“The key question for the future of the oil market is for how long can a surge in US shale supplies make up for the slow pace of growth elsewhere in the oil sector.”
–Fatih Birol, the IEA’s executive director
Oil prices fell again last week on concerns that the OPEC production cut will not be enough to offset increasing US shale oil production. The reopening of two Libyan oilfields which could bring Libyan production back to the vicinity of 700,000 b/d added to the pressure on oil prices. At week’s close, New York futures were below $50 a barrel with London a couple of dollars higher, both down about 8 percent from their April peak of $54-$55 a barrel.
“Global oil inventories are falling because of OPEC and non-OPEC production cuts, but the road to market balance will be long.”
–Arthur Berman, Consulting Geologist
Last week, oil prices underwent their biggest weekly decline in a month as the markets lost confidence in OPEC’s ability to reduce the global oil surplus in the near future. The move was supported by reports that a glut was developing in the physical oil market in the North Sea area as lower Asia purchases, increased shipments of US crude to the EU, and more supplies coming out of storage all served to drive down prices. At week’s end, US futures were once again trading below $50 a barrel and London’s Brent below $52.
“The shortcoming of oil replacement by the drill bit has been quite drastic … Discoveries are not keeping up with production.”
Per Magnus Nysveen, head of analysis, Rystad Energy. Last year, 10 billion barrels of oil were discovered, around one third of global consumption, including well-appraisal activity, said Nysveen. He added that supply could fall short by up to 2 million barrels per day within seven to eight years.
After climbing steadily since March 27th, oil prices stabilized at the $53-55 level late last week. As usual, prices got a boost from various oil minister’s comments about how well they were doing in meeting their production cut goals and how they are considering extending the cuts until the end of the year. The monthly OPEC report shows that the cartel’s production jumped by about 1.2 million b/d after production cuts were first seriously discussed last fall, and then fell about the same amount after cuts started in January. The net result was to leave OPEC’s production about where it was through most of 2016.
“It’s clear that wind energy’s time has come. My message is a very simple one: our government is committed to addressing climate change, and we know that wind power will play a critical role in those efforts.”
Canadian Natural Resources Minister Jim Carr.
After falling on Monday on the news that Libya was resuming production from its largest oilfield that was shut down the previous week, oil prices moved higher for the next three days on hopes that the OPEC production cut was having the desired effect. Some believe that oil traders have been too busy watching the well-publicized build in US crude stocks, while excess inventories in other parts of the world are shrinking away unnoticed. Futures prices, which were about $48 a barrel the US the week before last, climbed to over $51 a barrel by Thursday.
“My administration is putting an end to the war on coal…The miners are coming back.”
US President Donald Trump, as he signed the “energy independence” executive order
“I suggested that (Trump) temper his expectations. He can’t bring them back.”
Robert Murray, founder and CEO of Murray Energy, the biggest US coal company
Crude prices rebounded sharply last week erasing nearly half the $7-8 selloff that began in early March. The March price drop came on the consensus that increasing crude inventories and ever higher rig counts would offset the 1.8 million production cut that OPEC was trying to orchestrate. At the close Friday, New York futures were at $50.85, and London was at $53.83.
“Overall the idea that we have to go into the Arctic to find new resources I think has been dispelled by the enormous cheap, easier to produce and quicker time-to-market resources in the Permian onshore US. We think there is almost no rationale for Arctic exploration. Immensely complex, expensive projects like the Arctic we think can move too high on the cost curve to be economically doable.”
Michele Della Vigna, commodity equity business unit leader in EMEA at Goldman Sachs
Last week oil prices fell for the third time in a month, closing in New York at just below $48 a barrel. Increasing US crude inventories remain the chief motivation for the price drop as many traders now see higher US production as largely offsetting the OPEC/NOPEC production cuts. OPEC and its allies met in Kuwait last week to consider the situation and to talk about extending the cuts until the end of the year. In the meantime, the US rig count continues to grow amid some doubts as to whether all the new drilling will result in a concomitant amount of production.
–David Houseknecht, a senior research geologist at the U.S. Geological Survey, says the Smith Bay discovery in Alaska seems to have incredible potential. Then he adds: “But it’s the last one you’d want to bet your retirement money on.” (3/15)
After a quick drop of $3-4 a barrel the week before last, oil prices steadied last week as the markets contemplated just how effective the OPEC/NOPEC production freeze will be in the short term. Speculators had enthusiastically embraced the production freeze when it was announced late last year and drove open interest in futures to record highs. The cuts, however, did not come fast enough or be deep enough to offset increasing oil production from other countries and lower demand. As one important trader put it, “The OPEC cuts were good enough to prevent a repeat of the glut of last year, but it’s a different story if you want to have oil at $60 or $70.” For now, the physical oil market continues to indicate an oversupply situation.
“I want the states to see the EPA as a friend, as a partner, and not an adversary. Regulators ought not to use their authority to pick winners and losers.”
EPA Administrator Scott Pruitt
U.S. crude oil output “could go pretty high. But it’s going to have to be done in a measured way, or else we kill the market.”
Harold Hamm, CEO Continental Resources
“As an industry, we’re not investing enough for supply growth to keep up with demand growth.” Decreased spending, particularly in the resource-rich (but expensive) offshore, may cause supply to plateau or decline as global demand is rising, Hess said. A supply deficit is possible as soon as three years, and within five, when the reductions in capital investments should begin to show up in falling offshore supply, Hess said. “We’re not investing enough to keep the offshore investment pipeline full.”
John Hess, CEO Hess oil
“People might have drilled [the Eagle Ford} up very fast in the last two to three years, and they had to because they were measured on multiples of growth and had to grow very quickly. They probably regret it because they learned so much more about how to complete these wells more efficiently today than even what we knew two or three years ago.”
Ryan Lance, CEO ConocoPhillips
Last week was the most active in many months as oil prices, widely believed to be stuck in a narrow trading range for the foreseeable future, plunged some 8 percent in the last three days of trading. The price decline was triggered by an unexpected build of 8.2 million barrels in US crude stocks along with growing concern about increases in the US oil rig count. The week was highlighted by the annual “CERAWeek” conference in Houston which was attended by oil ministers and CEOs of oil companies from around the world. Many took advantage of the meeting to express opinions or issue warnings about where the global oil industry was headed.
“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
