China's Oil Demand Is Far Ahead Of Last Year's Pace

Authored by Robert Rapier via OilPrice.com,

OPEC recently released its Monthly Oil Market Report which covers the global oil supply and demand picture through July.

OPEC crude oil production decreased by 79,000 BPD in August to average 32.8 million BPD. This marks the first OPEC production decline since April and was primarily driven by sizable outages in Libya.

The cartel revised global oil demand growth for 2017 upward by 50,000 barrels per day (BPD) to 1.42 million BPD. The group reports strong growth from the OECD Americas, Europe, and China.

Global oil demand for 2018 is expected to grow by 1.35 million BPD, an upward revision of 70,000 BPD from the previous report. Growth next year is expected to be driven by OECD Europe and China.

China’s oil demand rose by 690,000 BPD in July, marking a 6 percent year-over-year (YOY) increase. China’s total oil demand reached 11.67 million BPD in July. Year-to-date data indicates an average growth of 550,000 BPD, more than double the 210,000 BPD growth recorded during the same period in 2016.

China’s gasoline demand was higher by around 0.10 million BPD YOY, driven by robust sports utility vehicle (SUV) sales, which were around 17 percent higher than one year ago.

China’s overall vehicle sales in July rose by 4 percent YOY, with total sales reaching 1.7 million units.

The numbers from China are interesting given the constant refrain of weakening Chinese demand. This seems to be wishful thinking based on China’s investments in clean technology.

China is the world’s top market for electric vehicles, and they recently announced that they have started “relevant research” and are working on a timetable for implementation of a ban on vehicles powered by fossil fuels.

That news followed previous announcements by France and the U.K. that they would ban the sale of vehicles powered by fossil fuels by 2040. These countries are making bets that electric vehicles (EVs) will be ready for near universal adoption when these bans go into effect. By making these bets, they are trying to create a self-fulfilling prophecy.

China may indeed join the ranks of countries banning fossil fuel vehicles. This news helps drive the narrative that the age of oil is nearing its end, but China is a long way from reining in its oil consumption growth.

EVs may lag lofty expectations, in which case governments may have to revisit or delay these announced bans. And even if bans and mandates end up having the desired effect, it’s going to take time.

That’s certainly not a knock on EVs. This is not a zero-sum game because the number of drivers is growing. It is possible — and I would argue that it is highly likely — that we will see both explosive growth in EVs for the next decade, and growing oil demand.

Hurricane Harvey Is A Disaster For OPEC

Authored by Nick Cunningham via OilPrice.com,

The skies are clearing over Houston, but the damage from the remaining elements of Hurricane Harvey has spread east to Port Arthur and Lake Charles along the Texas-Louisiana border. That has knocked more refineries offline, including the largest refinery in the United States.

In the aftermath of the storm, the most serious threat to the energy industry is the extended outage of refineries and pipelines, according to Goldman Sachs. The problem actually looks worse than it did earlier this week as the deluge has shifted towards Port Arthur, another refining hub. Motiva, which runs the U.S.’ largest refinery in Port Arthur, began to completely shut down its 600,000 bpd facility on Wednesday.

Goldman says the refinery shut downs, as of August 30, have spiked to 3.9 million barrels per day (mb/d), although upstream oil production outages have dropped below 1 mb/d. More ports are now closed – in addition to Corpus Christi and Houston, the ports of Lake Charles, Beaumont, and Port Arthur have shut down.

These outages, the investment bank says, will mean that the “ongoing recovery in production will only be partial.” The refinery and pipeline closures are “leaving the oil market long 1.9 mb/d of crude vs. last Thursday, short 1.1 mb/d for gasoline and 0.8 mb/d for distillate.”

More worrying is that the recovery might not be quick. While most refineries had controlled shut downs, there are quite a few, especially in the Port Arthur region, that have been inundated with water, which means that the damage to them is still unknown. Based on the past major hurricanes of Rita and Katrina, Goldman speculates that about 10 percent of the 4 mb/d of refining capacity that has been disrupted will remain offline for several months.

