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.

Getty Images
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.