The crude oil “supply gap” risk

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The crude oil “supply gap” risk
Photo: Dave Walsh / VW Pics / UIG via Getty Images

A big question among oil experts these days is whether today’s worldwide investments in new supplies are too low to avoid risk of a “supply gap” opening up in the early 2020s as demand grows and existing fields decline.

The big picture: Two competing views presented this week offer a pessimistic and optimistic take on the situation, taking on opposite sides of the investment debate.

Fresh warning: The head of one of the world’s largest oil-and-gas companies says the surge in U.S. crude production is not enough to prevent problems from emerging in a few years.

  • “Even if the U.S. shale oil is dynamic, we do not invest enough in this industry,” Total CEO Patrick Pouyanné says on the new episode of the Columbia Energy Exchange podcast.
  • He says under-investment in recent years is still a problem in 2018.
  • “Post-2020, the price will go high, because we will have a lack of capacity, and even with the shale oil dynamic, the global production of oil will be not enough. We are under-investing,” Pouyanné says.

Don’t worry so much: A research note this week from Barclays analysts, however, suggests that these types of concerns are likely misplaced.

  • They argue that even with declines from mature fields, there has been enough new supply coming online from 2011–2017 even outside OPEC and U.S. shale to nearly offset it. And they don’t see that changing.
  • “In the next couple of years, projects that have already received a green light are coming online and will further mitigate those declines. That means that the ‘mature base’ of non-OPEC non-US supply is flat from now through at least 2022, and it leaves OPEC liquids, US tight oil, Canadian oil sands, and non-crude liquids available to meet incremental demand growth,” they write.

US oil extends gains to hold near 3-week high

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  • U.S. oil prices rose for a fourth session on Tuesday to near a three-week high hit a day earlier.
  • Prices were supported by signs of robust production curbs by OPEC and non-OPEC countries.

An oil pump jack in the oil town of Gonzales, Texas.

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An oil pump jack in the oil town of Gonzales, Texas.

U.S. oil prices rose for a fourth session on Tuesday to near a three-week high hit a day earlier, supported by signs of robust production curbs by OPEC and non-OPEC countries and a slight fall in U.S. production.

U.S. West Texas Intermediate crude for April delivery was up 10 cents at $64.01 a barrel by 0020 GMT. The contract hit $64.24 on Monday, its highest since Feb. 6.

London Brent crude had yet to start trading after settling up 19 cents at $67.50.

Saudi Arabian oil minister Khalid al-Falih indicated on Saturday that its crude production would be well below the production cap as the Organization of the Petroleum Exporting Countries and its allies were committed to reducing output to bring balance and stability to the market.

Prices were also supported by U.S. Energy Information Administration data on Thursday that showed domestic oil production dipped to 10.27 million barrels per day from 10.271 million bpd the week before.

U.S. crude inventories are forecast to have risen by 2.7 million barrels last week, a preliminary Reuters poll showed on Monday.

Gasoline stocks are seen down by 600,000 barrels, while distillate inventories, which include heating oil and diesel fuel, were seen down 700,000 barrels. The American Petroleum Institute is scheduled to release its weekly data later in the day.

Oil hits 2-week high as Saudi Arabia to keep output well below cap

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  • Oil prices extended gains to hit two-week highs on Monday.
  • Saudi Arabia’s oil minister said the country hoped OPEC and its allies will be able to relax production curbs next year and create a permanent framework to stabilize oil markets.

Oil pumpjacks in the Permian Basin oil field are getting to work as crude oil prices gain.

Spencer Platt | Getty Images
Oil pumpjacks in the Permian Basin oil field are getting to work as crude oil prices gain.

Oil prices extended gains to hit two-week highs on Monday, supported by comments from Saudi Arabia that it would continue to curb exports in line with the OPEC-led effort to cut global supplies.

U.S. West Texas Intermediate crude for April delivery was up 25 cents, or 0.4 percent, at $63.80 a barrel by 0301 GMT after rising 3 percent last week.

