Oil Capped By Shaky Demand Outlook

July 19, 2019/OilPrice.com

Oil held up in Friday afternoon trading, showing some resistance to the continued selling of the last couple of days

Friday, July 19, 2019

Oil prices fell this week on rising fears of weakening demand and a renewed supply surplus.

Iran proposes new nuclear deal. Iran has offered a deal with the U.S. that would include permanent enhanced nuclear inspections in return for the U.S. lifting sanctions. Iran’s foreign minister Javad Zarif said it was “a substantial move.” The offer comes shortly after the U.S. downed an Iranian drone in the Persian Gulf on Thursday. It’s unclear how the Trump administration will respond, in light of the 12 conditions it laid out last year, many of which are unrelated to the nuclear program. Oil prices fell on the news.

IEA cuts oil demand forecast. The IEA lowered its 2019 demand growth forecast to 1.1 mb/d, and may cut it again if the global economy continues to cool, the agency’s executive director said. It’s the latest in a series of downward revisions. Last year, the IEA saw 2019 demand growth at 1.5 mb/d; as recently as the July Oil Market Report, the IEA stuck with a 1.2 mb/d estimate. “China is experiencing its slowest economic growth in the last three decades, so are some of the advanced economies … if the global economy performs even poorer than we assume, then we may even look at our numbers once again in the next months to come,” Fatih Birol told Reuters in an interview. A growing number of analysts see pitfalls to the IEA’s demand forecasts.

U.S.-China trade talks stalled. Trump and Xi met last month and agreed to restart trade talks, but nothing has been scheduled yet. China is upset about the treatment of Huawei, while Trump complained that China has not purchased U.S. agricultural goods, as he claims Xi had promised. Both Bloomberg and the Wall Street Journal reported that experts increasingly think that the odds of a breakthrough in negotiations is remote.

U.S. struggling to find partners in tanker patrols. The Trump administration is struggling to find willing partners in its effort to increase surveillance and patrolling in the Persian Gulf to head off tanker attacks. Sources told Reuters that other countries are balking because they fear the plan will only ratchet up tension. “The Americans want to create an ‘alliance of the willing’ who confront future attacks,” a Western diplomat told Reuters. “Nobody wants to be on that confrontational course and part of a U.S. push against Iran.”

Gasoline glut seen later this year. A cooling economy and a rise in refining capacity could lead to another gasoline surplus in late 2019 and early 2020. “Gasoline cracks had a rough start to the year and although fundamentals improved through mid-year thanks to refinery outages, cracks for the remainder of 2019 and 2020 look weak from a historical perspective,” Bank of America said.

Natural gas prices muted despite heat wave. The eastern seaboard of the U.S. is in the midst of a major heat wave, but natural gas prices have barely budged. Ongoing production increases have prevented any tightening of the market. Gas futures for August delivery dipped below $2.30 per MMBtu on Friday.

North Sea “short cycle” projects. North Sea oil producers are taking a page out of the U.S. shale playbook, opting for lower cost short-cycle projects, rather than multi-billion dollar long-lived projects, according to Bloomberg.

New York awards 1.7 GW of offshore wind. New York awarded a 1.7 GW offshore wind deal to two companies this week, as Governor Andrew Cuomo signed the state’s ambitious climate bill into law. An 880-megawatt Sunrise Wind project was awarded to Denmark’s Orsted. Meanwhile, the 816-MW Empire Wind project went to Equinor (NYSE: EQNR), the Norwegian oil giant. Analysts are starting to revise up their long-term forecasts for offshore wind in the U.S. as the industry gathers momentum.

Canadian heavy oil prices rise on rail. Western Canada Select has climbed in the past month as crude-by-rail shipments are expected to rise. Canadian Pacific Railway forecasts that its rail shipments will rise by 20 percent in the third quarter from about 160,000 bpd in the second. The WCS discount to WTI narrowed to just $9.20 this week, the smallest discount since April.

Oil tankers risk becoming “stranded assets.” A new report warns that the world’s oil tankers could become stranded assets as governments increasingly push for climate policy and the world shifts away from fossil fuels. The $160 billion tanker market risks losing a third of its value in the coming decades, according to Maritime Strategies International.

Financially stressed oil and gas companies on the rise. The number of oil and gas firms in financial stress is increasing “as investors lose interest, access to more credit is throttled and companies struggle to live within cash flows,” according to S&P Ratings and S&P Global Platts. “After a relatively quiet 2018 for oil and gas defaults, the sector appears to be back in the spotlight this year with 10 rated oil and gas issuers downgraded to ‘D’ or ‘SD’ so far in 2019,” S&P Ratings said in a July 12 note. The credit ratings agency went on: “there appears to be a possibility that many of these companies could soon end up back in court for Chapter 22 proceedings — a euphemism for a second Chapter 11 bankruptcy filing.”

Mexico rolls back some energy reforms. The Mexican government said that going forward, new contracts for oil exploration would involve service-fees rather than full joint ventures. Mexico will honor existing contracts awarded under the prior administration, but new contracts would bring “ownership” of reserves back under Pemex and the state, rather than for private companies. The goal is to boost production, but analysts say that it will scare away drillers.

Berkeley bans new gas lines. Berkeley, CA became the first city in the country to ban natural gas lines for new residential homes. 

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