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Oil prices look to be ending the year on a high with WTI breaking $60 on Friday morning and Brent climbing towards the $67 mark. Analysts are now looking towards the new year, with opinion divided on whether oil markets can maintain this upwards momentum.
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Friday, December 29, 2017
Oil prices are set to close out the year up more than 11 percent, hitting their highest level since 2015. However, the road to higher prices was rocky. In the first half of the year, the OPEC cuts appeared to have little effect, and oil prices gyrated. But the cuts started to take a large bite out of inventories in the third quarter and the price rally ensued. Other notable developments included the return of geopolitics as a market mover, with outages in Libya, Iraq, the North Sea and Canada all contributing to higher prices. U.S. shale also came roaring back in 2017, and those production gains are expected to continue into next year. Looking forward, there is disagreement among market analysts about where prices go from here. Some view oil as overpriced, with a price correction looming (see more below). Others see oil prices grinding higher as 2018 wears on due to falling inventories.
U.S. oil production unexpectedly falls. The EIA reported a drop in U.S. oil production, with last week’s output falling by 35,000 bpd. Also, crude inventories fell by a robust 4.6 million barrels for the week ending on December 22, although gasoline inventories ticked up again. The dip in oil production could very well be a one-off anomaly, but the report added some bullish momentum to oil on the final trading day of the year. WTI hovered at the $60-per-barrel mark with a few hours left in 2017.
Barclays: Oil set for price correction. Barclay’s analysts argue that oil prices are due for a correction, citing several reasons that point to a coming downturn. Investors are overstretched with bullish bets on oil futures, exposing the market to a snap back in the other direction. Also, China’s economy is expected to slow in 2018, raising the risk of weaker-than-expected demand. Plus, oil supply is rising in the U.S., Brazil and Canada, among other countries. Inventories could start to build again in 2018, slowing the rate of rebalancing. Barclays notes that there are plenty of reasons why their forecast could be wrong, but they predict lower prices in the near-term.
Trump could kill Iran nuclear deal in January. President Trump faces a series of deadlines in January that offer him the opportunity to tear up the 2015 nuclear deal with Iran. Every three months the President has to recertify the agreement, and Trump will have that decision before him again in about two weeks. “[I]n the event we are not able to reach a solution working with Congress and our allies, then the agreement will be terminated,” Trump said in October. The President could restore sanctions on Iran, which could lead to an escalation of conflict. Politico reports that Trump’s top national security team opposes such a move and hopes to convince the President not to go down that road.
Trump scrapping fracking rule. The Trump administration is rolling back Obama-era rules on hydraulic fracturing on public lands. The 2015 proposed rules had not yet taken effect, and were delayed by a Wyoming court. They would have required the disclosure of chemicals used in fracking and also set standards on well design. The oil and gas industry applauded the decision to scrap them.
Cold weather boosts coal and natural gas prices. The rate of coal burning in U.S. power plants hit a three-year high as the eastern half of the country found itself in a deep freeze. Coal temporarily reclaimed the top spot among power sources in the U.S., a position it held for decades until natural gas overtook it a few years ago. Coal and natural gas prices are up on higher demand for heating, with regional price spikes particularly acute. New England saw a spot gas price surge to $35/MMBtu. The development could add a bit of momentum to the Energy Department’s proposal to offer support for coal and nuclear power. Still, it should be noted that Henry Hub prices, while up a bit, remained below $3/MMBtu. The price spike is confined to areas in the northeast, and in any event, natural gas production is expected to continue to rise.
Explosion at Venezuelan refinery. Reuters reported that an explosion hit a unit at Venezuela’s largest refining complex, injuring two workers. The incident highlights the deteriorating state of Venezuela’s oil assets, as state-owned PDVSA lacks the cash to keep up with maintenance.