London Brent crude gained 13 cents, or 0.2 percent, to $67.44, after climbing nearly 4 percent last week.

Both benchmarks earlier hit their highest since Feb. 7.

“The rise in equities made it easier to buy risk assets such as oil,” said Tomomichi Akuta, senior economist at Mitsubishi UFJ Research and Consulting in Tokyo.

“But amid worries over U.S. crude production at near record highs, oil is struggling to make a move.”

Prices were supported after Saudi Arabian oil minister Khalid al-Falih on Saturday said the country’s oil production in January-March would be well below output caps, with exports averaging below 7 million barrels per day (bpd).

Saudi Arabia hopes OPEC and its allies will be able to relax production curbs next year and create a permanent framework to stabilize oil markets after the current supply cut deal ends this year, Falih added.

Jackie DeAngelis commodity hit

March seasonal turnaround for crude around the corner  

“A study is taking place and once we know exactly what balancing the market will entail we will announce what is the next step. The next step may be easing of the production constraints,” he told reporters in New Delhi.

“My estimation is that it will happen sometime in 2019. But we don’t know when and we don’t know how”.

U.S. energy companies last week added one oil rig, the fifth weekly increase in a row, bringing the total count up to 799, the highest level since April 2015, Baker Hughes energy services firm said on Friday.

Hedge funds and money managers upped their bullish wagers on U.S. crude oil for the first time in four weeks, data showed on Friday.

A powerful 7.5-magnitude earthquake struck Papua New Guinea’s Southern Highlands province early on Monday, disrupting communications and oil and gas operations.

Meanwhile, Libya’s National Oil Corp said on Saturday it had declared force majeure on the 70,000 bpd El Feel oilfield after a protest by guards closed the field.

Energy shares in Asia climb as oil prices hold onto gains following US inventory decline

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  • Energy stocks in Asia traded higher on Friday.
  • Oil prices touched a two-week high in the last session after data from the U.S. Energy Information Administration showed U.S. crude stocks unexpectedly declined.
  • The S&P/ASX 200 energy sub-index was up 0.68 percent. Gains were also seen in oil-related stocks listed in Japan and Australia.
Pump jacks and wells are seen in an oil field on the Monterey Shale formation, March 23, 2014, near McKittrick, Calif.

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Pump jacks and wells are seen in an oil field on the Monterey Shale formation, March 23, 2014, near McKittrick, Calif.

Oil-related stocks in Asia traded higher on Friday as oil prices recorded slight gains after touching two-week highs in the previous session.

Those gains in oil prices had come after U.S. crude stocks unexpectedly declined by 1.6 million barrels in the week ending Feb. 16, Reuters said, citing data from the U.S. Energy Information Administration. That compared to the 1.8 million-barrel rise in inventories forecast by experts.

Woodside Petroleum, Australia’s largest oil and gas company, was up 0.56 percent following those increases in prices. Other oil producers also gained: Santos rose 0.39 percent and Oil Search rose 1.46 percent.

More broadly, the S&P/ASX 200 energy sub-index traded higher by 0.68 percent in the afternoon Sydney time.

Energy stocks in Japan saw sharper gains, with oil producer Inpextrading higher by 2.55 percent and Cosmo Energy gaining 4.59 percent. JXTG Holdings, Japan’s largest refiner, was up 3.58 percent.

Meanwhile, Hong Kong-listed shares of Chinese oil producer CNOOCrose 0.88 percent in late morning trade local time. Oil giant China Petroleum and Chemical Corporation, or Sinopec, added 1.11 percent.

Oil prices were mostly steady on Friday. U.S. West Texas Intermediate crude futures advanced 0.05 percent to trade at $62.80 per barrel and Brent crude futures were off by 0.02 percent at $66.38.

“The unexpected fall in oil inventories in the U.S. should see support for crude oil prices remain strong,” said ANZ Research analysts in a Friday morning note.

“Prices were also supported by comments from UAE Energy Minister Suhail Al Mazrouei, who said the worry is undersupply, not oversupply, as demand remains strong amid the constraints on output,” they added.

