Global Oil Market - July 9

[dan_s]

MY TAKE: The global oil market is tight and getting tighter. Saudi Arabia will have trouble sustaining production over 11 million barrels per day. I rate the chance of Saudi Arabia being able to increase production to 12 million barrels per day at less than 5%. The chance of them sustaining production over 12 million barrels per day at less than 1%. Doing so will do long-term damage to their major oilfields. No matter how much they want to please Trump, they will not risk that. I also doubt that Iranian exports will go to zero, but that will not keep oil from going over $100/bbl because Venezuela is more likely to go to zero as each day passes. - Dan
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Could Saudi Arabia replace all the barrels lost from Iran sanctions? Kemp - Reuters News
09-Jul-2018 10:13:41
John Kemp is a Reuters market analyst. The views expressed are his own

LONDON, July 9 (Reuters) - The United States wants to eliminate all Iran’s crude oil exports from November, and is relying on Saudi Arabia and other OPEC and non-OPEC members to fill the gap in supplies.

"Our goal is to increase pressure on the Iranian regime by reducing to zero its revenue from crude oil sales," a senior State Department official told a news briefing this month.

"We are working to minimise disruptions to the global market, but we are confident that there is sufficient global spare oil production capacity," Brian Hook, the director of policy planning, said on July 2.

"We are not looking to grant licences or waivers broadly on the re-imposition of sanctions, because we believe pressure is critical to achieve our national security objectives."

But if the United States succeeds in reducing Iran's crude exports close to zero from November, in line with its stated policy, Saudi Arabia would have to raise its production to unprecedented levels to cover the loss.

And it would leave the global market tighter than at any time since the oil shocks of 1973/74 and 1979/80, with resulting upward pressure on prices.

ZERO EXPORTS

The administration has not been clear about whether sanctions will apply just to crude or will include condensates ("Briefing with an Iran diplomacy update", State Department, July 2).

But assuming sanctions apply only to crude, the global market would still need to replace more than 2 million barrels per day (bpd) of Iranian exports from the start of November.

According to the latest information from the Joint Organisations Data Initiative (JODI), Iran exported between 2.1 million and 2.2 million bpd of crude between January and April.

The question is where will the replacement barrels come from?

The International Energy Agency estimates OPEC members held 3.4 million bpd of spare capacity at the end of May, while their non-OPEC allies had no more than 330,000 bpd ("Oil Market Report", IEA, June 2018).

Saudi Arabia accounted for almost two-thirds of the reported OPEC spare capacity (2.02 million bpd), with smaller volumes held by Iraq (330,000 bpd), United Arab Emirates (330,000 bpd) and Kuwait (220,000 bpd).

Russia accounted for most of the non-OPEC spare capacity (roughly 250,000 bpd) with little or no available spare capacity in the other non-OPEC allies.

Other agencies and market analysts put the spare capacity figures for OPEC and non-OPEC members significantly lower than the IEA, which implies the market is even tighter.

But using the IEA's figures, it is clear Saudi Arabia would have to replace most of the Iranian barrels lost as a result of sanctions.

The kingdom would need to increase production and exports by at least 1 million bpd to cover the total loss of Iranian barrels.

The required increase would be even higher if other OPEC and non-OPEC countries struggle to raise their output or more production is lost as a result of problems in Venezuela and Libya.

SPARE CAPACITY

In theory, there is sufficient spare capacity in Saudi Arabia and other countries, but it would leave the global market with less than 1 million bpd of capacity left to meet all other contingencies.

In practice, some analysts think the market could be much tighter, with sanctions essentially using up all the spare capacity worldwide.

The IEA estimates Saudi Arabia could raise production to just over 12 million bpd and sustain it at that level for an extended period.

Saudi Arabia has already used some of its spare capacity to increase production by 458,000 bpd, from 10.03 million bpd in May to 10.49 million bpd in June.

The figures were contained in a communication from the kingdom to the Organization of the Petroleum Exporting Countries ("Saudi Arabia raised oil output by around 500,000 bpd in June", Reuters, July 5).

But according to the U.S. Energy Information Administration, the kingdom has not produced more than 10.42 million bpd on an annual basis (2016) or 10.63 million bpd in a single month (July 2016) in the last 20 years.

Saudi Arabia has reported roughly similar production numbers to JODI, with output peaking at 10.72 million bpd in November 2016 (https://tmsnrt.rs/2NwQzpZ).

It is possible the kingdom could lift production by another 1.3 million-1.4 million bpd beyond anything it has ever produced before but at the moment there is no way of knowing for certain.

PUMPING FLAT OUT

Some observers question whether such high rates of production could be implemented quickly and sustained for any length of time.

Maximum production would require opening the chokes on existing wells and bringing previously shut-in wells back into service.

Boosting production this way might risk a decline in oilfield pressure that could result in long-term damage to the reservoirs.

Some spare capacity might require drilling new wells within existing fields, in which case it is not strictly speaking spare capacity at all.