Libya pipeline explosion. An explosion hit a Libyan pipeline earlier this week, knocking about 70,000 to 100,000 bpd offline. The incident provided a lift to oil prices, and it also highlights the risk to supply from some unstable countries. Libya managed to restore output to about 1 mb/d this year after several years of producing only a fraction of that amount.
Russia looks to shale. Russia is starting to look at its shale potential, and large reserves are thought to be located in the Bazhenov shale in Western Siberia. In fact, it is thought to be the largest shale formation in the world. Up until now, Russia has relied on conventional sources, but Russian companies are starting to move into shale. “The Bazhenov is a huge prize,” says Alexei Vashkevich, Gazprom Neft’s exploration director, according to the WSJ. Output from Russia’s shale is not expected before the mid-2020s, but it could be crucial to offsetting declines from mature oil fields.
In our Numbers Report, we take a look at some of the most important metrics and indicators in the world of energy from the past week. Find out more by clicking here.
Thanks for reading and we’ll see you next week.
Best Regards,
Tom Kool
Editor, Oilprice.com
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Global Energy Advisory 22nd December 2017
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While Washington was busy saber-rattling, Russia was busy deploying soft power to strengthen its hold on Venezuela. Russia’s Rosneft is expanding its presence in Venezuela: the company recently signed contracts for the development of two offshore gas blocks, with CEO Igor Sechin saying this is the first time Caracas has awarded a foreign company 100% of the exploration and operation rights to a hydrocarbons block. Under the terms of the contract, Rosneft will have the right to market overseas all the gas it extracts from the blocks.
The two blocks have combined reserves of 180 billion cubic meters, and Rosneft will develop them for 30 years. It is possible that the deals have something to do with the $6 billion Caracas owes the Russian company. Then again, it may be eager to allow one of its very few remaining allies to get something in return for agreeing to restructure a debt owed to Moscow that Caracas is finding it impossible to pay as per the original schedule.
In the same week as the Venezuela deal became public, Rosneft also said it had plans to start exporting natural gas to Europe. Naturally, this won’t be Venezuelan gas but the fact Rosneft is eyeing the European market is indication enough that whatever the EU thinks about Nord Stream 2 and Russian gas in general has very little to do with market realities, which come down to who will offer the lowest prices. For now, this is Russia and it would do the EU well to try and accelerate alternative gas supply projects, such as the Trans-Adriatic Pipeline, that should bring in gas from the Caspian Sea but is being wildly outpaced by Nord Stream.
In October, Venezuela’s state-owned PDVSA was negotiating to swap Russian oil producer Rosneft’s collateral in Venezuelan-owned, U.S.-based refiner Citgo. Rosneft holds a 49.9 percent collateral in Citgo for a loan last year of about $1.5 billion
Deals, Mergers & Acquisitions
• Exxon and BHP Billiton have decided to pull the plug on their 50-year-old gas marketing joint venture operating in Australia. The decision was prompted by Australian market regulatory authorities that are currently focusing a lot of attention on competition in the gas market due to fast-rising prices. After the dissolution of the JV, Exxon and BHP will each market the gas they extract from the Gippsland Basin on their own.
• Statoil has bought a 25% stake in the Roncador offshore field in Brazil, which will allow it to triple its crude oil output in the country, from 40,000 boepd to 110,000 boepd the Norwegian company said. It paid $2.9 billion for the interest to Brazil’s Petrobras, which will be its partners in the development of the mature field, located in the prolific Campos Basin. The field started producing in 1999 and as of November averaged 240,000 barrels of crude daily.
• Aker BP has bought a 17% interest in Fishbones – a company active in the development of unconventional stimulation technology for oil and gas extraction from tight plays. The acquisition will provide Aker BP with cost savings and higher recovery rates, initially to be enjoyed at Valhall, a mature field in the Norwegian section of the North Sea. Besides Aker, Fishbones shareholders include Norway’s Statoil, with a 25% interest, and Freyer Holding, a private Norwegian company, with a 51% stake.
