OPEC gathers in Vienna. OPEC met on Friday to consider the possibility of extending the production cuts beyond March 2018. The meeting was uneventful, with no decision taken in regard to recommendations on extending or deepening the production cut deal. The recent uptick in oil prices will provide OPEC members with a bit of confidence as they sort out their next steps, but pitfalls remain for 2018. “The bull run in the oil market is running out of steam as unease builds” Stephen Brennock, analyst at London brokerage PVM Oil Associates, told Reuters on Thursday. While oil markets did not react too negatively to the lack of news, all eyes will be on OPEC as the production cut deal nears its agreed upon deadline.
Saudi Aramco expands oil trading business. In preparation for its IPO next year, Saudi Aramco is stepping up its oil trading arm, buying and selling oil produced outside of Saudi Arabia. Crude marketing and refined product trading will fall under the same unit, Bloomberg reports. “We’ll keep selling our own oil as normal, and we want to get into trading third-party crude,” Ibrahim Al-Buainain, who will head the expanded unit, told Bloomberg. Aramco is hoping to get into a business that the international oil majors are already involved in.
Oil mini-majors struggling. Bloomberg Gadfly points out that some large oil companies are trapped between pure-play E&Ps and the absolute largest oil companies, offering up a rather unappetizing opportunity for investors. Companies like Anadarko (NYSE: APC) are too large to offer the huge upside potential that small shale drillers have, but they are also not as safe as the likes of ExxonMobil (NYSE: XOM), leaving them with a tricky investment case. As such, the share price of Anadarko has sagged, and in fact, the company just decided buy back shares as a way of appeasing restless investors. Bloomberg Gadfly suggests Anadarko’s predicament is illustrative of a broader problem with oil companies of similar size, who are posting disappointing cash flow figures as they drill more and grow larger.
Refined product stocks falling. The EIA reported another significant drawdown in gasoline stocks, which is in part due to the lingering refinery outages in Texas, but also because demand is proving to be robust. U.S. gasoline stocks are now well within the five-year range, and globally, OECD refined product stocks are closing in on five-year averages. Refineries around the world are going to need to pick up the pace, which means crude drawdowns should be forthcoming. “If OPEC is really still willing to commit to extending production cuts, that gives this market some room to test the upside here,” Rob Haworth of U.S. Bank Wealth Management, told Bloomberg.
Saudi Arabia considers axing gasoline subsidies. The Saudi government could remove price subsidies for gasoline as soon as November, according to Bloomberg. The move would be made with an eye on cutting spending to improve the budget outlook, and it could push gasoline prices up by about 80 percent, putting them at parity with international prices. A final decision will come within a few weeks.
Argentina late on payments to oil and gas producers. Argentina implemented subsidies for drillers as a way of sparking a drilling boom for its vast oil and gas reserves, a policy particularly aimed at developing the country’s Vaca Muerta shale. But Reuters reports that the Argentine government is in arrears to those companies, struggling to come up with the money to pay them on time. The government promised to pay on a quarterly basis, but at this point, it is behind by about $700 million. Since 2013 the subsidies have cost the government some $7 billion, a large sum for a country already dealing with shaky finances.
U.S. government opposes Kurdish independence bid. Kurdistan is days away from staging a referendum on independence, a non-binding vote that nevertheless could have far-reaching political consequences. The U.S. came out against the vote, warning that it could lead to instability in Iraq. Kurdistan’s confidence at declaring independence from Baghdad is based on its sizable oil production that has reached 600,000 bpd. But declaring independence brings a lot of risks. Bagdad will do everything it can to prevent that from happening, including trying to block Kurdish oil exports by tying them up in international courts. Also, Turkey, through which Kurdish oil must be exported, fiercely opposes Kurdish independence, and in a worst-case scenario Ankara could halt Kurdish oil exports.
Oil demand in rich countries on the rise. Several years of cheap gasoline are going a long way towards reversing the demand reduction seen in OECD countries over the past decade. OECD oil demand fell between 2005 and 2014, according to the IEA, but by the end of 2018, 62 percent of that decline could be reversed. Consumers are turning back to heavier SUVs and trucks, despite policies intended to encourage fuel efficiency. “This period of lower oil prices has slowed the energy transition, no doubt about it,” Cuneyt Kazokoglu, head of oil demand at energy consultancy FGE, told the FT. “If crude stays around today’s [price] level the structural demand decline that everyone is expecting will be pushed further out.”
South Africa storage emptying out. Bloomberg reports that the key oil storage hub of Saldanha Bay in South Africa has seen a significant decline in crude oil inventories. Brent’s state of backwardation – oil futures a year out trading much lower than they are for immediate delivery – is forcing oil traders to unload cargo. The development is a sign of oil market balancing.
Texas refineries still operating below capacity. There is around 1 mb/d of refining capacity still offline in Texas, with a handful of large facilities operating below capacity. Motiva Enterprises, which operates the largest refinery in the U.S., is operating at reduced rates. ExxonMobil’s (NYSE: XOM) Baytown refinery is also below capacity. “We don’t have a timeline to share on when normal operations will resume at our refineries,” Charlotte Huffaker, with Exxon Mobil’s public affairs office, told E&E News. “The Baytown refinery is now producing products at reduced rates, and Beaumont continues to make progress on restart activities.” The refining outages will continue to have effects on the oil market, depressing the WTI benchmark price relative to Brent, and capping potential gasoline production.
California cities sue oil majors. San Francisco and Oakland filed a lawsuit against five oil majors, seeking to force them to pay for infrastructure related to climate change. The lawsuits allege that the oil companies are responsible for climate change, and thus, should pay for seawalls and other infrastructure. It is unclear if the lawsuits will go anywhere, but they represent yet another legal front on which the oil majors have to fight. The companies named in the suit are BP (NYSE: BP), Chevron Corp. (NYSE: CVX), ConocoPhillips (NYSE: COP), Exxon Mobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS.A).
The United States Oil Fund LP ETF (USO) closed at $10.24 on Friday, down $-0.01 (-0.10%). Year-to-date, USO has declined -12.63%, versus a 12.62% rise in the benchmark S&P 500 index during the same period.
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