Oil prices fell to multi-month lows at the end of the week, as a confluence of factors all point in a bearish direction.
U.S. oil production surges. The EIA reported that U.S. oil production skyrocketed to 11.6 million barrels per day (mb/d) for the week ending on November 2. Despite fears that shale output would plateau because of pipeline constraints, the shale industry is firing on all cylinders. The figures also help explain the recent downturn in prices.
Russia could benefit from OPEC+ cut. Russia’s oil production is at a post-Soviet record high, but a cut in output may actually work to the benefit of Russian producers. “Producing less at $80 per barrel is better than producing at current levels and at $70 per barrel,” Alexander Losev, the chief executive officer of Sputnik Asset Management, told Bloomberg. “A certain output decline will also help the companies to reduce operating costs and further improve their financials, including free cash flow.”
OPEC+ cut would be third reversal. Saudi Arabia increased production in 2015, 2016 and again this year. The first two times, the kingdom backtracked as oil prices sank amid swelling inventories. The potential third production cut in four years suggests Saudi Arabia once again ramped up too quickly, Bloomberg argues. A technical committee for OPEC+ is set to meet this weekend to consider options for 2019, including a possible production cut.
Chevron considers Venezuela exit. Chevron (NYSE: CVX) is one of a handful of oil majors that have stuck it out in Venezuela even as the country continues to fall apart. The oil major’s assets are no longer profitable, and the Wall Street Journal reports that the company is growing weary of the problems. In response to the article, Chevron denied the potential exit. “We’re committed to Venezuela and we plan to be there for many years to come,” Clay Neff, Chevron’s president for Africa and Latin America, said in an interview late Thursday with Bloomberg. The reporting that Chevron might pack up and leave “is not accurate.”
Natural gas prices up sharply. Natural gas prices jumped more than 7 percent on a single day this week, on reports that colder than normal weather is about to hit much of the country. Henry Hub prices jumped to $3.50/MMBtu, the highest level since January. With natural gas inventories at a 15-year low, the buffer the U.S. has heading into winter is unusually thin, which could heighten volatility during periods of abnormally cold weather over the next few months.
Keystone XL construction blocked by the court. A U.S. federal court on Thursday blocked construction of the Keystone XL pipeline, ruling that the Trump administration failed to offer a sufficient justification for its approval. The Obama administration blocked the pipeline on grounds that the project’s negative impact on climate change was too large. In approving it quickly after coming to office, Trump did not offer an adequate justification. “The Department instead simply discarded prior factual findings related to climate change to support its course reversal,” a federal judge wrote in his decision.
Imperial Oil gives FID to oil sands project. Imperial Oil (NYSEAMERICAN: IMO)gave the go-ahead to a $2.6 billion bitumen project in Alberta, the first new oil sands project to receive a final investment decision since 2013. Construction on the 75,000-bpd project is set to begin this quarter, with first oil scheduled to come online in 2022. The project will also represent the first application of next-generation oil sands recovery technology. ExxonMobil (NYSE: XOM) is a majority owner of Imperial Oil.
Shale companies to pivot back to Permian. Carrizo Oil & Gas (NASDAQ: CRZO) is considering shifting oil rigs back to the Permian basin, just months after moving them elsewhere. Carrizo was forced to slow drilling plans this year due to pipeline bottlenecks, but the potential plans to add rigs back into the field suggests that the lull in the Permian could be nearing an end, Bloomberg reports.
Enbridge pipeline at risk after elections. Enbridge’s (NYSE: ENB) Line 5 pipeline, which ferries oil from Canada, through Michigan and into Ontario for refining, could come under political fire now that the state of Michigan has elected a governor opposed to the project. The aging 65-year-old pipeline, with a capacity of 540,000 bpd, presents an environmental risk to the Great Lakes and Michigan’s waterways, Governor-elect Gretchen Whitmer has argued. She has indicated that she might push for the pipeline’s closure. If it were shut down, it would cause the discounts for Canadian oil to balloon.
Wind and solar cheaper than coal. Renewable energy has been gaining ground at the expense of coal for some time, but a new study estimates that wind and solar are not just cheaper than new coal plants, but actually cheaper than simply running existing coal plants. According to Lazard, the all-in Levelized cost of electricity for wind ranges from US$29-$56 per megawatt hour, without subsidies. The marginal cost of merely running a coal plant is US$27-$45 per MWh. Wind competes without subsidies; with supports, it is far cheaper than existing coal plants.
Saudi think tank explores the non-OPEC world. A Saudi think tank is undertaking a research study to explore the ramifications of a hypothetical scenario in which OPEC fell apart or was disbanded. It’s not that Riyadh is considering such a move, but they want to know what the consequences will be. “We’re looking at what happens if there’s no spare capacity,” Adam Sieminski, the former head of the U.S. EIA and who now heads up the King Abdullah Petroleum Studies and Research Center in Riyadh, told Bloomberg. “One scenario to that is OPEC doesn’t exist.”
China’s oil imports still strong. China imported a record volume of oil in October, dispelling fears that the Chinese economy is slowing down. China imported 9.61 million barrels per day in October, up to an astounding 31.5 per cent from a month earlier. However, some of the factors driving imports higher are temporary, such as the need to fill strategic storage, plus a one-off buying spree by small refiners who had quotas that were nearing expiration. Still, with China’s production gradually declining, and the economy still humming along, high demand is not going away.