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Intelligence Report: Oil Markets Are At A Stalemate

Friday, February 2, 2018

Oil prices seesawed over the past few days, but look poised to close out the week flat compared to last week. High OPEC compliance and falling Venezuelan production more or less offset surging output from U.S. shale and an uptick in inventories.

U.S. oil production tops 10 mb/d. The EIA said this week that U.S. oil production surpassed 10 mb/d in November, just shy of the all-time high set decades ago. There was a huge increase from October, a monthly increase of over 380,000 bpd. The surging output is clear evidence that the shale industry is ramping up production at an amazing pace, and could spoil OPEC’s plans to balance the market. Meanwhile, U.S. crude inventories also jumped last week, the first time that has occurred in several months.

Goldman: Brent to $82 in 6 months. Goldman Sachs dramatically overhauled its forecast for oil prices this year, stating in a research note that the market is tightening much faster than expected. Moreover, the investment bank said that OPEC’s objective of bringing down inventories to the five-year average has probably already occurred. “The rebalancing of the oil market has likely been achieved, six months sooner than we had expected.” The bank predicts that OPEC will stick with the cuts for the first half of the year, which could tighten the market more than the group intends, and push prices up above $80 per barrel by the summer. From there, OPEC might gradually ratchet up output.

OPEC compliance rate at 138 percent. OPEC maintained high levels of compliance with the production cuts in January, with its compliance rate at 138 percent according to Reuters. However, that is largely the result of the meltdown from Venezuela, which offset the gains from Saudi Arabia and Nigeria.

Venezuela’s production could fall 700,000 bpd. Barclays estimates that Venezuela’s production could fall by 700,000 bpd this year, averaging 1.43 mb/d. The crisis continues to erode the country’s production base, a drop off that accelerated at the end of 2017. Meanwhile, U.S. Secretary of State Rex Tillerson seemed to offer some measure of support for a military coup in the country. “There will be a change in Venezuela. We want it to be a peaceful change,” Tillerson said on Thursday at the University of Texas-Austin, according to Argus Media. “We have not advocated for the regime change or removal of President Maduro,” he tried to clarify. “Maduro could choose to just leave, that would be the easiest. He has friends in Cuba and they can give him a nice hacienda on the beach and he can have a nice life there.”

Shell takes 9 blocks in Mexico offshore auction. Royal Dutch Shell (NYSE: RDS.A) won 9 of the 19 offshore blocks awarded in Mexico’s deepwater auction on January 31. Shell is already the largest producer in Brazil and it is making a play to dominate Mexico’s offshore sector as well. From Mexico’s perspective, the auction was a success, and could garner as much as $93 billion in investment. The auction was also important because there are fears that Mexico’s election later this year might usher in a government less favorable to the industry. The results suggest oil companies are not deterred by the political risk.

Chesapeake lays off 13 percent of workforce. Chesapeake Energy (NYSE: CHK)laid off 400 workers, or about 13 percent of its workforce this week. The indebted natural gas driller said the layoffs will mostly occur at its Oklahoma City campus and were the result of asset sales over the last few years.

Wells Fargo: No bull market for commodities. Wells Fargo warned that optimism about rising commodity prices might disappoint investors this year. In fact, the down cycle could last for a long time to come. “We expect bear market dynamics (over-supply and range-bound prices) to dominate commodities for the next five to 10 years,” Austin Pickle, Wells Fargo investment strategy analyst, wrote in the note.

Royal Dutch Shell triples profit in 2017. Royal Dutch Shell (NYSE: RDS.A)reported strong profits in the fourth quarter, with earnings on a current cost of supplies (CCS) – similar to net profit –  of about $16 billion, excluding tax charges. That was roughly double the figure from a year earlier. Analysts were a bit disappointed because cash flow came in lower than expected, but nonetheless, the figures are a sign of an ongoing rebound for the oil majors, who are now earning about as much money at $60 per barrel as they were years ago at over $100 per barrel.

Deepwater discoveries. Several deepwater discoveries were reported in the past week, evidence that the offshore sector is gaining momentum. Shell said they made a potentially huge discovery in the Gulf of Mexico, a project called “Whale.” Just hours earlier, Chevron (NYSE: CVX) said it discovered the “Ballymore” field off the coast of Louisiana. Meanwhile, BP (NYSE: BP) announced a discovery in the North Sea.

Dutch gas field could be cut in half. The massive Groningen gas field could beforced to cut production once again over fears of earthquakes. Reuters reports that the Dutch government could order the field’s operators to slash output by half to 12 billion cubic meters per year “as quickly as possible” to limit the risks of earthquakes. Once the largest source of gas for the EU, the field is down from peak output at 54 bcm in 2013.

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