Other analysts agree that the damage could result in lengthier outages than many had hoped. “I"m actually quite concerned about Beaumont-Port Arthur because they just got a huge amount of rain in 24 hours, and we"ve already seen flooding within the refineries themselves, so we don"t know exactly how bad it"s going to be,” Andy Lipow, president of Lipow Oil Associates, told CNBC. “If it is bad, you"re looking at six to eight weeks of outages over in Beaumont-Port Arthur.”

Ultimately, that could mean that upstream oil producers will be unable to return to full production. Damage to pipelines, storage and processing facilities will also inhibit a full recovery. "It will be a while before operations can return to normal and the U.S. refining industry is bracing itself for an extended shutdown," Stephen Brennock of PVM wrote in a research note.

The prospect of lasting damage to the energy industry is sinking in. “Back to normal is months, not weeks, for exports and for the industry and the region. We have to acknowledge that,” Barclays analyst Michael Cohen wrote.

While much of the focus is (rightly) centered on the effect on gasoline supply, the refinery outages could eat into crude oil demand for quite some time. In fact, on balance, Goldman says that the supply outages could be outweighed by the destruction of demand. Houston alone accounts for around 750,000 bpd of oil demand. Goldman Sachs estimates the region will see demand fall by about 0.7 mb/d in the first month after the storm.

That will make “it harder for OPEC to rebalance the market and maintain bullish sentiment," Barclays" analysts said. OPEC has been struggling to drain inventories for almost a year, but without a substantial portion of U.S. refineries online, inland crude oil storage facilities in the U.S. could fill up once again. And the dip in demand could mean OPEC’s time horizon for balancing gets pushed out a bit more into the future, just as the cartel was hinting that it might have to extend its production cuts anyway.

But the problem is more complex because U.S. data will be much “noisier and less useful as a high frequency indicator at the very time OPEC needs it most,” Barclays says. Storage might increase, refinery runs will bounce around, production figures will edge up slowly – in short, the trend lines that the market has become accustomed to will be all out of whack. And because the U.S. offers the most transparent data, closest to real-time as one can get, it has an outsized impact on market psychology. The data will be really messy for weeks to come, which will complicate OPEC’s strategy.

Libya's Oil King Won't Be Stopped By OPEC

Authored by Tsvetana Paraskova via OilPrice.com,

Conflict-torn Libya, divided between rival factions in the east and the west, recently reached 1 million bpd of crude oil output - for the first time since 2013.

The oil production recovery has put in the spotlight the chairman of Libya’s National Oil Corporation (NOC), Mustafa Sanalla, whom analysts see as a central figure in the oil sector, wearing the hats of both a diplomat and an oil minister. It will be Sanalla who will lead Libya’s delegation at the upcoming meeting of the Joint OPEC-Non-OPEC Ministerial Monitoring Committee (JMMC) in Russia, at which he will argue his country’s position and share production plans for the immediate future.  

And the monitoring committee will be eager to find out how much Libya’s plans could further offset the cartel and friends’ production cuts, from which the African nation is—for now at least—exempt.

Winning exemption at the time of the November OPEC deal wasn’t difficult for Libya, whose production was at the mercy of the civil strife and port blockades that plagued Libya over the past few years.

Libya’s production averaged 390,000 bpd throughout 2016 and 404,000 bpd in 2015, according to OPEC’s secondary sources. In the fourth quarter last year, output increased slightly to an average of 574,000 bpd.

Since then, the lifting of port seizures and blockades and the June interim deal with Germany’s Wintershall to immediately resume production in concession areas and related fields, which unblocked 160,000 bpd worth of output—has helped Libya to nearly double production.

The recovery of Libya and Nigeria’s crude oil production in the past two months has rekindled fears that rising supply from those two exempt African producers is offsetting a large part of the reductions and is depressing crude oil prices, alongside rising U.S. shale output.

