Saudi Arabia and Iraq are bound by OPEC supply cut deal, leading to Iran overtaking Iraq as India’s second-biggest crude oil provider in February
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Saudi Arabia and Iraq are bound by OPEC supply cut deal, leading to Iran overtaking Iraq as India’s second-biggest crude oil provider in February
"The Saudis continue to be India’s largest oil supplier, but now Iran is replacing Iraq as no.2 provider, a spot that it had held before the EU and the U.S. imposed sanctions on the Islamic Republic over its nuclear program."
West Texas Intermediate (WTI) prices dropped five percent to a $50 rate on Wednesday in its biggest dip since September 2015
"Reuters reported that the plunge came as U.S. inventories surge to record highs every week, fueling doubts about the effectiveness of the Organization of Petroleum Exporting Countries’ strategy to curb production in order to deal with the global supply glut."
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"Either way you think oil is moving, whether higher or lower, you can almost certainly bank on it not being a straight line"
*Sasol sees oil production from Mozambique well in 2-3 years* Mozambique still seen mainly as a gas play By Ed Stoddard JOHANNESBURG, Feb 27-.
"Mozambique still seen mainly as a gas play (Recasts with oil production, hedging)"
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Politics, Geopolitics & Conflict
• U.S. President-elect Donald Trump has nominated Exxon CEO Rex Tillerson for Secretary of State, sparking outrage on all sides of the political spectrum. What unites the opponents of Tillerson’s nomination is the belief that he has uncomfortably close ties with Russian President Vladimir Putin and will work to end sanctions against Russia because of his loyalty to his current employer, Exxon. Others, however, argue that if Tillerson becomes Secretary of State, Trump will use him to convince Russia to back down from its strengthening alliance with Iran. This latter suggestion6 is unrealistic. Trump is not equipped to convince Putin of anything, and he will not be successful in any battle of wits with the Russian president.
• Brazil’s government has been shaken by another corruption scandal that could see investment-friendly President Michel Temer lose his job. The scandal is part of an ongoing investigation against a number of politicians and large business leaders accused of graft practices that brought down the senior management of state-owned energy giant Petrobras. Yet Petrobras was not alone in the corruption: construction firm Odebrecht has also been implicated in participation in the bribery network. Now, one Odebrecht executive is accusing Temer and members of his party of collecting millions of dollars in exchange for defending the company’s interests in Congress. The news has caused a fresh wave of protests among Brazilians, who were already pretty agitated by a bill aimed at capping public spending that the country’s Senate passed earlier this week. It is still not known whether any international company was involved in this new scandal. Just in October, international oil companies were hoping to see a huge benefit from the change of government in Brazil. The Brazilian Congress voted to open up the country’s oil sector to significantly more investment from international oil companies, liberalizing the lucrative pre-salt plays particularly. Foreign companies, under new legislation, will now be allowed to be pre-salt operators. All eyes will be on the risk to this new liberalization from continuing political instability.
• The battle for Syrian Aleppo is largely over and the evacuation of civilians and members of rebel groups has begun, according to various sources in both camps. A ceasefire was negotiated by the Syrian army, Russia and Iran with the rebel groups still holding parts of the city, but according to media reports, the initial deal collapsed and the rebels and the army exchanged fire. The Syrian regime and Iran were not satisfied with some of the details of the ceasefire, brokered nominally by Russia and Turkey. A revised version of the deal was negotiated later and evacuation started. Assad’s win in Aleppo will strengthen his control over the country and could very slightly tip the scales of Middle Eastern geopolitics in favor of Iran and away from Saudi Arabia. More than 3,000 people have been evacuated in buses and ambulances from the city.
Deals, Mergers & Acquisitions
• Kinder Morgan is working on the sale of its Permian assets, which could bring in some $10 billion as the shale play in Texas continues to gain prominence in the energy industry as the most lucrative one in the U.S. Barclays is advising the midstream major, according to unnamed sources. Kinder Morgan itself declined to comment on the possible sale.
