EIA estimates that PdVSA, Venezuela’s national oil company, could not restart the disrupted production because of deteriorating infrastructure, and the previously disrupted 100,000 b/d became lost capacity.