Oil Price - Oct 23

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dan_s
Posts: 37328
Joined: Fri Apr 23, 2010 8:22 am

Oil Price - Oct 23

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Phil Flynn at 9AM ET on 10/23:

Another big drop in U.S. rig counts and warnings from major oil service firms is making it clear that the Shale oil slowdown that I predicted is here. Baker Hughes reported a plunge of 7 oil rigs and eight natural gas rigs. Some of the drop is storm related but a lot of the drop is not. We know that in the prolific Permian basin rigs fell by 6 as Schlumberger (NYSE:SLB) CEO Paal Kibsgaard warned that U.S. energy and production companies seem to be moderating and that while he expects continued growth in the U.S., he believes the pace would slow. He also said that “There are clear signs the global oil market is balanced, which would support higher oil prices and investments if sustained, the head of Schlumberger said according to UPI. He said "The reduction in global oil inventories in the third quarter is clearly showing that the oil market is now in balance, which is reflected in the upward movement in oil prices over the past month”.

Reuters reports that, Baker Hughes’ CEO Lorenzo Simonelli was more pessimistic, saying the oilfield services industry continues to be volatile and describing the business environment as “challenging” with customers pushing out some equipment purchases. “We have seen some improvement in activity, but we have not seen meaningful increases in customer capital commitments,” he said.

The FT also is reporting that shale oil firms are finally focusing on profitability and not just volume of production. That means that shale producers will reduce production until they can start making money. Yet even with the cutbacks there are rising production costs per well and a shortages of oil workers that are tired of getting hired only to be fired a few months later. The frac crews will now command higher wages and that will increase to cost per well. (I've heard that a lot of oilfield workers are now in Houston doing home repairs after Hurricane Harvey. Over 200,000 homes were flooded by Hurricane Harvey. We are running out of sheet rock. - Dan)

It also means that it will be more difficult for frac producers to ramp up production, this should mean that U.S. shale production will continue to be revised downward by major reporting agencies. We are still hearing reports that the production per well is falling. (Based EIA numbers, the BOPD per completion in the Permian Basin have been 680 in the first quarter, 608 in the second quarter and 627 in the third quarter. IMO the first quarter was higher because upstream companies focuses on completing their DUC wells with the best logs first. - Dan)

This comes as global demand is red hot. Reuters reports China’s oil demand remains voracious, hitting a January to September average of 8.5 million barrels per day (bpd). India’s fuel thirst is also increasing. India imported a record 4.83 million barrels per day (bpd) of oil in September as several refiners resumed operations after extensive maintenance to meet rising local fuel demand. India’s September imports stood 4.2 percent above this time last year and about 19 percent more than in August, ship-tracking data from industry sources and Thomson Reuters Analytics showed.

With the U.S. tightening, flows from Iraq reduced due to fighting between government forces and Kurdish groups, and production still being withheld as part of a pact between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers to tighten the market, much will depend on demand going forward. Reuters reported that as of Sunday, oil exports from Iraq’s Kurdistan via the Turkish Mediterranean port of Ceyhan were still flowing at sharply reduced rates between 200,000 and 250,000 barrels per day, two shipping sources said. Flows had increased slightly to 255,000 bpd by Monday, one source said. Typically, the pipeline transports around 600,000 bpd. Iraqi Oil Minister Jabar al-Luaibi said on Saturday oil exports were increasing from the southern Basra region by 200,000 bpd to make up for a shortfall from the northern Kirkuk fields.

In a landmark visit to Iraq, Saudi Arabia’s Energy Minister Khalid al-Falih praised the two countries’ collaboration within the Organization of the Petroleum Exporting Countries to cut production in an effort to prop up prices. Iraq said the two countries would continue to cooperate in implementing decisions by oil-exporting countries according to Reuters.

The market balance is here. While oil may be reluctant to breakout just yet, it will only be a matter of time. The so called seasonal slowdown in demand will soon be ending and we expect to see significant tightening of supply. As we predicted the lifting of the U.S. oil export ban was very timely and the US is now a major factor in the global oil export market. This will allow for more global economic growth as oil will get to where it need to be to foster growth.
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U.S. refiners will need to ramp up production of heating oil. Distillate inventories are low and demand is rising. - Dan
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 37328
Joined: Fri Apr 23, 2010 8:22 am

Re: Oil Price - Oct 23

Post by dan_s »

Morgan Stanley Equity Research October 23, 2017

Over the last few years, oil markets had become largely immune to geopolitical
risk. Estimating the geopolitical risk premium in oil prices is far from an exact
science. Yet, a series of critical events that would have moved prices in the past
did not do so over the last 2-3 years. Therefore, it is probably fair to argue that
oil markets have priced in little geopolitical risk in the recent past.

With high inventories and amply supply, this made sense. At their peaks, supply
exceeded demand by as much as 2 mb/d and OECD inventories were 368 mln bbl
above their five-year average. The latter suggested stocks could draw 1 mb/d for
a year and only then be back to 'normal' levels. With effectively 2-3 mb/d of
excess supply, and very few of the world's 'hot spots' producing more than that,
markets could afford to be sanguine about geopolitical risk.

Yet, as the market tightens, oil price's sensitivity to geopolitical risk is changing
too. So far this year, oil markets have been undersupplied by ~0.3 mb/d,
according to IEA figures, and OECD inventories are currently just 190 mln bbl
above their five-year average. We expect this to tighten further into 2018, driven
by healthy demand growth, slowing US shale growth and continuing OPEC+
restraints. As the market has tightened, the amount of 'buffer' in the system has
shrunk. Geopolitical risks and supply shocks have become more relevant again.

Recently, two major sources of supply risk have lifted oil prices. Tension has
been building in Iraq, following the recent referendum on Kurdish independence.
This puts at risk the ~570 kbpd of exports via Turkey that is currently under the
control of the Kurdistan Regional Government (KRG). Also, uncertainty over
Iran's production over the medium term has grown, following President Trump's
decision not to certify Iran's compliance with the 2015 nuclear deal.

With enough geopolitical risks on the horizon, prices find a degree of
ongoing support. At the moment, we estimate that oil prices incorporate $1-2/bbl
for geopolitical risk, or a supply disruption of ~40-60 mln bbl. This is still
modest, in our view. With several 'hot spots' around the world, and markets
tighter than they used to be, this could become an ongoing feature of the market
once again.

As I have mentioned here before, Hurricane Harvey caused some refined product inventories to be drawn way down. Here is what Morgan Stanley had to say:
Product stocks have been drawing. As we highlighted in Winter is Coming, the strength
in oil demand has made some product markets look outright tight. Middle distillate in
particular has been drawing counter-seasonally and weekly data for selected countries
shows stocks in days-of-demand cover well below the seasonal average. The gasoil
forward curve has been in backwardation since early August and we are now moving
into a period of strength: distillate demand typically increases by 0.5 mb/d during the
fourth quarter. Although we have come down from the highs seen during Hurricane
Harvey, refinery margins remain supported and refinery throughput is around 1.4 mln
bpd above 2016 levels, supporting crude demand.
Dan Steffens
Energy Prospectus Group
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