Saudi Arabia Squeezed As OPEC Meeting Nears

30/11/ 2018/

Oil prices fell in trading on Friday morning, with a falling rig count unable to halt bearish sentiment.

Friday, November 30, 2018

Oil prices dipped in early trading, but the next few days will be volatile. First, any news from the G20 summit on the Trump-Xi meeting regarding the trade war could have ramifications for the global economy and oil demand heading into 2019. But much of next week will be characterized by whatever jawboning or rumors come out of upcoming OPEC meeting. For now, oil is downbeat but awaiting direction.

U.S. Senate vote hamstrings Saudi Arabia. Saudi Arabia is aiming to cut oil production in order to boost prices, but the recent vote by the U.S. Senate to end the war in Yemen, even if it doesn’t become law, heightens the pressure on Riyadh to assuage American concerns. That gives President Trump more leverage as he demands lower oil prices from Saudi officials. Riyadh faces a choice between accepting painfully low oil prices or defying Washington by cutting production. Reports suggest they are going to try to thread the needle, opting for modest cuts that at least put a floor beneath crude prices. “President Trump has effectively put a ceiling on oil prices — arguably this ceiling is about $70 a barrel Brent, maximum $75,” Thibaut Remoundos, founder of Commodities Trading Corporation Ltd., told Bloomberg. “It will be interesting to see if Saudi-Russia can keep the floor in place.”

Saudi Arabia struggling to convince others to cut. Many members of the OPEC+ coalition want Saudi Arabia to do all of the heavy lifting when it comes to production cuts. After all, they argue, Saudi Arabia was the one that added 1 million barrels per day of fresh supply since May. The Saudis “made this mess. They need to clean it up,” a Middle Eastern oil official told the Wall Street Journal. On Wednesday, Saudi oil minister Khalid al-Falih indicated that Saudi Arabia would not cut alone.

Trump administration to advance seismic drilling in Atlantic. The Trump administration is taking an early but critical step that could pave the way to oil exploration in the Atlantic Ocean. According to Bloomberg, the National Marine Fisheries Service could allow seismic surveying by five companies in the Atlantic, a precursor to exploration. Seismic testing is essential to exploration, but is highly controversial because of its effect on marine animals such as whales and dolphins.

Russia shows signs of support for OPEC+ cuts. Russia indicated that it could support an OPEC+ production cut next week in Vienna. Russia’s deputy foreign minister said that Russia wants more predictability and “smooth price dynamics.” However, Russia, and its oil firms, are not scared of lower prices. “Russian crude producers will feel comfortable in the $50 to $60 per barrel band,” said Dmitry Marinchenko, oil and gas director at Fitch Ratings.

Canadian oil discounts leading to layoffs. Oil prices for Western Canada Select (WCS) are trading below $15 per barrel, inflicting pain on the entire sector. Oilfield services companies in Alberta are issuing layoffs as activity slows down. Investment broker Peters & Co. said in a note that drilling activity has fallen by 10 per cent in recent weeks and could “weaken further over the course of December, a function of budget exhaustion and the curtailment of capital spending.”

Permian natural gas prices fall below zero. Natural gas prices at the Waha hub in the Permian fell into negative territory this week amid a worsening glut. A lack of pipelines to ferry away natural gas has some producers essentially paying other companies to take the product.

Shale industry could cut spending. The U.S. shale industry could cut budgets for the first time since the last downturn years ago. Shale companies are formulating their 2019 budgets right now, and the latest crash in prices could force a more cautious approach. “Something has to give,” Andy McConn, an analyst at Wood Mackenzie, told Bloomberg. “We expected some minor increases in budgets going into next year but now we see risk to the downside, with budgets flat or down year on year.”

China buying oil while it’s cheap. Bloomberg reports that China may be stepping up its purchases of oil as prices hit one-year lows, although data is spotty.

EPA to send ethanol blending requirements. The Trump administration’s EPA is set to announce ethanol blending requirements for 2019, which will include an increase in advanced biofuels by 15 percent while conventional corn ethanol levels will be kept flat. The implication is that the EPA has decided not boost the corn ethanol requirement to compensate for the rush of waivers it granted to oil refiners over the past two years, which ethanol producers have blamed for sinking the market for ethanol credits.

Iran’s nuclear chief warns that time is running out on nuclear deal. Iran’s top nuclear official warned the European Union that it could exit the 2015 nuclear deal if it does not begin to see some of the benefits from European efforts to rescue the accord. “If we cannot sell our oil and we don’t enjoy financial transactions, then I don’t think keeping the deal will benefit us anymore,” Ali Akbar Salehi, head of the Atomic Energy Organisation of Iran, told Reuters. “I think the period of patience for our people is getting more limited and limited. We are running out of the assumed timeline, which was in terms of months.” Meanwhile, the U.S. State Department said that Iran’s oil exports would fall further “very soon.”

Refining margins sink to five-year lows. Flat U.S. gasoline demand and high refinery output have combined to push refining margins down to five-year lows, according to the EIA.

Pemex triples estimated reserves for oil field. Pemex more than tripled the estimate reserve figure for its Ixachi field, saying the field in Veracruz could now hold 1.3 billion barrels of oil equivalent in proven, probable and possible (3P) reserves. “Without doubt this news will allow Pemex to contribute with more production in the future and stabilize the production platform,” outgoing Pemex CEO Carlos Trevino said.

LNG from Africa set to surge. New LNG capacity from Mauritania and Senegal in West Africa, operated by Kosmos Energy (NYSE: KOS), is set to come online in December. Other projects will come online in Cameroon, as well as Mozambique in East Africa, in the coming years. Many projects are using floating LNG, cutting costs and lead times relative to conventional onshore fixed facilities. “Africa is the hot spot for floating LNG,’’ said Lucas Schmitt, a senior gas analyst at consultants Wood Mackenzie Ltd., according to Bloomberg. “Confidence in floating facilities is firming up.’’

Volkswagen plans EV plant in U.S. Volkswagen is considering a plant in North America to manufacture electric vehicles. “We are 100 percent deep in the process of ‘We will need an electric car plant in North America,’ and we’re holding those conversations now,” Scott Keogh, the newly appointed CEO of Volkswagen Group of America, told journalists at the Los Angeles auto show. Earlier this month, VW said it would spend $50 billion by 2023 to remake itself, with a focus on EVs.

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