Libya’s oil production recovery is the primary goal of NOC’s chairman Sanalla, who said in an opinion piece in the New York Times in June, referring to the country’s internal power struggles:  

“Between 2013 and last September, these blockaded nearly all of Libya’s main oil ports and tried to leverage that chokehold into ransom money and political power. That cost the country over $120 billion in lost revenues and most of its financial reserves.”

Arguing that the country’s oil and gas resources should not be held hostage to power struggles and fractious politics, Sanalla noted:

“Caught between those rivals, we at the N.O.C. intend to remain neutral until there is a single legitimate government we can submit to.”

Geoff Porter, founder of the North Africa Risk Consulting, said in an interview with Bloomberg, commenting on Sanalla’s role in the Libyan oil sector:

"His job is to produce as much oil as possible while he can and I think that’s what he is going to continue to try to do.”

However, years of neglect and attacks on facilities have damaged the output capacity, and infrastructure needs investments if Libya were to return to producing 1.6 million bpd, its output level before the 2011 revolution that toppled Muammar Ghaddafi.

Libya may be close to its capacity, and possibly has a short-term “implicit” ceiling of just above 1 million bpd, Mattia Toaldo, senior policy fellow at the European Council on Foreign Relations, told Bloomberg.

So Libya could ‘cap’ not because OPEC asks it to, but because of infrastructure limitations.  

Unlike fellow exempt producer Nigeria—which has signaled that it could cap production when its production reaches a stable 1.8 million bpd—Libya has not specified any output level for a possible ceiling.  

Last week, Sanalla told Reuters in comments sent via email:

“Libya’s political, humanitarian and economic situation needs to be taken into account if we are going to talk about production caps.”

“Accurate information will remove uncertainty and help the market understand and respond to future supply levels,” NOC’s chairman noted.  

The OPEC/non-OPEC monitoring committee will receive the latest updates regarding Libya’s production and plans—and get more information about expected supply from the cartel—at the OPEC meeting this weekend. Despite the fact that the monitoring committee is only making recommendations to the larger group, it may consider whether further actions are needed in view of the latest supply figures and forecasts for the coming months.

The Major Wildcard That Could Send Oil To $120

Authored by Nick Cunningham via OilPrice.com,

The latest rally in oil prices ran up against a wall yet again, and the same fears about oversupply have not receded in the slightest. The expectation from most oil analysts is that there is very little room on the upside for oil prices and that we will have to wait until 2018 at the earliest before the market gets closer to “balance.”

But the one major wildcard for oil prices is geopolitics, which, however unlikely given the degree of supply overhang that still exists, could send prices up. But how high? The latest blockade of Qatar, which has mushroomed into a regional political crisis in the Middle East, would have caused a severe spike in oil prices in the past, even though Qatar is a relatively minor producer. However, the simmering standoff not only failed to register, but occurred at a time of falling oil prices.

If a crisis involving heavyweight oil producers was shrugged off by the market, it is hard to imagine some other event causing a sharp price spike, even if more barrels were on the line.

But that is exactly what some analysts are afraid of, warning that the markets are overlooking some potentially massive geopolitical problems looming just over the horizon.

"Venezuela"s 2 million barrels of oil a day could literally go any day. Mexico looks poor. Azerbaijan"s in trouble. China"s own production is collapsing rapidly," Neil Dwane, the chief investment officer of European equity at Allianz Global Investors, told CNBC last week.

"One only has to have one mistake and the only thing you"ll be talking about all morning is oil at $120."

Herman Wang of S&P Global Platts agreed with that sentiment, although he expects the price spike to be less severe.

"There are plausible scenarios where you could see, perhaps not $120 a barrel, but an elevated oil price, say $70 to $80 on some of these geopolitical and some of the supply concerns. Venezuela certainly is a mess right now," Wang told CNBC"s Squawk Box last week.

