Oil prices trended down last week to register the biggest loss in six weeks. At the close New York futures were at $49.27, down from $50.50 on Monday, and London was trading at $50.03. There was a brief rally during the week when US crude stocks came in lower than expected, but the week’s decline came mainly because traders lost faith that OPEC will be able to reach agreement on a production freeze.
“On the supply side, non-OPEC supply growth has reversed into declines due to major cuts in upstream investments and the steepening of decline rates. Without investment, that trend is likely to accelerate with the passage of time to the point that many analysts are now sending warning bells over future supply shortfalls and I am in that camp.”
Saudi Arabia’s Energy Minister Khalid al-Falih, at the Oil & Money Conference in London
“I don’t quite share the same view that others have that we are somehow on the edge of a precipice. I think because we have confirmed the viability of very large resource base in North America … that serves as enormous spare capacity in the system. It doesn’t take mega-project dollars, and it can be brought online much more quickly than a 3-4 year project. Never bet against the creativity and tenacity of our industry.”
Rex Tillerson, CEO ExxonMobil, at the Oil & Money conference
Except for a brief spike on Wednesday following the release of the EIA’s stocks report, oil prices were relatively stable last week trading around $51-52 a barrel in New York and London. Little price movement can be expected until the OPEC/Russia combine agrees on the nature of a production freeze, if any. Last week, there were mixed signals from Moscow as to just what their intentions regarding a freeze would be. With several countries expecting an exemption from any production cap, the bulk of the cut would likely fall on the Saudis and the other Gulf Arab states. The IEA is still saying that it does not expect the price of oil to go much above $60 in the near future as US shale oil producers would quickly flood the markets, offsetting any OPEC freeze of the size under discussion.
“We believe that the Barnett shale offers compelling evidence that technology improvements ultimately cannot overcome geology. We believe the implication is that shale is a scarcer resource than generally considered and thus are more constructive longer-term as the world must seek a more marginal barrel to match future demand growth. That is bullish for longer-term oil price.”
“Increasing lateral length hurts all horizontal well performance as frictional losses increase and in the Barnett, optimal well length was determined by balancing reduction of fixed costs with reduced incremental production. Even correcting for lateral length, Barnett wells got worse with time. The E&P narrative is that a revolution in technology of improved completions (more sand, water, clusters, geo-steering, landing, etc.) is pushing down the cost curve. Yet we fail to see it in the most complete data record we have.”
Bernstein Research
Last week started with a flurry of speculator optimism deriving from the World Energy Congress in Istanbul during which the Russians backed Saudi efforts to raise prices using a production freeze, the details of which have yet to be determined. For the rest of the week, oil prices moved little as various reports affecting the oil markets showed that it is unlikely that a significant OPEC/Russian production agreement can be negotiated. The week ended with New York futures settling at $50.35 and London at $51.95. Most analysts do not expect any significant change in prices until the fate of the freeze becomes known around the end of November. In the meantime, technical exchange meetings will take place to see if an agreement can be worked out. Recent and projected increases in OPEC production make it likely that considerably larger production cuts than were agreed to at Algiers will be necessary to move prices higher. Goldman Sachs warned last week that the planned Russian/OPEC production freeze is unlikely to be enough to rebalance the markets in 2017.
“This discovery [Smith Bay; see Briefs below] could be really exciting for the state of Alaska. It has the size and scale to play a meaningful role in sustaining the Alaskan oil business over the next three or four decades.”
Caelus CEO Jim Musselman.
“With an oil pipeline that is three-quarters empty, this is good news for the state of Alaska.”
Alaska Governor Bill Walker
The rally that began with the announcement of the OPEC production freezes in late September continued through Thursday last week. There is much skepticism that the tentative agreement, which will not be signed for another six weeks, will have a significant impact on global oil supplies. Crude prices slipped on Friday settling at $49.81 in New York and $51.93 in London. The 10-day rally now has taken prices up by about $5 a barrel. OPEC and the Russians have figured out that just talking about supply cuts can increase oil revenues substantially. A $5 price jump increases OPEC’s revenues from pumping roughly 33 million b/d by some $160 million a day.
(Bloomberg) If you ever find yourself at a cocktail party with a bunch of oil executives, one phrase is a guaranteed mood-killer: “reserve replacement.”Not merely awkward to say, it is the industry’s bogeyman. Because in a business chiefly concerned with getting stuff out of the ground, you need to replace that stuff pretty consistently unless you want to, well, eventually run out of stuff.Last year, the stuff-gathering did not go so well.
““There are few easy answers, but one thing is clear: the current trajectory of climatic change presents a strategically-significant risk to U.S. national security, and inaction is not a viable option.”
Statement by the Center for Climate and Security, a Washington-based think tank, signed by more than a dozen former senior military and national security officials
Oil prices continued to fall last week, closing Friday in New York at $43.39 and $46 in London. There was considerable news tending to push prices lower. OPEC and the IEA revised their forecasts for the next year and concluded that the imbalance in the oil markets would continue into 2017 vs. predictions that the gap would close this fall. This coupled with increased Iranian production; the possibility that Libya and Nigeria oil production will soon rebound; the report that Bakken shale oil production grew in July and EIA’s admission that US oil production is not falling as rapidly as forecast; all contributed to the weaker oil markets.
(Toronto Star) The much-anticipated rebalancing of oil markets appears to be a bit further away after the International Energy Agency revised its forecast, trimming its expectations for the growth in oil demand and citing near-record production by OPEC’s Middle East exporters.
The IEA said Tuesday that global oil demand is rising at a slower pace than expected, lowering its forecast by 100,000 barrels a day to an increase of 1.3 million barrels a day in 2016 and 1.2 million barrels a day in 2017.