• Italy’s Eni has sold a 30 percent stake in the offshore license block that contains the giant Zohr field in Egypt to Russian Rosneft. The Russian company will pay Eni $1.125 billion and will reimburse it for past expenditures, which, for the 30 percent stake, amounts to about $450 million. Rosneft also has an option to acquire a further 5 percent in the project.
• China’s Sinopec, the world’s largest refiner of crude, is mulling over the purchase of Gulf Keystone Petroleum, an energy firm operating in the autonomous Kurdistan region in Iraq. The target has run into financial problems because of delayed payments for exports from the Kurdistan Regional Government (KRG), on top of the oil price crash that brought it to the brink of insolvency. At the moment, Gulf Keystone’s value is around $360 million. Meanwhile, Sinopec is also considering the listing of its retail business in Hong Kong. The IPO could fetch as much as $10 billion for the company.
• Statoil is selling its oil sands operations in Alberta to local energy company Athabasca Oil Corporation. The value of the deal is around US$625 million and includes a yet undeveloped deposit plus a demonstration plant. The Norwegian company will pay 80 percent of the price in cash and will also buy shares in Athabasca, which will give it a 20 percent stake. The deal will result in a writedown of $500-550 million for the seller.
• Independent energy firm Gulfport Energy is buying acreage in the SCOOP region in Oklahoma for $1.85 billion. The seller is Vitruvian II Woodford, a portfolio company of Quantum Energy Partners. The acreage at the moment produces 183 million cubic feet of natural gas equivalent.
Tenders, Auctions & Contracts
• PDVSA, Venezuela’s troubled state-owned energy firm exported an average 742,535 bpd of crude to the U.S., a 23 percent increase on October. Still, compared to a year earlier, the daily rate of exports was lower. The biggest buyer of the heavy crude was PDVSA’s U.S. business unit, Citgo Petroleum. Valero Energy, Phillips 66, and Chevron were also among the buyers. There has been no improvement in Venezuela on the economic, humanitarian and political front since the opposition and the government launched a dialogue mediated by the Vatican and UNASUR. In fact, the crisis has only worsened.
• Brazil’s Petrobras has signed definitive terms for a $5 billion, 10-year financing agreement with China Development Bank Corp and an oil supply accord with Chinese companies. This will help somewhat to secure more stable revenue streams. It also agreed to sell 100,000 barrels of oil per day for the next decade to China National United Oil Corp, China Zhenhua Oil Co Ltd, and Chemchina Petrochemical Co Ltd subject to "market conditions"
• Russia’s Yamal LNG project, led by Novatek, Russia's largest independent gas producer, says it has received almost $800 million in funding from Italian bank Intesa Sanpaolo in a 14.5-year credit line. This will enable the company to launch production next year. Earlier this year, Yamal LNG obtained $12 billion in financing from Chinese lenders. The total value of the project has been calculated at $27 billion. Japanese and French funding is also a possibility. However, some of Novatek’s moves may put it at odds with state-run giant Gazprom. Novatek’s expansion plans on the Yamal peninsula, which is currently controlled by Gazprom, as such may run into some roadblocks and the Kremlin may not allow Novatek to obtain four licenses there it is seeking.
Discovery & Development
• Anadarko has dropped an exploration license for the shallow waters off the coast of New Zealand’s North Island but it has not given up completely on the country. The company said it will continue to reprocess seismic survey data from another license block, in the Canterbury Basin, in the eastern part of the South Island. For this license block, Anadarko has asked for a delay from the New Zealand government.
• Israel’s giant Leviathan gas field could start producing commercial amounts of gas late in 2019, according to a development plan just approved by the project partners, which include Noble Energy as operator, and three Israeli firms: Delek Drilling, Avner Oil, and Ratio Oil. According to the plan, initial production from Leviathan should be 12 billion cu m a year, with investments in this first phase of production seen at $3.5-4 billion.