Tenders, Auctions & Contracts
• Aramco awarded GE-owned Baker Hughes a $175-million contract for enhancing gas recovery and processing rates at two gas fields that are part of the Al-Ghawar oil and gas field – the largest in the world. Baker Hughes will supply 27 high-efficiency gas compression trains to boost production rates. The fields, Haradh and Hawaiyah, are instrumental in Saudi Arabia’s attempts to utilize its not-too-impressive gas resources more fully, as petrochemical production grows and as domestic demand for gas soars sky-high. Plans are to boost gas production in the kingdom to 23 billion cubic feet daily over the next 10 years. Riyadh also plans to increase the share of gas in its energy mix from 50% to 70%.
• The Australian government plans to include a block in the Great Australian Bight in its 2018 offshore Petroleum Exploration Acreage Release, which has sparked the anger of the Wilderness Society. The block will be among 21 that will be the subject of public consultation before the final decision on the 2018 tender, but environmentalists have been quick to speak out against any oil and gas drilling plans for the Bight, which is home to fragile marine ecosystems and endangered species. Even if the block goes on to be offered in the tender, the chances of any company taking up drilling there are questionable: recently, two Big Oil majors quit exploration in the Bight—BP and Chevron—citing economics.
Discovery & Development
• French Total SA has announced it will commission the construction of the first-phase floating production, storage, and offloading vessel for the Libra oil and gas project in Brazil’s Santos Basin. The vessel will have a daily capacity of 150,000 barrels of oil, to be extracted from 17 wells, at technical costs of less than $20 a barrel.
• The giant offshore Zohr gas field in Egypt has begun production, its operator, Eni, said. The company noted that the launch of production had taken a record-short time but given Egypt’s eagerness to expand its natural gas production, the rush is understandable. According to Eni, Zohr’s reserves in place reach more than 30 trillion cubic feet of gas, or 5.5 billion barrels of oil equivalent. The field was discovered in 2015 and is to date the largest gas discovery not just in Egypt but in the whole Mediterranean.
• Tellurian has a plan to build a $7-billion natural gas network from the Permian and the Haynesville shale plays to the LNG export terminals along the coast of southern Louisiana. The pipelines will be connected to existing gas transport infrastructure in the region as well as to another pipe planned by Tellurian, to carry gas to the company’s future Driftwood LNG export terminal on the Louisiana coast. Plans are to have the new network ready by 2022, as long as Tellurian can find enough paying customers to fund the project.
• Colombia’s Ecopetrol says it struck oil and gas in the Middle Magdalena Valley Basin in northwestern Colombia. The well yielded crude oil of a grade lighter than the heavy oils typical of Colombia’s fields. The discovery was made in an already producing region with processing infrastructure in close proximity, which significantly improves the commercial viability of the discovery.
Politics, Geopolitics & Conflict
• The U.S. has started talks with China on the prospects of new sanctions targeting North Korea after Pyongyang’s latest missile test conducted at the end of November. The sanctions will aim to cut the country’s access to oil products as a means of slowing down its nuclear weapons program. A military option is also being discussed in Washington.
• The giant corruption scandal that shook Brazil and Petrobras has spilled into Peru: President Pedro Pablo Kuczynski is now facing impeachment on charges of bribery from Brazilian conglomerate Odebrecht.
• Congress has passed the Republican tax bill that will see some major corporate tax cuts and will also allow oil and gas drilling in parts of an Alaskan wildlife refuge.
• Former executives from oil Royal Dutch Shell and Italian Eni are to be tried on charges of aggravated international corruption for their role in a $1.1 billion deal for Nigerian oil block OPL 245 in 2011. The Nigerian people lost out on over $1 billion because of this, and the precedent of trying Big Oil CEOs should have the industry on edge.
• Kazakhstan's oil fund has just been frozen on grounds of corruption as a Moldovan investor Anatolie Stati allegedly was pushed out of his oil and gas investments by the Kazakhstan government. Freezing a sovereign wealth fund is another precedent no one was expecting. |
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