Crude oil inventories down 1.6 million barrels

Crude oil inventories down 1.6 million barrels  

Oil falls as stronger dollar eclipses US inventory drop

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  • Stronger dollar makes oil costlier for some buyers
  • API report showed lower U.S. crude inventories

Oil pumpjacks in silhouette at sunset.

Oil pumpjacks in silhouette at sunset.

Oil prices fell on Thursday, dragged lower by a firmer dollar that offset support from a surprise decline in U.S. crude inventories.

Brent crude futures were down 28 cents at $65.14 a barrel by 1007 GMT, while West Texas Intermediate (WTI) futures dropped 37 cents to $61.31 a barrel.

The dollar rose to a one-week high against a basket of major currencies on Thursday, after minutes of the Federal Reserve‘s January meeting showed policymakers were more confident of the need to keep raising interest rates.

With the strengthening dollar, the oil price has lost nearly 10 percent since hitting a multi-year high above $70 in January.

RBC:  Two offsetting stories at play in the oil market this year

RBC: Two offsetting stories at play in the oil market this year  

“Given the market’s whipsaw reaction we could add another key takeaway, that recent heightened market volatility could be here to stay,” LCG markets strategist Jasper Lawler said.

The correlation between moves in the oil price and the dollar has strengthened in the last couple of weeks, as investors increasingly sell other assets to buy the U.S. currency on expectations of a faster pace of rate rises.

“The firming dollar continues to thwart investor sentiment despite the bullish inventory data,” said Stephen Innes, head of trading for Asia-Pacific at futures brokerage OANDA.

A stronger dollar pushes up the bill for countries paying for imports in other currencies, potentially curbing demand.

The American Petroleum Institute on Wednesday reported an unexpected drop in U.S. crude oil inventories by 907,000 barrels to 420.3 million barrels for the week to Feb. 16.

Geopolitical risk has heightened as a factor in crude oil prices

Geopolitical risk has heightened as a factor in crude oil prices  

Inventories usually rise at this time of year, as many refineries cut crude intake to conduct maintenance, but a bottleneck in Canada’s pipeline system has reduced U.S. imports and pushed U.S. stocks lower.

“Improved pipeline infrastructure to the Gulf coast and the decreased supply via TransCanada’s Keystone pipeline, sent … inventories tumbling,” Innes said.

But analysts said oil markets were still generally well supported due to rising demand for crude and production restraint led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia.

“OPEC production curbs have stabilized the market. Adherence to (the) agreement has been relatively good,” Daniel Hynes, senior commodity strategist at ANZ bank, said in a report on Thursday.

Oil falls as dollar rises, US inventories expected to rise

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  • Dollar steadies against other leading currencies
  • Ongoing OPEC-led output cuts provide some support
  • Brent, WTI move in sync

An oil pump jack in the oil town of Gonzales, Texas.

Getty Images
An oil pump jack in the oil town of Gonzales, Texas.

Oil prices fell on Wednesday, weighed down by a rebound in the U.S. dollar from three-year lows hit last week and by an expected rise in U.S. crude production.

Brent crude futures were last down 71 cents at $64.54 a barrel by 1013 GMT, while West Texas Intermediate (WTI) crude futures fell 74 cents to $61.19 a barrel.

The premium of Brent over WTI widened to almost $3.60 a barrel, having neared its narrowest in six months on Tuesday as concern about a bottleneck of Canadian crude imports underpinned U.S. futures.

“A sense of harmony has returned this morning with both crude benchmarks ploughing a southerly furrow as the dollar gains further ground,” PVM Oil Associates analyst Stephen Brennock said.

The dollar rose against other major currencies, buoyed by the rise in short-term U.S. government bond yields their highest in over nine years and ahead of the release of the minutes of the Federal Reserve’s most recent policy-setting meeting, which may signal the pace of any interest-rate rises.

U.S. inventory data is due later in the day and stocks are expected to have risen by 1.3 million barrels in the week to Feb. 16, according to a Reuters poll.

