Global Oil Market - July 13

[dan_s]

Our opening speaker at Monday's luncheon in Houston is from Raymond James and he will address the issues below. Frank Lodzinski, CEO of Earthstone Energy, will address the Permian Basin takeaway issue. Seating is limited to 80, so register ASAP if you wish to attend. As of the time of this post, we have over 60 registered to attend. - Dan

With the world's spare oil production capacity cut to the bone (lowest ever), it will only take one more "Unplanned Supply Disruption" to cause a spike in oil prices. Remember, they call them "unplanned" for a reason. - Dan

OPEC output may be stretched to limit by supply crises, IEA says By Grant Smith on 7/12/2018

LONDON (Bloomberg) -- OPEC’s Gulf members may need to pump almost as much crude as they can to cover swelling supply losses from Venezuela to Iran and beyond, the International Energy Agency said.

Saudi Arabia might have to draw harder than ever before on its spare production capacity as a spiraling economic crisis in Venezuela, renewed U.S. sanctions on Iran and disruptions in Libya strain global markets, the agency predicted.

“Rising production from Middle East Gulf countries and Russia, welcome though it is, comes at the expense of the world’s spare-capacity cushion, which might be stretched to the limit,” the Paris-based IEA said in its monthly report. “This vulnerability currently underpins oil prices and seems likely to continue doing so.”

Facing intense political pressure from U.S. President Donald Trump, Saudi Arabia pledged last month that the kingdom and its allies would increase oil supplies to prevent rallying prices from hurting the global economy. Yet as Venezuela continues to unravel and Trump unleashes aggressive sanctions against Iran, fears that the supply boost won’t be enough are keeping prices near the highest in three years.

Venezuela’s total output capacity could sink below 1 MMbpd by the end of the year, bringing its overall loss in 2018 to more than 40%, the IEA said. Iran has already seen its shipments to Europe fall almost 50% as U.S. penalties deter buyers, and the country’s total exports could slump even more, according to the agency, which advises most of the world’s major economies.

As supply losses in the Organization of Petroleum Exporting Countries pile up, its biggest producer, Saudi Arabia, is trying to plug the gap. The kingdom bolstered output by the most in three years last month, increasing by 430,000 bpd to 10.46 MMbpd, according to the agency.

Output ramp-up

If the Saudis raise production to a record 11 MMbpd next month, as they’ve indicated they might, it would be the kingdom’s biggest increase over a two-month period since 2011, the IEA said.

Raising output further could shrink the country’s spare production capacity -- the crude left idle for emergencies -- to “an unprecedented level below 1 MMbpd,” the IEA predicted. That would leave barely 1% of global supply to compensate for any additional outages.

World markets remain vulnerable as the Trump administration seeks to choke off Iranian crude exports after the president quit an accord that polices the Islamic Republic’s nuclear program. U.S. sanctions look set to cut Iranian shipments by more than 1.2 MMbpd, the IEA said.

The agency, which oversees the release of emergency oil stockpiles held by importing nations, reiterated that it’s monitoring developments in case any action is required.

U.S. crude futures climbed above $75/bbl on July 3, the highest since late 2014, prompting criticism from Trump that OPEC should do more to moderate prices. Fuel costs have sparked protests in Brazil and Russia, and complaints from India.

The IEA report showed further signs that prices are taking a toll, with global demand growth slowing in the second quarter to just 900,000 bpd. However, the agency kept its annual consumption growth forecasts for this year and next unchanged.

[dan_s]

Additional comments: https://finance.yahoo.com/news/oil-mark ... 00300.html

MY TAKE:

1. Upstream companies don't need $100 oil to make money. Q2 results are going to be strong and none of the upstream companies will report realized prices over $70/bbl in the quarter. Actually, financial results at $70/bbl are better today than when oil was selling for $100/bbl in 2014. < This is the main reason why the Sweet 16 is a STRONG BUY at today's share prices.

2. There is strong support for WTI at $70/bbl, so the bias for the next move is to the upside.

3. The Permian Basin pipeline capacity issue is a "FEAR" that is overblown. Most of our Sweet 16 and other model portfolio companies have takeaway contracts and hedges that will minimize their exposure. None of the oil will be "stranded", but it may require some high transportation fees to get about 5% of the Permian Basin oil to market from Q4 2018 to Q3 2019. Regardless, this is a short-term problem that is being solved by companies like PAA and ONEOK.

4. Iran is obviously the "wildcard". I personally won't mind paying a bit more for gasoline if Trump can cause regime change in Iran. The world has put up with their crap way too long. If the sanctions do reduce Iranian oil exports to near zero, there is no way the other OPEC members can make up the difference.