But there are a few reasons why some analysts would roll their eyes at the prospect of triple-digit oil prices in the near future. After all, oil inventories are still sky-high even if they are starting to come down; U.S. shale production has roared back, adding roughly 0.5 mb/d since late last year; and Libya and Nigeria have restored around 400,000 barrels per day of disrupted production. Not only that, but sharper gains are expected to be forthcoming from the U.S., Nigeria and Libya, while other long-term projects in Canada and Brazil are set to add production this year. 

However, not all of that is guaranteed. The U.S. shale rally recently hit some bumps in the road. More importantly, the geopolitical uncertainty in unstable countries such as Libya and Nigeria could quickly knock production offline once again. For example, Reuters reported that heavy clashes took place in Libya on July 9, underscoring the fact that the country’s recent calm is highly fragile.

Also, the peace in the Niger Delta is also starting to look rocky. Former militants, according to Reuters, are unhappy with government promises, and have threatened a return to violence.

"This peace is a graveyard peace," a local chief in the Niger Delta told Reuters. "Nobody can assure anybody that nothing will happen in the Delta." Nigeria is aiming for 2 mb/d of production in August, which would be the highest total in a year and a half, and almost double the low point from last year.

There is also the vaguer and more uncertain variable of the recent ascendance of Saudi Crown Prince Mohammed bin Salman, who has brought a more hawkish approach to Saudi foreign policy. The escalation of confrontation against Qatar is one clear consequence of that. So is the war in Yemen. More conflicts could arise from a more belligerent Saudi government. “We contend that the region could be subject to more volatility and heightened risk,” as a result of Mohammed bin Salman taking over as crown prince, RBC wrote in a note last month.

But it is Venezuela that could be the mother of all black swan events. As Neil Dwane of Allianz Global Investors mentions, Venezuela has already seen the near total breakdown of society, and its oil production of 2 million barrels per day (mb/d) could unravel. It still seems unthinkable at this point, but becoming more likely by the day. Already, Venezuela’s oil production has eroded sharply, falling to 1.96 mb/d as of May 2017, down from 2.375 mb/d in 2015. Meanwhile, Venezuela’s refining industry is in shambles, forcing the country to increasingly import gasoline to avoid fuel shortages.

The street protests in the South American country just marked their 100^th day, and show no sign of slowing down.

The oil market is rather depressed and subdued at the moment, but could awaken at moment’s notice if large volumes of oil production are disrupted from some unforeseen event.

Exxon Cuts Reserves By A Record 3.3 Bilion Barrels As Oil Crash Finally Takes Toll

Last September, when the price of oil was well below where it had been trading for the bulk of the past several years,  we reported that NY Attorney General Eric Schneiderman was probing why Exxon Mobil hasn’t written down the value of its assets, two years into a pronounced crash in oil prices. The complaint was simple: out of the 40 biggest publicly traded oil companies in the world, Exxon - then still led by now Secretary of State Rex Tillerson - was the only one that hasn’t booked any impairments in the prior 10 years.

As the WSJ wrote at the time, "since 2014, oil producers world-wide have been forced to recognize that wells they plan to drill in the future are worth $200 billion less than they once thought, according to consultancy Rystad Energy. Because the fall in prices means billions of barrels cannot be economically tapped, such revisions have become a staple of oil-patch earnings, helping to push losses to record levels in recent years." And yet, Exxon had - until the later half of 2016 - declined to take any write-downs, the only major oil producer not to do so, which has led some analysts to question its accounting practices. 

Maybe the NYAG was on to something? 

To be sure, the company had played down the criticism, saying it is extremely conservative in booking the value of new potential fields and wells. That reduced its exposure to write-downs if the assets later prove to be worth less than expected. Then again, not even the most "conservative" company could have factored in oil crashing from $100 to $42 without that impacting the balance sheet.

