OIL & ENERGY INSIDER

Oil prices collapsed on Friday, with WTI threatening to break the $50 mark and Brent falling below $60 for the first time in over a year. Friday, November 23, 2018 Brent fell below $60 per barrel during trading on Friday, a threshold not breached in over a year. WTI also saw a significant collapse, threatening to break below $50. The more oil prices fall, the more pressure OPEC+ will feel as its December 6 meeting approaches. Saudi production hit 11 mb/d. Saudi Arabia’s oil production hit 11 million barrels per day (mb/d) temporarily in November, although the full monthly average is expected to come in a bit lower than that. The 11 mb/d figure is a record high, but Riyadh plans to cut exports by 500,000 bpd in December. Permian surge expected next year. The inauguration of new oil pipelines in 2019 could unlock another wave of supply from the Permian basin. “The Permian will continue to grow and OPEC needs to learn to live with it,’’ said Mike Loya, the head of Vitol Group’s unit in the Americas, according to Bloomberg. The U.S. shale industry proved that it could weather pipeline bottlenecks this year, and even grow production at an incredible rate, which suggests that even more growth is forthcoming. Bloomberg says that shale executives talk about a coming “tsunami” or a “flooding of Biblical proportions,” with a lot of other hyperbolic adjectives being thrown around. U.S. total liquids production (both crude and natural gas liquids) could hit 17.4 mb/d by the end of next year, according to the EIA. Does Saudi Arabia want to build a nuclear weapon? The New York Times exploresthe secret negotiations between the U.S. and Saudi Arabia over a nuclear power deal. The agreement would allow for the construction of nuclear reactors in Saudi Arabia, but Riyadh wants to control the fuel cycle, which raises questions about motivations for a weapons program. The recent murder of Saudi journalist Jamal Khashoggi, and the shifting explanations for what happened, also seriously undercuts the credibility of the Saudi regime. China’s gasoline exports drop to 13-month low. China’s gasoline exports in October fell to a 13-month low, a sign of an emerging glut in Asia. Inventories in Singapore are at a three-month high. At the same time, diesel exports in October jumped by 40 percent from a month earlier, as demand for middle distillates remains strong. BP begins production at Shetlands project. BP (NYSE: BP) began production at the second phase of its Clair field in the West of Shetland region this week. According to Wood Mackenzie, the West of Shetland region will be the only area of the North Sea zone that will see output grow through 2025. The mature North Sea has struggled to attract new investment, but some of the oil majors see the West of Shetland region as promising. “Clair is a massive oil accumulation with over 7 billion barrels of oil in place. That’s why we see Clair Ridge being out there for 40 years,” BP’s head of North Sea Ariel Flores told Reuters. The Clair project was seven years in the making, and production could hit 120,000 bpd. TransCanada halts construction on gas pipelines in Mexico. TransCanada (NYSE: TRP) suspended construction on several natural gas pipelines in Mexico, citing delays, cost overruns and alleged acts of extortion. “The social and legal uncertainty that prevails in this state makes the continuity of our investments impossible,” the company wrote in the statement published in Mexican newspapers. “On multiple occasions, social groups have made irrational requests that border on extortion and have performed acts outside the law.” Libya expects OPEC exemption. Libya’s oil production has climbed significantly this year, but the war-torn North African nation still expects to be exempted from any production cut deal, despite the fact that the global oil market is starting to suffer from oversupply. Production recently hit 1.28 mb/d, a five-year high. Political progress also promises to clear the way for Libya to boost production. The National Oil Corp. hopes to raise production to 1.6 mb/d. Canada offshore outage due to storms. Canada’s eastern province of Newfoundland and Labrador saw four oil fields go offline due to a powerful storm last week, knocking a combined 150,000 bpd offline. Only one field has resumed operations. Trump administration to propose biofuels requirements. The Trump administration is set to propose blending requirements for the final three years of the U.S. Renewable Fuels Standard in January, which will set off another round of fighting between the ethanol and oil industries. The program, launched in 2007, expires in 2022. Reuters reports that the Trump administration is expected to propose blending requirements that lean more in favor of refiners, lowering the ethanol requirements that refiners need to use in their fuel mixes. “We are going to ask and we expect to see lower volumes across the board,” Derrick Morgan, a lobbyist for the American Fuel and Petrochemical Manufacturers, told Reuters. Canada considers buying rail cars to move oil. The crisis in Canada’s oil industry is forcing the government into action. The federal government is considering a request from Alberta to share the cost of buying rail cars to move 120,000 bpd of oil from the province, according to Reuters. The pipeline bottleneck in Alberta has pushed prices for Western Canada Select (WCS) below $15 per barrel. Investment banks lower oil price forecast. A survey of investment banks by S&P Global Platts finds an average forecasted Brent price of $75.50 per barrel in 2019, down from $78.51 per barrel in October. The price is significantly higher than prevailing spot prices, and the price also is notable because of worries over the global economy. The investment banks expect OPEC+ to cut production to help erase the supply glut. “OPEC has indicated its determination not to let the market slip back into oversupply in 2019, and we think it has given a clear indication of its intention to defend prices in the $70s,” HSBC said in a note last week. Philippines and China make progress on South China Sea. The Philippines and China struck an agreement that would move the two sides closer to cooperation on oil and gas exploration in the South China Sea. Thanks for reading and we’ll see you next week. Best Regards, Tom Kool Editor, Oilprice.com P.S. – We are excited to announce in the past few weeks the Oilprice community has grown over 50%, becoming one of the largest most active energy communities on the internet. Join the discussion now and have your say!