• GDF Suez has delivered Turkey’s first floating LNG plant, Neptune, to the coast of Izmir, where it will be stationed. The facility has a capacity of 5.3 million tons of LNG and should feed into Turkey’s gas network some 20 million cu m of gas on a daily basis.
• An internal report from BP leaked to Greenpeace has revealed the company, which had to pay over $60 billion in fines and compensations for the Deepwater Horizon disaster from 2011, is sub-par in safety at its downstream operations. The report lists at least two almost critical occurrences that could have caused deaths and calls for urgent attention to improving BP’s engineering data management practices to avoid further accidents of a critical nature.
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“U.S. President-elect Donald Trump has nominated Exxon CEO Rex Tillerson for Secretary of State, sparking outrage on all sides of the political spectrum. What unites the opponents of Tillerson’s nomination is the belief that he has uncomfortably close ties with Russian President Vladimir Putin and will work to end sanctions against Russia because of his loyalty to his current employer, Exxon. Others, however, argue that if Tillerson becomes Secretary of State, Trump will use him to convince Russia to back down from its strengthening alliance with Iran. This latter suggestion6 is unrealistic. Trump is not equipped to convince Putin of anything, and he will not be successful in any battle of wits with the Russian president”
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"We'll take one prepackaged bankruptcy to go." That was the upshot of an announcement yesterday from oilfield services company Seventy Seven Energy (SSE)--the
'In January SSE was threatened by the New York Stock Exchange with de-listing its stock (see Seventy Seven Energy’s Stock Threatened with Delisting from NYSE). One of SSE’s ongoing problems is that Chesapeake Energy, itself not in all-that-great-a-shape, provides nearly three-fourths (70%) of SSE’s revenue.'
60 Reasons Why Oil Investors Should Hang On
Inventories will continue to rise, but the momentum is slowing.
The following are some observations as to how we got here and how we're gonna get out.
9 reasons why oil has taken so long to bottom:
1. OPEC increased production in 2015 to multiyear highs, principally in Saudi Arabia and Iraq where production between the two added 1.5 million barrels per day (mb/d) to inventories after the no cut stance was adopted.
2. Russian production increased in 2015 to post Soviet highs.
3. Long planned Gulf of Mexico production began coming on in late 2015.
4. An overhang of 3,000 or 4,000 shale wells that were drilled but uncompleted ("ducks") entered a completion cycle in 2015.
5. Service companies and suppliers went to zero margin survival pricing (not to be confused with efficiency). The result has been an artificial boost to completions that cannot be sustained.
6. Resilience among a few operators in the Permian who felt the need to thump their chests, creating the rally that killed the rally last spring (disclosure: I own stock in Pioneer Resources but am going to dump it if they don't cut it out!).
7. The dollar strengthened.
8. Iranian exports are coming.
9. And, finally, China.
5 Demand-Side Reasons Why We Need to Hang-On:
1. Chinese oil demand is up year-over-year by 8 percent. It is expected to slow in 2016 to as low as 2 percent (maybe) but it is still growth in a tightening market.
2. Watch Chinese car sales. They were sluggish in early 2015 but finished very strong in what could be a 2016 V-shaped recovery.
3. The Indian economy is on a tear. The IMF has it as the world's fastest growing large economy. GDP growth was 7.3 percent in 2015 and is projected to be 7.5 percent in 2016. That trumps Chinese growth. Although India's oil demand is only one-third that of China, it is the growth picture that should be better covered by analysts and headlines. India is about to be the world's most populous nation with a middle class that is likely to double over the next 15 years. 40 cars now service 1,000 people but that is rapidly changing. And this is not something that will occur sometime, someday in the future. 2015Indian consumption grew by 300,000 barrels per day (bpd).
4. U.S. consumption has been increasing with higher employment and lower fuel costs. Truck and full size SUV sales have been extraordinary.
