Energy Prospectus

From Bloomberg:

The world’s biggest oil traders say crude could rise above $60/b in a year as demand grows and OPEC keeps cutting. Or it might fall to $45 as another wave of U.S. shale hits the market. The disagreement between Glencore, Gunvor and Trafigura on the bullish side, and Vitol on the other, underscores the huge uncertainty over the key drivers of oil supply and demand.

• "Towards the back end of next year we’re going to be well above $60," Trafigura CEO Jeremy Weir said at the Oil & Money conference in London on Wednesday. Demand is growing, oil-field productivity is declining in the U.S. and further weakening of the dollar will boost commodities, he said.

• The market has certainly tightened up in the last few months, said Vitol CEO Ian Taylor, but U.S. shale producers still have the ability to drive down prices, just as they did back in 2014.

• Gunvor CEO Torbjoern Toernqvist said he’s cautiously optimistic about the oil market for the year ahead. OPEC will probably sustain its production cuts for at least another six months because Russia and Saudi Arabia have shown they’ll do what’s necessary, he said in an interview with Bloomberg TV.

• "You’ll see oil at $100 again I’m sure, you’ll see oil at $25 again — that’s just the nature of the oil price,” said Alex Beard, global head of oil at Glencore.

The crisis unfolding around Kirkuk has left some of the world’s largest commodity trading houses worried the country’s autonomous Kurdish region will struggle to repay billions of dollars in cash-for-oil loans. The approximately $3.5 billion in debts were going to be met with the roughly 500,000 to 600,000 b/d that the northern region of Iraq was pumping, according to people familiar. But output has now collapsed to about half that level.

OPEC sent its strongest signal yet for an extension of production cuts until the end of 2018. It said preparations for the next meeting on Nov. 30 are taking their lead from Russian President Putin’s statement on Oct. 4, which tentatively backed a further nine months of curbs. Since Putin’s intervention, representatives of Iran, Angola and Algeria have indicated their willingness to extend.
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MY TAKE: Forecasts that U.S. oil production from shale and other tight formations will rise just because oil prices are over $50 are exaggerated; based on the rapid gains made in the early years of shale development.
Growth at the initial rate cannot continue because:
1. It will take more and more wells each year to keep up with the higher depletion rates of unconventional wells. U.S. oil production has been relatively flat since Q1 2017.
2. The big rebound in Q4 2016 and Q1 2017 was possible because there were plenty of completion crews and equipment ready and eager to go back to work. Plus, the upstream companies completed their very best DUC wells in Q4 2016.
3. After the big rebound phase, infrastructure cannot maintain the pace of growth.
4. Upstream companies will eventually run out of Tier One leasehold. Remember, the best areas are always developed first.
I believe there is a 50/50 chance that U.S. oil production goes from ~9.5 million barrels per day now to ~10.0 MMBPD by the end of 2018. Production moving much higher than that will be difficult unless the oil price goes a lot higher because the areas that are economic at $50 oil are limited.

More from Bloomberg;

Oil exports from northern Iraq dropped by more than half as production in the country’s disputed Kirkuk province slumped for a third day at fields that government troops captured from rival Kurdish forces. Flows by pipeline from Iraq to the Turkish port of Ceyhan fell to about 240,000 b/d on Wednesday compared with their normal daily level of 600,000 b/d, according to a port agent familiar.

Saudi Arabia's monthly crude exports rose by 0.2% to 6.69 million b/d in August, according to JODI data released on Wednesday. That's down 8.2% y/y and almost 1 million b/d below October 2016, the month chosen as the benchmark for OPEC output cuts. Iraq exports also increased by 0.7% to 3.761 million b/d. Unlike Saudi, however, shipments have consistently held above October's level. Its year-to-date average is over 400,000 b/d above the benchmark, the data show.

India's oil demand grew by the most in 10 months as manufacturers were seen boosting fuel demand amid an export surge and as automobile sales rose. Total oil products use in September rose by about 10% y/y to 16.26 million metric tons, data from the oil ministry's Petroleum Planning and Analysis Cell show.

Japan's crude imports from Russia fell by 32% y/y to 771,000 kiloliters, or about 162,000 b/d, in September, according to preliminary data from the Ministry of Finance.

U.S. crude imports from Saudi Arabia and Venezuela both hit record lows in the week ended Oct. 13, according to EIA data, leading to a 20% decline in total imports from OPEC. Shipments from Saudi fell by 111,000 b/d to 465,000 b/d, while those from Venezuela dropped by 211,000 b/d to 255,000 b/d, the data show. U.S. imports of Saudi crude peaked in 2017 at 1.5 million b/d in the week ended Feb. 10.

Market Calls

OPEC and Russia have defied the skeptics and their production cuts have eliminated half the oil-inventory surplus, meaning the rebalancing of the market is accelerating, said Secretary-General Mohammad Barkindo. “A balanced oil market is now fully in sight,” he said at the Oil & Money conference today. “Stability is steadily returning and there is far more light at the end of the dark tunnel we have been traveling down for the past three years.”

Up to 1.5 million b/d is at disruption risk in the short-term, according to ANZ analyst Daniel Hynes. While the situation in Iraq remains fluid, the risk of imminent disruptions there is greater than in Iran, Hynes said in a note today. “At best, after a relatively quiet period for unplanned disruptions, we believe the risks are now high enough to warrant a geopolitical risk premium. At worst, these issues should underpin prices for the foreseeable future.”

Asia's gasoline market will end 2017 in deficit, according to Energy Aspects. Growing imports into Indonesia and Malaysia and falling exports from China are supporting the Singapore gasoline market, contrasting with “pervasive bearishness west of Suez,” it said in a research report. It projects a deficit of 120,000 b/d in its Asia balance in December 2017, compared with a surplus of 20,000 b/d in the same month last year.

Propane pricing in the Far East has continued to firm along the curve, opening potential arbitrage opportunities for U.S.-sourced volumes in the near term, Clarksons Platou said in an emailed report.