“Keep it in the ground’ has been the mantra of environmental groups worried about climate change. But it could be low oil prices and the lack of competitiveness of Canada’s oil sands that keep those reserves in the ground.”
Nick Cunningham of Oilprice.com
On Thursday last week NY oil prices fell to near the bottom of the $52.50-$54.50 trading range they have been stuck in since early January. On Friday a falling dollar pushed prices higher to close at $53.33 in New York and $55.22 in London. There was much discussion last week about the status of OPEC’s production cuts and how they were being achieved. Much of the cut seems to be coming from the Saudis whose production was down by 90,000 b/d during February to 9.78 million. Overall OPEC production, however, only fell by 65,000 b/d during February. Ecuador, Venezuela, Angola, the UAE, and Iraq are still well below their targets under the production cut agreement. The Saudis finished February with a production cut of 157 percent of their target which was enough to bring all of OPEC close to its goal. The non-OPEC exporters participating in the cuts seemed to have implemented around 66 percent of their targeted cut.
“If you can get anywhere near the cost target [$100 per kilowatt-hour of energy storage] then you can change the world. It becomes cost effective to put storage batteries in so many places – this research puts us one step closer to reaching that target.”
Michael Aziz, lead researcher in a Harvard battery project and a professor of materials and energy technologies
Oil prices moved to the top of their trading range last week as many traders believe prices are about to move higher. Even though the EIA reported that US oil stocks rose the week before last by 600,000 barrels to an all-time high of 518 million barrels, some traders are saying that we have reached the end of the buildup in US crude stocks which has been going on for the last two months. A drop in US crude imports is being interpreted as the result of the OPEC production cut. Many are expecting that US crude inventories will continue to fall on lower imports and increased US crude exports, which are now up to circa 1.2 million b/d, the highest on record. The surge in exports of crude seems to be due to lower availability of OPEC crude in Asia, and the gap between Brent and US crude prices which have averaged $2.24 in recent trading.
“There has been no recovery in offshore and international oil and gas activity with the price of crude in the $50 range … for companies with significant exposure, offshore and internationally, the downturn in the oil and gas industry is not over, and job cuts may continue.”
John Graves, CEO of Graves & Co.
Oil prices have moved little since they jumped from the mid-$40s to the mid-$50s in late November. Last week was no exception. OPEC hints about extending the price cuts beyond mid-year supported prices last week despite several indicators which suggested that the surplus may continue and it may be difficult to rebalance the markets in the short term.
“Fossil fuels may lose 10 percent of market share to PV and EVs within a single decade. This may not sound much but it can be the beginning of the end once demand starts to decline.”
Carbon Tracker Initiative
Oil prices rebounded last week as the IEA confirmed that the ten OPEC members obligated to cut oil production are making good progress and obtained 91 percent of their goal by the end of January. The agency also reported that OECD crude stocks fell by nearly 800,000 b/d in the 4th quarter of 2016 although stocks continued to grow in China and other emerging economies. If OPEC and the other production cutters can maintain this level of cuts for the next five months, the IEA says that global stockpiles should drop by about 600,000 b/d during the first half of this year. This was the kind of news that many oil speculators wanted to hear. Hedge fund bets on higher oil prices have surged in recent weeks as many markets participants say they are expecting higher oil prices later this year.
“Oilfield service companies have pressed fresh (green) blood into service amidst a vigorous ramp up in activity, and failure/HSE rates have already felt the negative impact. Not only is labor a bottleneck, it is shaping up to be the primary bottleneck in the early stages of the [North American] recovery…E&P’s will throw enough money at the North American labor problem to bring the sector back to equilibrium, sacrificing capital efficiency to hit production targets.”
James West, a senior managing director at Evercore ISI
With the advent of the Trump administration and Republican control of the Congress, the world oil situation seems likely to become more uncertain than usual. In the last two weeks, the new President has signed numerous executive orders that will have an impact on the oil industry in coming years. The President and the Republicans in Congress will soon have done everything they can to launch a new oil boom by reducing environmental and financial regulations; permitting whatever pipelines the oil industry wants to build; and opening federally-controlled property and offshore areas for drilling. Republicans have long held that America would be energy independent were it not for the restrictions unfairly placed on the industry. While these measures may eventually spur more drilling, for the time being, however, oil prices and the demand for oil will still determine investment decisions. Some are questioning whether the Keystone XL will be built in the near future given the relatively low oil prices and the shale oil boom that have become important since the pipeline was planned.
“The blunt reality for the Trump administration is that there is no way to make pipeline approvals conditional on the use of U.S. steel without undermining the goal of fair market access for U.S. exporters.”
John Kemp, Reuters energy columnist
Prices moved slightly higher last week as the markets continued to watch the decline in oil production by most OPEC members and a few other exporters interested in seeing oil move higher. The evidence continues to accumulate that progress is being made in achieving OPEC’s 1.8 million b/d cut. In addition to a number of OPEC luminaries who assured the world that the cuts are happening and that the markets would be balanced shortly, tanker-tracker Petro-Logistics said that its information indicates that OPEC will reduce its supply by 900,000 b/d in January. This number does not include 11 non-OPEC members that are also supposed to be cutting production 600,000 b/d. The CEO of Petro-Logistics which has been monitoring tanker movements for 30 years said this suggests “a high level of compliance thus far.”