5. Europe, the world's largest oil market, is in a decade long decline but not as steeply as it was. Asia demand is strong with Vietnam's GDP growing 7.5 percent in 2015. Middle East countries are seeing increases in consumption. And as a final observation, go back one year when most oil analysts were looking at supply as the means to a correction. Demand was thought to be too inelastic and would thus take too long to play out. But it was demand that responded first. When the story is written, it will be demand that outplayed supply 2 to 1 on our way to parity. Thereafter, if we go into imbalance, it will be the damage done to supply that really moves prices.
16 Supply-Side Reasons Why We Need to Hang On
1. Earlier in 2015 global supply exceeded demand by about 2.2 mb/d according to the EIA. Others had it at 2.5 mb/d. The EIA now has it down to 1.3 mb/d and change. We are still nowhere near an inflection point but we are converging.
2. The rig count in OPEC's GCC countries has not corrected down with prices. It is mostly maintenance drilling and somewhat additive in Saudi Arabia. The level of production that we have seen lately likely means the GCC is close to or at capacity.
3. There is near universal acknowledgement that there will be another 300,000 to 500,000 bpd decline in U.S. productionthis year. It could be more given the struggles of the onshore conventional market which alone should give up 150,000 bpd. Shale's steep decline rates will easily make up the rest even against increasing Gulf of Mexico production.
4. Global non OPEC, non U.S. production will decline by 300,000 to 400,000 bpd in 2016 according to the IEA. This number could increase as marginal production at current low prices comes off line due to lifting costs.
5. After an upside surprise in 2015 Russian production, there is a building consensus that 2016 results will be off with further declines thereafter. Russian oil giant Lukoil is stacking contractor rigs which will show up fairly soon in the numbers. State backed Rosneft is showing financial strain.
6. Pemex production is down 10 percent.
7. North Sea production, which has increased over the last few years, will slip in 2016.
8. Long-term Canadian oil sands projects will come on in 2016 as will some production in Brazil, but even collectively the amounts are small. It's probable too that some of the oil miners will put a hold on production due to lower product costs (about $15/bbl less than WTI) and extraordinarily high lifting and processing costs (some of the sands are subjected to subsurface CO2 drives, others are surface mined).
9. Anticipated Iranian exports are here, but the projections are all over the place from the Iranian government's claim of 1 million b/day in 6 to 12 months to Rystad Energy's claim of 150,000 b/day. Even the middle ground argument of 500,000 b/day assumes Iran can get back to their long term trend line, which had been declining during the 5 years prior to 2011 sanctions. Fields are in poor repair and the gas drives essential to production have been mostly abandoned. All in, it's most likely that production will stutter step up to the trend line due to delays caused by political process and infrastructure funding. This, like all things, will take longer than expected but watch out for early sales. You will be seeing more inventory than production as Iran unloads the 30 to 45 million barrels of oil in storage. Allow some time to work off stocks to get an idea of the actual production numbers which will likely disappoint.
10. Depending on the source, $140 to $200 billion of expenditures has come off of long term projects in 2015 with calls for another $40 to $150 billion in cancellations and postponements in 2016. This won't be made up by renewables. The current and projected crude and natural gas prices have dis-incentivized consumers from wind and solar. Governments after the Paris accord may throw money around but consumers will likely not follow until commodity prices make them.
11. All said, these capex cuts will result in a loss of at least 5 mb/d in long-horizon production. These are the goliath type projects that we absolutely need to match to current plus anticipated consumption increases.
12. Existing wells have natural decline curves. Some hold up better than others but all said the global yearly decline rate without additional drilling is right around 4 mb/d.
13. Hedged bets started coming off in late 2015 and will continue in early 2016. Accompanying this could be the capitulation in activity and production that the market has been looking for.
14. Global capex declines have occurred here and there over the past 20 years but always rebound the following year. For the first time in recent history, the global oil complex has charted two consecutive years of declining budgets. 2014 showed a small constriction but 2015's 20 percent capex decline is unprecedented in terms of size and is the highest by percentage in 20 years. And right now, 2016 doesn't look like it's going to have much bounce to it.