Could Trump And Xi Kill Bearish Sentiment In Oil?

On November 30th two rather powerful men are set to have a meeting in Argentina and they may very well decide the short-term fate of global oil prices. Markets have been holding their breath in the lead up to the Trump/Xi meeting at the upcoming G20 summit, and this week they seem to be running out of air. Crude oil tumbled and US stocks tanked as the two sides squabbled over current trade arrangements which ultimately ended up in a US-bound China trade delegation cancelling their trip. US Vice President Mike Pence reiterated that the US will not hesitate to double current tariff levels on roughly $250 billion worth of goods and Trump rejected a list of 142 concessions made by Chinese officials as inadequate. The US Trade Representative’s office also released a report on Tuesday concluding China has yet to begin altering the practices which the US views as unfair. Both sides seem to be downplaying the likelihood of reaching a deal prior to January 1 when the next round of US duties will increase to 25% on a wide array of Chinese consumer goods. From our angle, it appears that Trump and Xi seem to be the only two people who could slow the radically bearish price action in oil. Brent crude has tumbled from $86.74 to $61.71 over the last six weeks as massive over production from Saudi Arabia has been exacerbated by increased confidence that the global economy is heading into a chilly 2019. Global markets are increasingly playing defense, as evidenced by this week’s flight out of US stocks and into short term US government bonds. Speculators continue to drive much of the price weakness in crude having cut net length held in WTI and Brent to its lowest level in more than two years while more than tripling their new short positions since September. This week the geopolitical front was mixed as it related to an OPEC+ crude deal. On the bearish side, Russia seems to be dragging their feet in joining a potential supply cut deal. So far, Russian Energy Minister Novak has merely commented that they need to further assess the state of the market before agreeing to cut supplies. On the positive side, Saudi Arabia may be emboldened to lead a round of production cuts after President Trump fully aligned himself with MBS despite a CIA report concluding that the murder of Jamal Kashoggi was led by the crown prince. Reaching a deal will be complicated by the fact that the Saudis need a substantially higher Brent price (roughly $75/bbl) to operate with a balanced budget than the Russians (roughly $55/bbl) do after Putin realigned Russian spending during the 2015-2016 bear market. Nevertheless, we still expect to see reduced supplies from OPEC+ beginning early in 2019 in order to prevent another tsunami of hedge fund selling. In the meantime, trade concerns are dominating markets and we don’t expect to see any positive signs from either the Trump or Xi camps prior to formal negotiations at the G20. These concerns will only be compounded by the impending US Fed rate hike which will keep upward pressure on the US Dollar and push commodities lower. Nevertheless, the majority of research we see still views oil as oversold and sees a rally to +$70 for Brent into the end of the year. There very well may be some rally potential in the coming weeks as hedge funds inevitably cover the short positions they’ve built over the last two months, but it will certainly take a strong stomach to buy the current dip in oil! Quick Hits -    Oil prices are under a bearish assault yet again this week with WTI lowering to $53 while Brent touched $62. WTI’s selloff now represents a 13-month low while Brent is on an 11-month low. Both grades are down more than $22 over the last six weeks. -    The primary driver of crude bearishness has been continued global trade pessimism related to China and the US. Rhetoric from both sides suggests that they remain far apart in their efforts to forge trade pacts and markets are increasingly concerned that this is not just jockeying for a better bargaining position prior to the impending G20 meeting. -    Hedge funds were confirmed as contributors to last week’s price bearishness by this week’s COT report. Speculators cut more than 10% of their combined NYMEX WTI + ICE Brent net length last week and more than 22% over the last two weeks. Gross short positions have more than quadrupled in NYMEX WTI over the last two months and more than tripled in ICE Brent. -    Adding to the macro concerns is that markets still expect the Fed to hike rates again in December. The US 2yr bond yield was near 2.80% this week as investors rushed to safety and out of stocks and commodities. If we zoom out a bit, however, we’re reminded that the 2yr yield has increased by more than 50% in the last twelve months and that financial conditions are obviously tightening as a result. The US housing market continues to show signs of slowing with cooling prices and mortgage applications. -    US stocks struggled mightily to begin the week lead by a bludgeoning of tech stocks. The S&P 500 traded near 2,640 mid-week and is lower on the year by about 50 points. -    On a more positive note, the Shanghai Composite seems to be expressing a more positive view of trade related comments made by US and Chinese leadership and has rebounded by more than 5% in the last four weeks. -    Another positive note: US gasoline spreads (previously a predictor of the oil market’s woes) have rebounded in the last two weeks. The US gasoline 1-month / 6-month spread has jumped by about 4 cents as funds and trade groups have speculated that the market could be due for a short term bounce