And it is not clear whether the pipelines, processing plants and export terminals have enough capacity to handle 12 million bpd because such high flow rates have never been tested.

Saudi Arabia could boost volumes supplied to the market by releasing some of its domestic crude stocks as well as raising field production, but stock releases would only ever be a short-term measure.

Domestic crude stocks have already fallen by 95 million barrels since their peak in October 2015, according to government data submitted to the JODI.

Domestic stocks had been drawn down to 234 million barrels at the end of April, the lowest level since November 2011.

Most of the remaining inventories are required for operational reasons, including as feedstock for the country’s growing refinery capacity, as well as ensuring smooth flow of oil from the fields onto tankers.

If Saudi Arabia needs to replace Iranian barrels, most of the increase will have to come from more pumping rather than stock releases, and it would require producing more oil than Saudi Arabia has ever pumped before.

Stringent sanctions on Iran will take both Saudi Arabia and the oil market into the unknown.

John Kemp

Senior Market Analyst
Reuters

[dan_s]

Raymond James weekly Energy Sector Stat July 9, 2018

Raymond James is providing the opening speaker at out Hess Club luncheon on Monday, July 16

We expect about a 100 rig gain in the rig count in the back half of 2018, before a more modest growth trajectory in 2019. Given the rig count outperformance in the first half of the year and continued growth in 2018, our average rig count comes in up about 22% this year at ~1,070. After a robust expected exit rate of ~1,160 rigs in YE18, 2019 should see a more modest 14% growth with buffered support from the Bakken and Eagle Ford. More importantly, in 2020 and beyond we expect to see consistent multiyear growth in U.S. oilfield activity as a tightening global oil market calls for robust U.S. drilling activity to keep up with declining base decline rates.

Despite the negative hype around widening Permian oil price differentials (and lower Permian spot oil prices), we see the current U.S. oilfield market as prime for continued growth due to the following:
1) Overall U.S. E&P cash flows are set to be VERY healthy in both 2018 (up 56%) and 2019 (up 18%) supporting continued robust U.S. E&P spending despite widening Permian differentials,
2) Even if Permian oil price differentials widen to an irrational $25/bbl average over the next 18 months (as we are modeling), realized Permian spot prices would still be in-line with initial 2018 budgeting assumptions (in the low to mid-$50 range),
3) Even with the potential Permian price reduction, we expect the U.S. to average realized prices above $65/bbl over the next 18 months since many of the U.S. producers should see realized prices closer to Brent levels,
4) Thus, the incremental rig count growth in Eagle Ford and the Bakken should more than offset a temporarily stagnating Permian rig count,
5) We believe that most of the larger E&Ps will be unwilling to turn off the efficiently running Permian well manufacturing ''machine'' for a short-term downward blip in oil prices,
6) Historically, the rig count lags WTI crude prices by 15-20 weeks (or 4-5 months). Since crude prices have moved steadily higher over the past year, we have yet to see the impact of higher oil prices over the past quarter show up in U.S. drilling activity, and
7) Long-term (2020 and beyond), we expect continued solid (5-10% annual) multiyear oilfield activity growth as operators struggle to offset the impact of rising U.S. production declines.
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MY TAKE:
> Even if the oil price differentials go to $25/bbl in the Permian Basin (unlikely), it will not impact the realized oil prices of our Sweet 16 or other model portfolio companies by anything close to that number. It will only impact "Spot Market" sales by that amount.
> This is extremely good news for oilfield services companies and for the frac sand companies. See our recent profile on HCLP, which you can find under the High Yield tab on our website.
> Eagle Ford oil and other areas that can ship their oil to the LLS market are getting a BIG PREMIUM to WTI. < Know were your companies are selling their oil.

[k1f]

<<An independent Chinese refiner has suspended crude oil purchases from the United States and has now turned to Iran as one of its sources of crude, media reports, citing an official from the refiner, Dongming Petrochemical Group.

What’s more, the source said that Beijing is planning to slap tariffs on U.S. crude oil imports and replace them with West African and Middle Eastern crude, including crude from Iran. China has already said that it will not comply with U.S. sanctions against Iran.>>

"Trade wars are good and easy to win."

https://oilprice.com/Energy/Crude-Oil/C ... Crude.html

[dan_s]

On July 7, CMA CGM, a France-based shipping company, ended its operations in Iran due to sanctions imposed by the United States. Other shipping giants such as A.P. Moller-Maersk also expect to stop their operations in Iran.

Thomson Reuters data estimates that Iran’s oil supply to Asia could drastically fall below 0.5 million barrels per day in November. In July so far, Asian refineries have imported ~1.5 million barrels per day of oil from Iran. These factors may increase oil’s undersupply fears—a factor that could support higher oil prices.
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The thing to remember is that the U.S. sanctions against Iran will cripple the country's economy and quickly reduce its ability to export oil. Over time it will also reduce their production capacity, since Iran must have foreign investments to fund oilfield development.

China not taking a few 100,000 BOPD from the U.S. is not a reduction in global oil supply. Someone else will take that oil.