• Tag Archives tight oil
  • 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

  • Global Crude Oil Rebalancing And The Producers’ Accord

    Crude oil prices plummeted from more than US$110 per barrel in the second quarter of 2014 to just above US$26 per barrel in the first quarter of 2016. This was due to massive supply additions by tight oil producers followed by ramp-ups by major producer-countries such as Saudi Arabia and Russia. The global crude oil imbalance ─ excess of supply over demand ─ exceeded a staggering 2 million barrels per day (bpd) by the second quarter of 2015, exerting downward pressures on prices. Market speculations about the necessary trigger for a global rebalancing grew rife. Large supply outages early last year, which bore such ascription proved false.

    With proceeds buffeted by a protracted low-price regime, major oil-producing countries ─ excluding the United States ─ agreed late last year to cut production, effective January 2017 and rein-in the supply overhang. The agreement provided for a total supply cut of 1.8 million bpd for the first six months of 2017 with the option of a rollover for a further six months. The Organization of the Petroleum Exporting Countries, OPEC ─ excluding Nigeria and Libya, both of which had and still have issues of domestic unrest ─ agreed to a supply cut of 1.2 million bpd while for the eleven non-OPEC countries, the agreed cut was 600,000 bpd.

    For both investors and analysts alike, three issues underscore concerns about the accord’s capacity to rebalance the global oil market:

    First, a record of breaches of assigned production quotas among OPEC members; second, the lack of an effective mechanism for enforcement of such production quotas; and finally, the effect on prices, of rebounding production, especially among the nimbler United States shale producers.

    It is really no secret that some OPEC countries have often violated their production quotas with little or no effective sanctions applied. A report by World Oil for example, showed that even with a supply reduction agreement in place, crude oil shipments by OPEC member Iraq, increased during the first 15 days of February by 122,000 bpd over the average for January. While this could be counterbalanced by reductions in subsequent months, it only accentuates concerns about compliance.

    However, due perhaps to the magnitude of the afore-mentioned slump in proceeds, the compliance rate for OPEC under that November accord was high for the first month. Per a report by Argus, the group reduced output by 1.14 million bpd out of the agreed target of 1.17 million bpd (a 97% compliance rate) between December 2016 and January 2017; Saudi Arabia exceeded its agreed reduction quota by 16%. For non-OPEC members, that rate was less than 50%. That said, whether a significant compliance rate among the groups can be sustained, remains to be seen.
    Continue reading  Post ID 546

  • Why Some Investors Are Betting On An Oil Price Shock

    The global crude oil glut ― driven principally by the dueling spigots of U.S. tight oil producers and those of Organization of the Petroleum Exporting Countries ― has diminished somewhat. However, stockpiles in the U.S., which consumes more crude oil than any other country, remain well above the five-year range.  In addition, inventories of products such as gasoline stand at multi-seasonal highs, with the likelihood of a pullback in throughput by refiners. Concerns about weak fundamentals saw money managers and speculators, in the week to July 26, holding a record (dating back to 2006) net-short position on NYMEX-traded gasoline, Reuters reports.

    While money managers and other investors also reduced their net-long positions on NYMEX West Texas Intermediate crude to a near five-month low, some independents are betting on a crude oil spike in the mid-term; and there may be justification for that.

    Oil Prices

    Front month September contracts for the international benchmarks Brent and West Texas Intermediate (WTI) settled at US$42.46/bbl and US$41.60/bbl respectively, 29 July. That settlement price for Brent was down 14.5% for the month, the largest monthly drop in about six months; for WTI the price was down 14% for the month, the largest in about twelve months.

    The low price regime is driven in the main, by a massive inventory of crude oil and refined products, as well as a sluggish demand. According to data from International Energy Agency, IEA, global crude oil demand declined by 510,000 barrels per day (bpd) between 3Q 2015 and 1Q 2016. Many industry analysts have projected a market re-balancing in 2017, but any oil price rebound is likely to be sluggish.

    World Oil Supply, Demand Continue reading  Post ID 520