• Category Archives Oil and Gas
  • Why The Uncertainty Over Crude Oil Prices Will Endure

    Twenty-four oil-producing countries, members as well as non-members of the Organization of the Petroleum Exporting Countries, OPEC, met Thursday, 25 May, and voted to extend their production reduction accord by nine months, to April 1, 2018. The extension aims to rebalance the global oil market and stabilize oil prices. Investors however, viewed the effort as inadequate as oil prices fell about 5% in the wake of that meeting. Prices since ticked upwards somewhat, perhaps in anticipation of product drawdown during the driving season beginning with the Memorial Day holidays; but Goldman Sachs just lowered its 2017 price projections for both Brent and West Texas Intermediate oil grades.

    The original production reduction accord ─ which saw a spike in both oil prices and energy company stocks in its wake ─ was signed in November 2016 and was a reversal of an earlier OPEC laissez faire production policy. While OPEC, as has been surmised, adopted that production policy in a bid to drive higher-cost (shale, oil sands, etc.) oil producers offline and garner greater market share, its implementation may have been mistimed. If the policy had been adopted before the massive investment in shale production, it would most likely have killed, or at least significantly deferred the rise of, shale oil; but shale oil, once birthed, has proved resilient.

    The raison d’être for this accord extension may be that accruals from the marginal price increase would countervail losses from reduced production. But, with most of these producers dependent on oil proceeds for meeting budgetary provisions, its sustainability remains critical.
    Continue reading  Post ID 600

  • The Internecine Duel For Oil Market Share

    The crude oil producer-group, Organization of the Petroleum Exporting Countries, OPEC, in November 2014, adopted a laissez faire output policy which essentially removed caps on members’ supply quotas. Driven in the main by Saudi Arabia and some Gulf producers, the policy was a thinly-veiled attempt to drive the higher-cost (mostly North American tight oil) producers offline and ensure a good share of the global oil market. On a year-on-year basis, petroleum liquids additions by North American tight oil producers rose from 44,000 barrels per day (bpd) in 2006 to a staggering 1.7 million bpd in 2014, according to a report by Rystad Energy. Though this was largely responsible for the massive global supply overhang ─ which exceeded 2.5 million bpd in 2015 ─ the response by top producers, Saudi Arabia and Russia as well as Iran and Iraq among others, unleashing their massive supply capacities, only served to exacerbate the condition. Global crude oil prices plummeted to multiyear lows. In what was loosely termed a ‘‘sheikh-versus-shale’’ duel, this bid for better market share exacted a devastating toll on the duelling spigots.

    North American Tight Oil Producers

    When global crude oil prices were well-above US$100 per barrel, tight oil producers in North America, which in the main, had breakeven oil prices in the US$65 – US$90 per barrel range, stayed profitable. However, when falling prices tested US$26 per barrel and even stayed low for months on end, many of these producers were forced offline, and quite a few, permanently. Data from the law firm, Haynes and Boone LLP, show that in the period from January 2015 to 14 December 2016, there were 114 bankruptcy filings in the North American upstream sector and with a total debt of more than US$74 billion. For many of the ‘‘oil-rigged’’ states and provinces, taxes on proceeds from oil and oil-related businesses formed a major proportion of revenue; for some, tax proceeds from such businesses exceeded US$5 billion in 2014. Continue reading  Post ID 560

  • Crude Oil Prices And An Uncertain Rebalancing

    Crude Oil Prices

    The rise in crude oil prices from twelve-year lows seen in the first quarter of the year led many analysts to project a complete oil market rebalancing between 4Q 2016 and 3Q 2017. Investment bankers Goldman Sachs Group Inc. as well as the Saudi Arabian government, the world’s largest-volume oil exporter had earlier declared the crude oil glut over and announced the beginning of a market rebalancing. With oil (technically) entering a bear market on Monday, those projections may have been a little hasty. However, analysts at the Paris-based intergovernmental organization, International Energy Agency (IEA), as well as bankers Barclays Plc, Citigroup Inc. and Société Générale SA, have expressed confidence that the rebalancing is on track.

    False Re-balancing

    Contrary to declarations, that “rebalancing” of the oil market never really began. Global oil imbalance ― excess of supply over demand ― grew steadily from 1Q 2014 through 2Q 2015 even as demand was increasing.

    The unplanned supply outages in Canada (wildfires), Nigeria (militancy), and Libya (factional discord) among others in the early part of the year sent about 3.5 million barrels per day (bpd) of oil supply offline. This led to a decline in imbalance, which was mistaken for the significant cut in supply deemed necessary for a rebalancing of the market. Most of that outage has since been brought back on-stream.

    Crude oil demand fell by 510,000 bpd between 3Q 2015 and 1Q 2016 according to IEA data and is likely to continue in that trajectory over the next few months. Global crude oil and product storage facilities are currently bloated. In the U.S., crude oil inventories are well above the five-year average range while gasoline and other product stocks stand at multi-seasonal highs. Continue reading  Post ID 530