“The basic feature of the petroleum industry … that matters most is that it is not self-adjusting.” The industry has “an inherent tendency to extreme crises” and “hectic prosperity is followed all too swiftly by complete collapse.”
Paul Frankel, economist, “Essentials of Petroleum,” 1946 (from energy columnist John Kemp)
Three themes dominated the oil news last week. 1. Will OPEC with Russian help succeed in cutting production enough to rebalance the oil markets and move prices significantly higher? 2. Will the US oil industry rebound so vigorously as to offset the OPEC cuts? 3. And finally what will the be the impact of all the new energy policies the Trump administration is beginning to implement?
“We must break from the recent past [and] re-examine the regulatory onslaught of the last few years that has proposed or imposed some 145 regulations and other executive actions on our industry, and instead work to implement smart energy regulations.”
Jack Gerard, President, American Petroleum Institute
For the last month oil prices have been stuck in a trading range in New York of between $52 and $54 a barrel. In London, oil has been trading two or three dollars higher. After a 30 percent jump in the last six weeks of 2016 in response to the OPEC production freeze, prices have stabilized as the markets wait to see the degree of compliance with the pledged production cuts. It may take several months to establish a clear trend as so many nations are involved in the cut. While a few countries, particularly the US, publish oil production and inventory statistics weekly, others do a poor job of collecting statistics. A few release incorrect production numbers they know to be untrue for a variety of political reasons.
“California can make a significant contribution to advancing the cause of dealing with climate change, irrespective of what goes on in Washington. I wouldn’t underestimate California’s resolve if everything moves in this extreme climate denial direction. Yes, we will take action.”
California Governor Jerry Brown
Most of the discussion last week focused on the year just past and what 2017 will bring. Oil prices barely moved during the holiday week closing out the year at $53.72 in New York and $56.82. During 2016, however, US futures closed up about 45 percent for the year and London about 52 percent. It was quite the year for the oil industry with prices ranging from $30 to $55 a barrel; the election of fossil-fuel-friendly Donald Trump to the US presidency; and the OPEC/Russia production cut agreement deemed responsible for the record price rebound during the year.
For the last two weeks, oil prices have hovered around $53 a barrel in New York, and a couple of dollars higher in London. Optimism that an agreement among the major oil producers will actually lead to a 1.8 million b/d production cut during 2017 is being balanced off by a stronger dollar, the revival of Libyan and Nigerian oil production, and a steady increase in the US shale-oil rig count.
“If we stay (at $55 a barrel), the world’s biggest oil companies start to make money again. If we go back down to $50 (or lower) in 2017…then those companies are in the negative territory and they go back into survival mode where they have been in the last two years.”
Angus Rodger, Wood Mackenzie’s research director for upstream oil and gas
“Significant advances in battery technology, financial support from governments, regulations and values of Millennials will be key factors leading to increases in electric vehicle adoption.”
Jim Burkhard, energy researcher for IHS Markit
On Saturday, OPEC and non-OPEC oil exporters agreed to an additional 562,000 b/d non-OPEC production cut in addition to the 1.2 million b/d cut that OPEC agreed on last week. At the meeting, Mexico pledged to cut 100,000 b/d, Azerbaijan 35,000 b/d, Oman 40,000 b/d, and Kazakhstan 20,000 b/d after strong diplomatic pressure was applied. Some analysts expressed doubt as to whether the cuts pledged by Mexico and Azerbaijan are valid reductions as their production was on course to decline by that much anyway next year due to natural depletion. The Kazakh cut, however, was seen as important as the country was due to increase production in 2017 by 160,000 b/d as its giant new oil field came in production.
“The OPEC drama is behind us (for now) with the cartel and its friends agreeing to a peak supply. But the topic that’s talked about behind the scenes in Viennese cafes is that of ‘peak demand.’ Every pundit has an opinion about when peak demand will happen. Articles, podcasts, and snappy videos mostly debate in what year our 150-year addiction to the product will begin to wane. Some think it’s as early as 2020; the authoritative International Energy Agency conjectures 2040.”
Peter Tertzakian, Chief Energy Economist and Managing Director, ARC Financial Corp.
The agreement between OPEC and Russia came as a surprise for most. Until the Vienna meeting started, there was much pessimism that a deal would be reached and all indications had been that negotiations were deadlocked over the issue of who would cut by how much. The breakthrough seems to have come when Moscow changed its position from “freeze but no production cut” to agreeing to reduce output by 300,000 b/d from the 11.2 million b/d it reached in November. This change, plus the agreement by Baghdad to cut oil production by 210,000 b/d, was enough to convince the Saudis to cut by 486,000 b/d and the other Gulf Arab states would join in for at total Gulf Arab cut of 786,000 b/d. Libya, Nigeria, and Indonesia were left out of the agreement and Tehran was allowed to increase production by 90,000 b/d to 3.8 million – somewhat short of their 4 million b/d goal. Given the bad relations between Riyadh and Tehran, allowing the Iranians to continue increasing production was the toughest part of the deal for the Saudis to swallow.
“People do tend to look at the total volumes [of conventional oil] being added in recent years and conclude that we are running out of subsurface potential, I find that unlikely. It’s our view that conventional exploration is a perfectly viable growth and renewal option, particularly for those that are good at it. In reality, a lot of exploration’s recent decline is nothing more than the fact that it’s drilling fewer wells in the downturn.”
Andrew Latham, head of exploration research at Wood Mackenzie
