So President Trump has pulled America out of the shackles of the Paris Agreement. Back in December 2015, 196 countries of the United Nations adopted the agreement, requiring them to tackle climate change through emissions cuts. Under the previous administration, the US was an enthusiastic proponent of the measure, aiming to reduce its emissions by 23-25% through 2025. This week, President Trump, joins Syria and Nicaragua as the three lone holdouts. Syria is in the middle of a civil war. Nicaragua didn’t think the agreement went far enough. Russia supports the agreement. Even North Korea has adopted it!
The logic behind Trump’s decision can be debated ad infinium. In the dramatic ebb and flow of his administration, it now appears that the right-wing led faction has asserted itself over the argument for what is best for America. There have been observations that Trump’s decision was a petulant one in the wake of what he perceived as disrespect as he met the leaders of the European Union and the G7 last week. But whatever the actual reasons, the reality is that the US no longer wants to be bound to the (voluntary) targets.
President Trump wants to free the US to drill for oil anywhere and burn coal as much as it wants, to grow its economy and create jobs. Good news for medium and small-sized drillers, who may now face fewer costly environmental regulations. It is also nectar to the ears of American mining towns, hoping for a return for coal, his strong voter base. The mining towns of the Appalachia were instrumental in handing Trump the Presidency.
“I was elected to represent the citizens of Pittsburgh, not Paris,” Mr. Trump said, on Thursday, calling the decision a “reassertion of our sovereignty.” Mr. Trump cited disadvantages to US workers and the blocking of the development of “clean coal” technologies as reasons for pulling the out of the agreement, which is aimed at curbing greenhouse-gas emissions, believed to be a key driver of climate change, the Wall Street Journal reports.
But there are some risks associated with this new freedom. What Trump has done will unleash market forces that may minimise any clear economic advantage in the long term. Amongst other things, further increased oil and gas supply in the US, will push crude prices down. OPEC may just decide that it is futile to continue their supply cuts, and revert to a war for market share, driving prices further down again. And there will be so much gas sloshing around America that coal will continue to decline; not because it is a dirty fuel, but because burning it is too expensive.
Ironically, the heads of America’s largest energy firms (including ExxonMobil and ConocoPhillips) are all committed to it – recognising that energy now needs to include clean energy. American states are in rebellion. California, New York and Washington states – collectively the fourth largest economy in the world – have formed a pact to adhere to the Paris targets within their states. Some 11 American state governors and 71 city mayors - including Republicans – are defying their President to stick to the Paris climate accord emission standards. Across the pond, the EU has agreed closer cooperation with China to ensure the Paris Agreement does not collapse. However it is worth noting that it will take the US four years to pull out from the already implemented framework, so any effect will be in the long term.
Will the US be no longer a partner in global climate initiatives? It is worth noting that the US is not totally against any future climate accords but just a better deal (for itself). “President Trump said he would begin negotiations to either re-enter the Paris agreement under new terms or craft a new deal that he judges fair to the U.S. and its workers,” the Wall Street Journal reports. In response to the announcement from the White House, recently elected President Emmanuel Macron of France issued a joint statement with the leaders of Germany and Italy saying the accord “cannot be renegotiated, and there is no plan B, as there is no planet B”. This will be a mistake. The US is currently the world’s second largest greenhouse gas emitter, and to exclude it from any future climate discussion would be like ignoring the elephant in room. The world needs real leadership on how it can save itself.
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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.