Here is oil observer Tom Whipple’s take on the OPEC agreement this past week to cut back crude oil production in an effort to raise world oil prices:

The total cut by OPEC members is supposed to be 1.2 million barrels per day (b/d) to which a non-OPEC cut of 600,000 b/d, including Russia’s 300,000 b/d, would bring the cut up to 1.8 million b/d. This assumes that everybody involved adheres to the agreement. Given the organization’s track record on production caps over many decades, there is little reason for optimism that we will see a 1.8 million b/d cut. The agreement is to start in January, last for six months, and can be renewed. OPEC officials say they have rounded up additional an 300,000 b/d of production cuts from non-OPEC countries beyond the 300,000 b/d announced by Russia.  Countries mentioned as possible additions to the non-OPEC cut include Azerbaijan, Kazakhstan, Mexico, Oman, and Bahrain.

There seems to be general agreement that an actual cut of 1.8 million b/d will eliminate any production surplus in 2017, but whether it will bring the surplus crude in storage back down to normal levels is still up in the air. A meeting is scheduled for December 10th in Moscow to round up the last 300,000 b/d, but there are still a few unknowns in production next year. Libyan production could grow by another 400,000 b/d or so next year. Nigeria could settle its insurgency problems and add another 200,000 b/d.
 
The great unknown for the next year or two is what will happen to US shale oil production which has dropped by roughly 1 million b/d in the last two years. While the US rig count has been rising steadily for the past few months, it is still way below the high seen in 2014. Should crude prices be forced up to a point where US shale oil comes storming back into production, the OPEC freeze could come to naught and prices will fall again.

Opinions as to the efficacy of the cuts varies. Some such as Goldman Sachs see prices above $60 a barrel shortly if the agreement is completely fulfilled; however, this price level is likely to trigger a resurgence of US shale oil production. Others such as the Fitch rating agency expect London’s Brent crude to average $46 a barrel next year, up by only $1 a barrel from 2016. Fitch sees more problems on the demand side. 

 

Indonesia has suspended its membership in OPEC less than a year after rejoining the cartel, as it said it could not agree to the group’s production cuts. OPEC had proposed Indonesia cut oil production by about 37,000 barrels per day, or about 5% of its output.

Peak oil demand” is getting a lot of attention in the financial press these days. Now that the OPEC production cut is over for a while, the discussion is turning toward whether the global demand for crude oil will peak in the foreseeable future and start to trend downwards.  A peak in the demand for oil is seen as being caused by increasing efforts to combat climate change by reducing carbon emissions. We are starting to see many forecasts of much-reduced demand for gasoline via an onslaught of electric vehicles, but these are usually discussed as though they will not come for another 15 to 25 years.

Decommission spending for aging offshore crude oil and natural gas assets is on track to increase dramatically from $2.4 billion in 2015 to $13 billion each year by 2040, according to an IHS Markit study. During the next five years, more than 600 international projects are expected to be decommissioned in the UK, Norway, the Gulf of Mexico and Australia.

As previously announced, work has now begun on the construction of a crude oil pipeline between the African countries of Uganda and Tanzania. To be known as the East African Crude Oil Pipeline, the project – which will transport Ugandan crude oil to Tanga Port in Tanzania – will be built jointly by a French oil giant Total, the UK-based Tullow Oil, and Chinese state-owned oil company Cnooc.

Norway’s state-owned Statoil has received regulatory authority to start drilling an appraisal well in the Johan Sverdrup oil field in the North Sea. Drilling is scheduled to start in December and should last 30 days. The field is under development and production is planned to start in 2019. The Johan Sverdrup oil field is expected to account for up to 25 % of total Norwegian petroleum production once at peak capacity.

Mexico is preparing to auction rights to drill in the oil-rich deep waters of the Gulf of Mexico, considered the crown jewel of the country’s energy industry. The Mexican waters were opened to foreign investment three years ago. This week’s auction is seen as the first major test of Mexico’s ability to work with the world’s largest energy players. Seven groups and eight individual bidders have been qualified to participate in the auctions.

As the oil and gas industry downturn cycles into 2017, dozens of exploration and production companies remain vulnerable t0 bankruptcy. Since January 2015, more than 100 North American exploration and production companies have filed for bankruptcy, according to the Haynes & Boone law firm.

Michael Stoppard, the global natural gas chief strategist at IHS Markit, said gas will be the fastest growing fossil fuel in the world with a 1.9% compound annual growth rate through to 2025. “Last year was the fifth straight year in which gas volume discoveries exceeded that of oil – this is not a strategic choice but rather by geology.”  Natural gas competes with coal, nuclear, hydro, wind, solar and biofuels in the production of electricity.

India’s Prime Minister Narendra Modi said his country is giving priority to moving toward a natural gas-based economy and efforts must be made to raise local production of the fuel while also creating infrastructure to import it. “Natural gas is the next-generation fossil fuel, cheaper and less polluting. Efforts must be made to increase natural gas production whole also creating import infrastructure to meet the growing domestic demand,” Modi said.

Delek Drilling, Noble Energy, Avner Oil and Ratio Oil, a collective working to exploit the giant Leviathan natural gas field in the Mediterranean Sea off Israel, said they reached a $2 billion agreement with Dalia, the largest private electricity generator in Israel, to supply gas for up to 20 years once production begins.

The US has become a net exporter of natural gas, further evidence of how the US shale boom is reshaping the global energy business. The US exported an average of 7.4 billion cubic feet a day of gas in November, more than the 7 billion cubic feet a day it has imported, Platts reported. It has been nearly 60 years since the US last exported more natural gas than it imported annually. Exports to Mexico have accounted for more than half of all US natural gas exports since April 2015.

With many countries closing or pledging to close coal mines, world coal prices have risen by well over 100% this year to $100 a ton.

Delta Air Lines is preparing to market gasoline from a refinery it owns outside the US city of Philadelphia. Delta became the first airline in the world to own a petroleum refinery when it bought the closed facility in 2012, hoping to turn it into its own jet fuel supplier and capitalize on cheap oil supplies from booming US shale oil output.

 

with h/t Tom Whipple

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