“2017 is the sweet spot for integrated companies. It took two to three years to adjust to the drop in oil prices, and a lot of the efficiencies introduced in recent years will roll into 2017 when projects kick in and free cash flow will improve.”
Lydia Rainforth, analyst with Barclays
It was a volatile week, with New York futures starting out at around $43 a barrel on Monday, climbing to $47.50 on Thursday and then falling to close at $45.88 on Friday. The major event last week was the EIA status report, which came out on Thursday, reporting a near-record fall in the US crude stocks of 14.5 million barrels from the week before last. This was the largest weekly drop in 17 years and set off a short-lived buying frenzy. Traders ignored the impact of tropical storm Hermine which was thrashing around in the Gulf that week, closing production platforms and delaying tanker arrivals along the Gulf and East Coasts. The EIA reported that US crude imports were down by 12.6 million barrels from the week before, and that US refineries were running at 93.7 percent of capacity to satisfy US gasoline consumption demand over Labor Day. By Friday, traders realized that the crude drop was likely a one-off event and not the beginning of a trend.
(Forbes) If you happen to be someone who is interested in the topic of “peak oil”, you know the name M. King Hubbert.
The history of the scientific study of peak oil dates to the 1950s, when Hubbert, a Shell geophysicist, reported on studies he had undertaken regarding the production rates of oil and gas fields.
(CNN) Apache ( APA ) revealed the huge find this week after more than two years of stealthily buying up land, extensive geological research and rigorous testing.
The Houston company estimates the discovery, dubbed “Alpine High,” could be worth at least $8 billion.
New discoveries from conventional drilling are “at rock bottom. There will definitely be a strong impact on oil and gas supply, and especially oil.”
Nils-Henrik Bjurstroem, manager with Oslo-based consultants Rystad Energy
“…seriously, there is no exploration going on today.”
Per Wullf, CEO of offshore drilling company Seadrill Ltd.
The struggle between fundamentals and speculators’ dreams of much higher prices continued last week with oil futures falling through Thursday and then rebounding on Friday to close at $44.44 in NY and $46.83 in London, down about $2.50 for the week. The fundamentals include growing stockpiles, increasing US and Canadian rig counts, and fears that US interest rates will be going up shortly which will lead to a stronger dollar and lower oil prices.
“When it comes to scarce resources, the simplest solutions on the surface are not always the best ones. You have to change people’s behavior, reassess society’s dependency on this resource and reduce consumption—otherwise society may, in fact, be more vulnerable to catastrophes than safer, despite clever solutions.”
Linda Kuil, Vienna Technology University, in a study on Mayan civilization and water resource constraint
Oil futures fell some 3 percent in New York and 2 percent in London last week, settling at $47.64 and $49.92 respectively. The markets have become volatile of late with traders reacting to nearly every API or EIA report and every utterance from the Saudi or Iranian oil ministers. Last week the markets were pressured by numerous comments pro and con the possibility of an oil production freeze next month; a jump in Chinese diesel exports; comments by Federal Reserve Chair Janet Yellen that there could be a price-depressing rate increase sooner-rather-than-later; increased exports from Iraq via Kurdistan; the possibility of a ceasefire in Nigeria; sluggish US and Chinese economies; and a jump in US crude and oil product inventories.
(peakoilbarrel.com) When oil fell below $30 a barrel earlier this year, banks turned away from lending to energy companies. The price of crude has bounced back more than 80% from its February low, but banks are still wary.
Big banks cut loans to the energy sector by about 3% in the second quarter over all and some individual lenders pulled back much more, according to an analysis of July and August securities filings by Barclays analysts.
(oilprice.com) Ever since the February crash, when oil tumbled to 13 years lows, and when OPEC started releasing tactical headlines at key inflection points about an imminent oil production freeze (which not only never arrived but has since seen Saudi Arabia’s output grow to record levels) which we first suggested were meant to trigger a short squeeze among headline scanning HFT algos, our suggestion was – as is often the case – dismissed as yet another conspiracy theory.
(fuelfix.com) The flow of oil from U.S. shale fields is projected by government analysts to fall 14 percent by 2017, as the reverberations of the recent crash in crude prices are felt.
Production from those shale fields had increased exponentially over the past decade as hydraulic fracturing and horizontal drilling techniques were improved. Shale oil now accounts for more than half of the nation’s crude output.
“The notion of ‘rig productivity’ has to be taken with caution. We can’t assume that the best-posted performance in the field is the norm for all wells…There is a statistical distortion at play. Starting in late 2014, the severe downturn in oil prices forced the industry to park three-quarters of their rigs and ‘high-grade’ their inventory of prospects. Producers focused on only their best rocks, drilling with only the most efficient rigs. All the low productivity stuff was culled out of the statistical sampling, skewing the average productivity numbers much higher.”
Peter Tertzakian, Chief Energy Economist, and Managing Director at ARC Financial Corp
Oil prices climbed another $3 a barrel last week as traders continued to hope that not only will OPEC and Russia agree to a production freeze next month, but that it will eventually result in the elimination of global oversupply and reduce global stockpiles to a normal level. The week closes with New York futures at $48.52 and London at $50.88.
“If we are to believe Lux Research, Big Oil should use the cash it has, while it still has it, to enter the energy storage market. It has become abundantly clear that lying low and waiting for oil prices to reach former heights is useless since nobody can say with certainty whether or even if this will happen at all.
“If we are to believe Big Oil, all is well, and crude will soon jump back to $100 a barrel to the joy of shareholders all around. If it doesn’t, Big Oil will just continue cutting costs and maintaining dividends. The problem with this approach is that it’s unsustainable over the long term. This is just basic survival, while in the meantime, other leaner, more far-seeing companies [like France’s Total] bet on a future in renewable energy.”
Irina Slav, Oilprice.com