15. The world seems to be moving closer to a supply side disruption. Middle East wars, skirmishes and terrorist attacks are increasing in size and frequency. Libyan oilfields are a constant target. Nigerian installations are vulnerable. ISIS controls most of Syria's small oilfields. Yeminis missiles are targeting Saudi oil installations and would have hit their targets in December launches had the Saudi's not shot most of them down. Iraqi production is somewhat safe, but only somewhat. Venezuela's PDVSA is teetering in its ability to pay for the imported diluents needed to export its crude. Tankers are stacking up in the Jose Petroterminal demanding payment up front before unloading up to 3 million b/month of naphtha. And then there's the torched embassies, mass beheadings, a resurgent Shiite state and a hardening Sunni stance amid a claw back of freebies to Saudi Arabia's citizens. It's not good. Not at all. Our best hope is that price rebalancing will occur quickly through supply and demand metrics rather than bloody supply-side shocks.
16. At $25 oil, the Bakken is at $13 to $15 after transportation which puts operators up there underwater after lifting costs, taxes and carrying royalty owner costs. Sub $30 oil will not only kill development drilling, but it will be where production stops. In cases where operators are committed to selling natural gas produced alongside oil there may be a reason to continue due to supply obligations, but otherwise what's the point? If you want to lose money buy a boat. It's more fun.
6 Things to Ignore
1. This is not the 1980's with 14+ mb/d spare capacity. In 2016, we are oversupplied by about 1.5 percent and it will be at zero by early to mid-2017. The last time we were at zero was late 2013/early 2014 when WTI was at $100 and Brent up around $105+.
2. Lower for longer is true but $29 oil is not. This is a classic over-sold scenario and likely somewhere in the realm of capitulation. Operators and service companies can find a footing at $50 oil. We won't prosper but we'll survive. $100 may be a long way off and that's because ridiculously high, sustained oil prices only leads to ridiculously low sustained oil prices. But who wants $100? It will only get us back to $30. The industry makes no sense at the top or the bottom. The high middle is best.
3. Demand is dropping. Not true. Demand growth may be slowing but not by much. Consumption is up and it is increasing.
4. Chinese demand is down. The rate of growth may slow in 2016 but it will still be up year-over-year. A 6.8 percent Chinese economy is consuming more oil now than a 10 percent economy was 5 years ago. A lot more.
5. We're going to float the lids right off our oil tanks. Don't worry. You can sleep tight. We're not.
6. Efficiency gains are offsetting the declining rig count. This one is always amusing. Give me the rig count and higher density fracking and you take all the recent efficiency gains and let's see who gets invited to the bank's Christmas party.
6 Things You Shouldn't Ignore
1. Q1 oil prices are going to be ugly. Try and ignore them if you can. The market will remain uncertain over Iran as it determines and adjusts to how much oil is coming on.
2. Hedges coming off will not bode well for producers and the service companies looking to them for a lifeline.
3. Spring debt redeterminations may knock the wind out of the E&Ps. If capitulation hasn't already occurred, it will then.
4. China. The sinking Shanghai Composite Index is oil's anchor.
5. Pioneer and other chest thumpers getting too aggressive. Any recovery will be short lived if they jump the rig count as they did in the short-lived Spring 2015 rally. Traders are fixated on even meaningless moves in the rig count. Best to play it cool. We all want to work but operators need to practice some restraint.
6. Lack of capitulation. There will be no recovery until there is general agreement that the shorts cannot drag the market any lower. The Saudi's, with Russia following, can always point to a large U.S. failure as proof that they did not blink first.
14 Things We Owe Ourselves:
1. The water wars of 3 or so years ago are mostly solved. Recycling frac water is now a "gimme". Marcellus operators like Shell and Cabot are able to boast of 99 percent recycle rates. We still have hurdles with deep well brine injection but the issues are getting defined and will be addressed.
