Is This The End Of The Oil Rally?

July 17, 2018/

Chart of the Week

–    The U.S. processed a record amount of crude oil in 2017, even as refinery capacity remained flat.
–    Gross crude oil inputs averaged 16.6 million barrels per day in 2017, up from 14.3 mb/d in 2009. Over that period, refining capacity only increased by 945,000 bpd. 
–    That means that refining utilization jumped over that time period from 83 percent to 91 percent.

Market Movers

•    Plains All American Pipeline (NYSE: PAA) was denied an exemption on steel tariffs by the Trump administration for its Cactus II pipeline. It was the first ruling to affect the pipeline industry. Plains says the ruling could increase the cost of the project, originally pegged at $1.2 billion. 
•    TransCanada (NYSE: TRP) announced the startup of the Topolobampo Pipeline, which provide greater interconnections in Mexico, allowing more U.S. natural gas from Texas to reach Mexico. 
•    ExxonMobil’s (NYSE: XOM) Baytown refinery shut down after a power interruption and remained shut. The refinery resorted to safety flaring because of an operational issue, but Exxon says there is “minimal impact” on production. 

Tuesday July 17, 2018

Oil prices were mostly flat at the start of trading on Tuesday, after having posted two of the worst single-day declines over the past week. 

Oil price correction holding for now. The oil market has seen a sudden shift in sentiment compared to just a week ago. There are several reasons for this: The return of oil from Libya, the lifting of force majeure on a key oil stream in Nigeria, the anticipated return of oil from an outage in Canada, increased production from Saudi Arabia and the prospect of an SPR release from the U.S. Taken together, the oil market doesn’t seem as desperate for supply as it did a week ago. 

Saudi Arabia offers extra barrels. Saudi Arabia is offering extra volumes of oil to some buyers in Asia, according to Bloomberg, a sign that the Kingdom is going further to ensure the market is adequately supplied. It also suggests that Russia and Saudi Arabia are likely set to go beyond what was agreed to at the OPEC+ meeting, which called for an additional 1 mb/d of supply. Saudi Arabia also said that OPEC+ would no longer focus on country-specific output limits but instead would heed a collective target, a switch that would free Saudi Arabia to ramp up production. 

Shell lifts force majeure on Bonny Light. Royal Dutch Shell (NYSE: RDS.A) lifted force majeure on Bonny Light in Nigeria following the repair of the Nembe Creek Trunkline. Bonny Light represents about 200,000-250,000 bpd, and Shell had put it under force majeure in May because of problems with the pipeline. The return of Bonny Light has helped ease concerns regarding global supplies.

Houston oil contract to launch. Intercontinental Exchange Inc. said that it would launch an oil futures contract with physical delivery in Houston as soon as this quarter if all goes well. For decades, the WTI contract based in Cushing, OK has been the benchmark for U.S. oil prices, but Houston has surpassed Cushing in terms of importance. The Houston area is home to significant refining capacity, it has proximity to upstream production and the Gulf Coast has emerged as a major region for oil exports. As such, Houston reflects the dynamics of the crude trade much better than Cushing at this point. 

Vitol launches new fund to invest in wind power. Vitol Group, the world’s largest independent oil trader, is set to launch a new fund that will invest in wind farms in Europe, according to Bloomberg. The sum, roughly $234 million, is relatively modest, but the move is highly symbolic. Vitol largely operates behind the scenes, and thus, does not face the public relations pressures that some oil majors do. As such, its interest in clean energy carries weight. “We see that challenge facing electricity markets and we are also evolving our business model to adapt to this future,” Simon Hale, investment director at Vitol, told Bloomberg. “We’re trying to create a platform of scale and we think offshore wind is the best means to achieve that.”

China’s crude imports slowing. China’s imports of crude oil slowed in the second quarter and could slow further in the second half of the year. In June, imports fell 4.9 percent, year-on-year, the first decline in 2018. “We think crude imports in H2 2018 will likely ease to an average of 9.01 million b/d, from 9.08 million b/d seen in H1 2018,” S&P Global Platts Analytics’ senior analyst Zhuwei Wang said.

Goldman: U.S. political decisions causing oil volatility. Goldman Sachs said that unpredictable policy from the U.S. government is increasing volatility in the oil market. The potential release of oil from the strategic petroleum reserve and the pressure from the Trump administration on Saudi Arabia to increase output has increased uncertainty. Most important, the uncertainty over how the U.S. will treat Iran sanctions has led to a spike in volatility. 

Iran needs Asian refiners to skirt U.S. sanctions. China’s willingness to buy Iranian oil will largely determine how much supply Iran can keep online. The U.S. is taking a hardline on sanctions, suggesting waivers will be very scarce. “If China…buys Iran’s oil, we can resist the US,” an Iranian economic analyst told the FT. “China is the only country which can tell the US off.” Estimates of how much supply will be disrupted vary, but range from 700,000 bpd on the low end to as much as two-thirds of the 2.5 mb/d of exports. 

U.S. rejects European request for Iran waiver. Several European nations requested a waiver from U.S. sanctions on Iran, which would have allowed European companies in certain strategic sectors to continue to operate in the country. The U.S. rejected the request, an indication that Washington is going to give very little leeway on sanctions. 

IEA: Global energy investment fell for third year in a row. The IEA said in a new report that total global energy investment fell by 2 percent in 2017, the third consecutive year of a dip in spending. Much of the decline occurred in the power generation sector, due to “fewer additions of coal, hydro and nuclear power,” the IEA said. Fossil fuel spending rebounded a bit, but remained at two-thirds of that for 2014.

Trump considers SPR release. Although news reports have previously suggested that the Trump administration was pondering a release from the strategic petroleum reserve, new reports add a bit more detail. Bloomberg reports that options under consideration include a 5-million-barrel test sale, a more significant 30-million-barrel release, or an even larger release in coordination with other countries. No decision has been made and, in fact, the recent decline in prices takes some of the urgency away. 

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