Oil Falls On OPEC Uncertainty
Oil prices fell slightly on Friday morning, but remains supported by production declines in Venezuela.
Friday, June 8, 2018
Oil prices seesawed this week, dipping on expectations of more supply from OPEC+, but rebounding on news of deeper troubles in Venezuela. Trading will likely be choppy over the next two weeks until the market gets some clarity from the Vienna meeting.
Trump isolated, to leave G7 early. President Trump has done severe damage to the U.S.’ relationship with its closest allies, and the other six countries attending the G7 Summit today in Quebec are prepared to issue a statement denouncing Washington’s policies. Trade tariffs, among other issues, have isolated President Trump, although he doesn’t seem to mind. The White House said he would leave the G7 Summit early, before any official statements are issued. The fraying ties mean there is little sign of a solution to the trade fights on the horizon.
Trump steel tariffs could hurt oil and gas. Trump’s 25 percent steel tariffs on Canada, Mexico and the European Union could drive up the cost of oil production in the U.S. shale patch if the industry is not granted exemptions. Also, oil and gas pipeline construction relies on specialty steel, about 75 percent of which comes from outside the United States. Steel makes up 10 to 20 percent of the cost of drilling a shale well, and half of the steel for drilling is imported. The tariffs are already having an impact – U.S. steel prices are up 20 percent since February.
U.S. request angers OPEC. The U.S. reportedly asked Saudi Arabia for higher oilproduction to offset Iranian outages, a request that was made before the U.S. withdrawal from the Iran nuclear deal. The apparent sudden shift in the Saudi position shortly after the conversation has angered a lot of OPEC members. “It’s crazy and astonishing to see instruction coming from Washington to Saudi to act and replace a shortfall of Iran’s export due to their Illegal sanction on Iran and Venezuela,” Iran’s OPEC governor, Hossein Kazempour Ardebili, told Reuters. “OPEC will not accept such a humiliation. How arrogant and ignorant one could be (to) underestimate the history of 60 years’ cooperation among competitors,” he said. The comments raise the possibility of a contentious meeting in Vienna. Venezuela wrote to OPEC members, issuing a call to denounce U.S. sanctions.
Venezuela begins ship-to-ship loadings as bottlenecks curtail exports.Venezuela’s decrepit oil ports don’t have enough capacity to handle tanker traffic, which has become an immediate crisis because the seizure of PDVSA’s Caribbean assets last month by ConocoPhillips (NYSE: COP) has disrupted operations at those ports. The problem is that some of Venezuela’s terminals can’t handle very large crude carriers (VLCCs), and so PDVSA has asked customers to accept ship-to-ship loadings, which analysts say adds about $1 per barrel to the purchase cost. PDVSA is even considering declaring force majeure on its oil contracts because it might not be able to fulfill obligated shipments. Reuters reports that dozens of tankers, waiting to load about 24 million barrels of oil, are sitting off of the Venezuelan coast. The delays helped pushoil prices up this week.
European refiners cut purchases of Iranian oil. European refiners are winding downoil purchases from Iran, according to Reuters, which suggests that the European Union might struggle to keep the nuclear deal alive. Companies are starting to cut business ties with Iran in the face of U.S. sanctions, and Iran, angered by the economic assault, has suggested it could restart its nuclear program.
Total SA wants to drill in sensitive Amazon basin. Total SA (NYSE: TOT) said it still plans to move forward with exploration plans in Brazil’s Foz do Amazonas basin, but has seen applications rejected by Brazilian regulators. Greenpeace activists disrupted the French oil giant’s annual shareholder meeting last week to protest the plans for the Amazon. Brazil’s Foz do Amazonas basin could contain up to 14 billion barrels of oil, which would exceed the proven reserves in the Gulf of Mexico.
Hedge fund sees $100 oil this year, $150 by 2020. Pierre Andurand of Andurand Commodities Fund told the WSJ that the oil market is “in the middle of a multiyear bull run.” He has been bullish on oil for a while, and paid dearly in the past few years as crude languished, but his hedge fund has bounced back with oil prices this year. He sees no reason to let up. “We could see $100 oil this year…$150-plus in 2020-2021…People think $100 is high. But we’ve seen $100, we’ve seen $150 in a much weaker economic environment  than today, and I think today is much more bullish,” he told the WSJ. “I don’t think we’re close to the top at all.”
Exxon and Chevron undermining corruption efforts. The refusal of ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) to disclose their U.S. tax payments is undercutting anticorruption efforts around the world, according to the chairman of the Extractive Industries Transparency Initiative. The criticism comes after the Trump administration withdrew from the initiative last year.
Equinor leads Brazil’s oil auction. Equinor (NYSE: EQNR), formerly Statoil, led the pack in Brazil’s latest offshore auction. The Norwegian oil company, in a consortium with ExxonMobil (NYSE: XOM) and Petroleos de Portugal, bid more than three times the minimum bid for the Uirapuru block in the Santos Basin. Offshore Brazil has been one of the most prized regions in the world for the oil majors, with investment pouring into the country over the past year. The latest results will be welcomed by a government under fire as the Brazilian economy teeters – a plunging currency and widespread protests have rocked the country.