2. Progress is being made on recognizing and reducing methane emissions from well sites. Ultimately, this could slow drilling in places like the Bakken until infrastructure is in place, but it will also move operators to effectively use lease gas to power operations.
3. No government agency provided directives for Halliburton and Pattison to build dual fuel frac fleets that run on clean burning lease gas. They just did it in cooperation with their customers.
4. We've proven than natural gas is beyond abundant.
5. There have been fewer bankruptcies than anticipated.
6. No one has been arrested yet for fracking.
7. Harold Hamm was still able to write a billion dollar personal check.
8. Aubrey McClendon was still able to raise fresh money.
9. T. Boone Pickens overshot the mark with an $80 call but his optimism helped us – a lot.
10. Even President Obama jumped in and did us a favor with the elimination of the 40 year old export ban. It might have been done grudgingly but we got it.
11. LNG exports will set sail by March 2016.
12. Coal miners displaced by the current administration's EPA in Kentucky and West Virginia have been finding work in oil and gas fields. Hopefully they'll find more soon enough.
13. We can celebrate the abrupt end of the glossy multicolored booklets from fawning jewelers and art auctioneers arriving in the mail.
14. David Einhorn's crass and predictable "mother fracker" short on Pioneer Resources was a yawn. The stock even climbed after the news. If this was a political statement, which was my read of the subtext, then short the stock now big guy.
The inevitable will occur. Supply and demand will cross. The question is will Wall Street notice? Some of the analysts caught the cross in early 2014 but most didn't. For full disclosure, I missed it too.
The question this time around is will we see it coming and if so will it be an orderly reaction? Or will the market miss the coming wake-up call and instead deliver a severe supply disruption with skyrocketing prices and a political response along the lines of windfall profits taxes? My worry is that everything takes longer than you think, from recognizing coming imbalances in the global crude complex to painting the house. In the meantime, just hang on and keep your equipment running. You're going to need it. Until then, all the best of luck.
Article Source: http://oilprice.com/Energy/Energy-General/60-Reasons-Why-Oil-Investors-Should-Hang-On.html
By Dan Doyle for Oilprice.com
There will be no recovery until there is general agreement that the shorts cannot drag the market any lower. The Saudi's, with Russia following, can always point to a large U.S. failure as proof that they did not blink first.
$10 Trillion Investment Needed To Avoid Massive Oil Price Spike Says OPEC
OPEC says that $10 trillion worth of investment will need to flow into oil and gas through 2040 in order to meet the world’s energy needs.
The OPEC published its World Oil Outlook 2015 (WOO) in late December, which struck a much more pessimistic note on the state of oil markets than in the past. On the one hand, OPEC does not see oil prices returning to triple-digit territory within the next 25 years, a strikingly bearish conclusion. The group expects oil prices to rise by an average of about $5 per year over the course of this decade, only reaching $80 per barrel in 2020. From there, it sees oil prices rising slowly, hitting $95 per barrel in 2040.
Long-term projections are notoriously inaccurate, and oil prices are impossible to predict only a few years out, let alone a few decades from now. Priced modeling involves an array of variables, and slight alterations in certain assumptions – such as global GDP or the pace of population growth – can lead to dramatically different conclusions. So the estimates should be taken only as a reference case rather than a serious attempt at predicting crude prices in 25 years. Nevertheless, the conclusion suggests that OPEC believes there will be adequate supply for quite a long time, enough to prevent a return the price spikes seen in recent years.
Part of that has to do with what OPEC sees as a gradual shift towards efficiency and alternatives to oil. The report issued estimates for demand growth five years at a time, with demand decelerating gradually. For example, the world will consume an extra 6.1 million barrels of oil per day between now and 2020. But demand growth slows thereafter: 3.5 mb/d between 2020 and 2025, 3.3 mb/d for 2025 to 2030; 3 mb/d for 2030 to 2035; and finally, 2.5 mb/d for 2035 to 2040. The reasons for this are multiple: slowing economic growth, declining population rates, and crucially, efficiency and climate change efforts to slow consumption. In fact, since last year’s 2014 WOO, OPEC lowered its 2040 oil demand projection by 1.3 mb/d because it sees much more serious climate mitigation policies coming down the pike than it did last year.