Needless to say, avoiding reality and Exxon’s "ability" to avoid write-downs, and the massive losses that come with them, had been the main factors helping the company outperform rivals since prices began falling in mid-2014. Exxon shares had fallen by about half of the average of top peers Chevron,  Royal Dutch Shell, Total and BP. Since 2014, those companies have booked more than $50 billion overall in write-downs and impairments.  But not Exxon.

Then-CEO Rex Tillerson has an unusual explanation why Exxon has refused to write down assets so far: Rex told trade publication Energy Intelligence in 2015 that the company has been able to avoid write-downs because it places a high burden on executives to ensure that projects can work at lower prices, and holds them accountable.

“We don’t do write-downs,” Mr. Tillerson told the publication. “We are not going to bail you out by writing it down. That is the message to our organization.”

All of that changed this afternoon, when Exxon, now ex-Tillerson, disclosed the deepest reserves cut in its history as the ongoing rout in oil prices erased the value of a $16 billion oil-sands investment and other North American assets.  In a press release filed after the close, Exxon announced that "proved reserves were 20 billion oil-equivalent barrels at year-end 2016, inclusive of a net reduction of 3.3 billion oil-equivalent barrels from 2015. Reserves changes in 2016 reflect new developments as well as revisions and extensions to existing fields resulting from drilling, studies, analysis of reservoir performance and application of the methodology prescribed by the U.S. Securities and Exchange Commission."

As a result of very low prices during 2016, certain quantities of liquids and natural gas no longer qualified as proved reserves under SEC guidelines.

In other words, after years of denials, and claims that "we don"t do write-down", Exxon just concluded the biggest reserve cut on record, as 3.3 billion barrels of crude was removed from the company"s "proved reserves" category. The revisions were triggered when low energy prices made it mathematically impossible to profitably harvest those fields within five years. The massive 3.5-billion barrel Kearl oil-sands development in western Canada accounted for most of the hit, with another 800 million oil-equivalent barrels in North America did not qualify as proved reserves, "mainly due to the acceleration of the projected economic end-of-field life."

Following the reserve cut, the company"s total reserves dropped to 20 billion, the lowest in two decades.

As Bloomberg adds, the oil-sand mines in northern Alberta are among the costliest types of petroleum projects to develop because the raw bitumen extracted from the region must be processed and converted to a thick, synthetic crude oil. As such, they have been particularly hard hit by the worst oil slump in a generation.

The reductions were partially offset by reserves additions of oil and natural gas totaling approximately 1 billion barrels of oil equivalent in the U.S., Kazakhstan, Papua New Guinea, Indonesia and Norway, which replaced 65% of production and were the result of acquisitions, improved asset performance and a decision to fund an expansion of the Tengiz project in Kazakhstan.

According to Bloomberg calculations, the 19 percent drop amounts to the largest annual cut since at least the 1999 merger that created the company in its modern form. That includes 1.5 billion barrels of reserves that were pumped from wells. The previous record cut was a 3 percent reduction taken during the height of the global financial crisis in 2008.

Proved Reserves are among the most important metrics watched by investors because they are an indicator, along with commodity prices, of future cash flow. When the 2008 reserves cut was announced in February 2009, Exxon shares lost more than 4 percent in a single day, wiping out almost $17 billion in market value.

Today, after the biggest reserve write down in history, the shares gained 0.2% to $81.08 in after-hours trading as of 5:46 p.m. in New York on Wednesday, after closing at $80.93, suggesting that either the market does not care about fundamentals, or had largely priced in the announcement. As noted above, Exxon was facing an SEC probe into how it valued its portfolion, and signaled in October and again last month that the revision was probably coming, which may explain the lack of reaction.

On Tuesday, ConocoPhillips engaged in a similar reserve reduction when it removed the equivalent of 1.15 billion barrels of oil-sands crude from its books as part of a 21 percent cut that pushed the Houston-based company’s reserves to a 15-year low.

Under SEC rules, proved reserves can only include oil fields that can be produced economically within the next half decade. Price trends from the previous 12 months are compared against the estimated cost to harvest crude and gas in determining which reserves are counted.