RBC: Two offsetting stories at play in the oil market this year

RBC: Two offsetting stories at play in the oil market this year  

The Organization of the Petroleum Exporting Countries and other producers, including Russia, will discuss extending their existing cooperation for many more years when they meet in June as they seek to avoid major market shocks, the United Arab Emirates’ energy minister told Reuters on Tuesday.

The group has agreed to cut crude output by 1.8 million bpd throughout this year to force global inventories to drain.

Futures prices have also been dented by the physical markets, which are showing signs of seasonal weakness, given that most of the world’s refineries close, either partially or wholly, to conduct maintenance at this time of year and cut their crude intake as a result.

Differentials, or prices for physical barrels, have slid on both sides of the Atlantic and it is the cheaper sour, or more sulphourous, grades that have borne the brunt of the declines.

Prices for North Sea barrels on Tuesday recovered after hitting their lowest levels since mid-2017, as an overhang of surplus oil has materialised.

Light, sweet West African grades have proven to be the most resilient in the Atlantic basin, thanks in large part to demand from China, but Mediterranean crudes, including Russian Urals, have slid since the start of the year.

“European maintenance does not peak until May, two months later than last year, and demand in Q1 18 has been hobbled by unusually warm weather,” consultant Energy Aspects said.

Oil markets mixed as US crude, Brent move in opposite directions

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  • Oil markets were split on Tuesday, with U.S. crude pushed up by reduced flows from Canada.
  • Traders said the higher WTI prices were a result of reduced flows from Canada’s Keystone pipeline.
  • Brent crude prices eased on Tuesday.

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Oil markets were split on Tuesday, with U.S. crude pushed up by reduced flows from Canada while international Brent prices eased.

U.S. West Texas Intermediate (WTI) crude futures were at $62.38 a barrel at 0518 GMT, up 70 cents, or 1.1 percent, from their last settlement.

Traders said the higher WTI prices were a result of reduced flows from Canada’s Keystone pipeline, which has been operating below capacity since late last year due to a leak, cutting Canadian supplies into the United States.

Outside North America, Brent crude eased on the back of a dip in Asian stocks and a stronger dollar, which potentially curbs demand as it makes fuel more expensive for countries using other currencies domestically.

Brent crude futures were at $65.48 per barrel, down 19 cents, or 0.3 percent, from their last close.

The opposing price direction of the two main crude benchmarks has sharply reduced WTI’s discount to Brent, to around $3.22 per barrel on Tuesday, down from over $7 in late 2017.

Overall, oil markets remain well supported due to supply restraint by the Organization of the Petroleum Exporting Countries (OPEC), which started last year in order to draw down excess global inventories.

OPEC Secretary-General Mohammad Barkindo said on Monday the organisation registered 133 percent compliance with agreed output reduction targets in January.

Barkindo said compliance last year stood at 107 percent.

Global oil demand for 2018 is estimated to grow 1.6 million barrels per day due to an “encouraging environment”, Barkindo added.

Geopolitical risk has heightened as a factor in crude oil prices

Geopolitical risk has heightened as a factor in crude oil prices  

“OPEC and Russia continue to support the production cuts that are due to expire at the end of this year, and they assure markets that there will be an orderly ramp up of production once the cuts expire,” said William O’Loughlin, investment analyst at Australia’s Rivkin Securities.

While most of OPEC, especially its de-facto leader Saudi Arabia, is showing strong support for the production restraint, non-OPEC producer Russia has shown signs it may at some stage gradually start to increase output again.

Saudi Arabia – not least in an attempt to give the planned listing of its state-owned oil giant Saudi Aramco – a boost, is keen for Russia and other producers to keep withholding supplies to prop up prices.

But soaring U.S. production is threatening to erode OPEC’s efforts.

Last week, the amount of U.S. oil rigs drilling for new production rose for a fourth straight week to 798, in an indication that U.S. crude output, already at a record 10.27 million bpd, may rise further.

The United States late last year became the world’s second biggest oil producers, only slightly behind Russia and ahead of top exporter Saudi Arabia.