Of course, some might argue that even that estimate – that the world will be consuming 110 mb/d in 2040 – could be overly optimistic. Coming from a collection of oil-exporting countries, that should be expected. Energy transitions are hard to predict ahead of time, but when they come, they tend to produce rapid changes. Any shot at achieving the world’s stated climate change targets will require a much more ambitious effort. While governments have dithered for years, efforts appear to be getting more serious. More to the point, the cost of electric vehicles will only decline in real dollar terms over time, and adoption should continue to rise in a non-linear fashion. That presents a significant threat to long-term oil sales.
At the same time, OPEC also issued a word of caution in its report. While oil markets experience oversupply in the short- to medium-term, massive investments in exploration and production are still needed to meet demand over the long-term. OPEC believes $10 trillion will be necessary over the next 25 years to ensure adequate oil supplies. "If the right signals are not forthcoming, there is the possibility that the market could find that there is not enough new capacity and infrastructure in place to meet future rising demand levels, and this would obviously have a knock-on impact for prices," OPEC concluded. About $250 billion each year will have to come from non-OPEC countries.
In a similar but more disconcerting conclusion, the Oslo-based Rystad Energy recently concluded that the current state of oversupply could be "turned upside down over the next few years." That is because the drastic spending cuts today will result in a shortage within a few years. To put things in perspective, Rystad says that the oil industry "needs to replace 34 billion barrels of crude every year – equal to current consumption." But as a result of the collapse in prices, the industry has slashed spending across the board and "investment decisions for only 8 billion barrels were made in 2015. This amount is less than 25% of what the market requires long-term," Rystad Energy concluded. The industry cut upstream investment by $250 billion in 2015, and another $70 billion could be cut in 2016. The latter figure did not take into account the recent decision by OPEC to abandon its production target, which sent oil prices falling further.
So what are we to make of this? There could be plenty of oil supplies in the future, but as it stands, the industry is massively underinvesting? This illustrates a troubling tension within the oil industry. Oil prices will be set by the marginal cost of production, and recent efficiency gains notwithstanding, marginal costs have generally increased over time. Low-cost production depletes, and the industry becomes more reliant on deep-water, shale, or Arctic oil, all of which require higher levels of spending. In many cases, these sorts of projects are not profitable at today’s prices. The price spikes seen in 2011-2014 sowed the seeds of the current bust, but the pullback today could create the conditions of another spike in the future. OPEC could be a bit too sanguine with its call for $95 oil in 2040.
At the same time, future price spikes set up the possibility of much greater demand destruction, especially if alternatives become more viable. This is the difficult balancing act that the industry must pull off over the next few decades.
Article Source: http://oilprice.com/Energy/Crude-Oil/10-Trillion-Investment-Needed-To-Avoid-Massive-Oil-Price-Spike-Says-OPEC.html
By Nick Cunningham of Oilprice.com
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Investor Sentiment Could Be Shifting
A drop in U.S. crude oil production helped drive futures prices higher this week. There is even evidence of renewed hedging in the deferred futures contracts that suggest the bottom has been made.
The slowdown in U.S. crude oil production is the key to sustaining the rally since excessive production was the driving force behind the tremendous price slide. The recent inventory figures suggest that cutbacks in oil production and oil exploration may finally be taking hold. U.S. production fell for the second time in three weeks and refinery runs are spiking higher indicating increased demand. Market participants seem to be indicating that they believe that U.S. production is slowing, at least for now.
The recent Commitment of Traders data released by the Commodity Futures Trading Commission also indicates a possible shift in investor sentiment. The report covering the March 31st to April 7 time period showed that speculators increased their overall bullish bets.
The non-commercial contracts of crude oil futures saw a weekly change of +25,348 contracts to total a net position of +252,043 contracts. Long positions in oil futures increased by 4,901 contracts, while the short positions fell by 20, 447 contracts.
Despite the rally, the market remains oversupplied according to most fundamental analysts, but the price action and chart pattern suggest that traders still haven’t taken out enough of the weaker speculators holding on to short positions for this very reason.
A sustained rally could drive these speculators out of the market. While the current rally has been slow and steady, producing an almost perfect “W” chart pattern, crude oil may be in the window of time where the panic buying starts as shorts may be forced to scramble out of their positions. When a situation like this develops, these shorts will pay almost anything just to get out of their positions. This action will trigger a price surge and at the same time present better prices to attract fresh shorting pressure. This is why any rally is likely to be limited.
Speculators shouldn’t be looking for a strong surge based on normal supply/demand analysis because it takes time to figure out what the usage rate is. In other words, analysts are going to have to figure out how much the U.S. is producing and how much demand there is in order to determine inventory targets. Given the nature of the crude oil market, all it is going to take is a disruption in supply to trigger a short-covering rally and to attract speculative buying.
One story breaking late this week that could be the speculative event to fuel such a surge is the news that a tribal group made up of former Al Qaeda militants took control of a major southern oil terminal in Yemen after military forces protecting it withdrew from the site. If this action is found to have an effect on supply then we may have the ingredients needed for a breakout rally.
The chart pattern looks promising for June Crude Oil futures. While the set-up is there for a strong upside breakout, we can’t predict if the volatility will be there to drive it higher. It is going to take some strong buying and short-covering over the near-term to reach the two identifiable objectives.
Based on the main range of $93.31 to $45.93, one objective is its retracement zone at $69.62 to $75.21. The trigger point for this move is the swing top at $57.27. Earlier this week, buyers took out this top with a drive into $57.92, but the rally failed and the market pulled back. This tells us that something in the fundamentals has to happen to fuel a sustained move.
This price action typically indicates that the breakout was triggered by buy stops and short-covering rather than fresh buying. This makes sense because after all, who would buy strength with all this supply sitting around? Nonetheless, if there is a shift in the fundamentals or a panic situation, aggressive speculative buying and short-covering could drive this market sharply higher.
This weekly chart shows that there is plenty of room to the upside with the primary objective $69.62 to $75.21.
The second objective is determined using conventional chart pattern analysis. The last break from $57.27 to $45.93 was $11.34 in 4 weeks. If we add $11.34 to the top at $57.27 then the objective of this double-bottom chart pattern is $68.61.
Based on this analysis we have to conclude that there is a possibility of a rally into $68.61 to $69.62. We can come up with the objectives on the chart, but we don’t know the catalysts or the events that could trigger the breakout rally.
As traders, we would like to see strong upside momentum on a breakout over $57.27, but this is dependent on volatility which is, understandably, very difficult to predict. Forecasting the timing of events is also difficult so we have to conclude that a gradual reduction of supply will probably encourage more short-covering, fueling a slow, but steady grind into our objectives over the near-term.
Keep in mind that it took 3 weeks for crude oil to rally $10.59 from $46.68 to $57.27 and another 4 weeks to rally $11.99 from $45.93 to $57.92. Given this scenario, it may take a sustained move of 4 weeks or more over $57.27 to reach out objective of $68.61 to $69.62.
Now that the fundamentals are in place and the crude oil market has formed a double-bottom, there has to be something that triggers a breakout of its current supportive base. The chart pattern suggests there is room to the upside, now all we need is a reason to encourage more short-covering and to attract speculative buying. It looks as if traders will be watching the news next week besides the supply and demand reports for reasons to extend the current rally.
Now that the fundamentals are in place and the crude oil market has formed a double-bottom, there has to be something that triggers a breakout of its current supportive base.