Traders Lose Faith In OPEC Orchestrated Freeze
Oil prices have fallen to one month lows as traders are less confident that OPEC will manage to reach a production freeze.
(Click to enlarge)
(Click to enlarge)
(Click to enlarge)
Chart of the Week
(Click to enlarge)
• Chevron (NYSE: CVX) made news when it completed its $54 billion Gorgon LNG export terminal in Australia a few weeks ago. It also made headlines this week when it announced that it temporarily shut down the terminal due to technical difficulties, less than one month after its first shipment.
• But assuming Chevron fixes its problems at Gorgon, Australia’s LNG export capacity stands at 6.2 billion cubic feet per day (Bcf/d). A list of other LNG export terminals are under construction that will lead to a huge increase in Australia’s export capacity in the next few years, nearly doubling by 2019 to 11.5 Bcf/d.
• LNG prices have crashed in the past two years, but much of the capacity has long-term contracts signed already, which provides some protection against the downturn. However, moving forward, future capacity will increasingly rely on the spot market, as the LNG markets transition away from long-term contracts.
OPEC Orchestrated Freeze – Market Movers
• Royal Dutch Shell (NYSE: RDS.A) withdrew its application for the latest licensing round for Arctic offshore acreage in Norway, diminishing the chances that Norway will be able to expand Arctic oil development. Shell said the decision was “part of an optimization” of the company’s portfolio. Norway’s oil minister said the withdrawal won’t affect its licensing round and said that “many other competent companies” are interested.
• The Moody’s oil and gas Liquidity Stress Index, which measures the proportion of issuers with the lowest liquidity rating, hit a record high of 31.6 percent in March, a big jump from 27.2 percent in February. The worsening trend is largely due to the energy sector.
• ExxonMobil (NYSE: XOM) got the go-ahead from California regulators to restart its Torrance refinery in Southern California, a facility that has been offline since last year because of an explosion. The outage led to higher gasoline prices for the region. Exxon agreed to sell the unit to PBF Energy (NYSE: PBF) for $537 million.
Tuesday April 5, 2016
Oil prices fell on Monday to one-month lows as the markets became more disillusioned with the prospects of a production freeze at the OPEC-Russia meeting in Doha on April 17. Saudi Arabia backtracked from its pledge to limit output, when the Deputy Crown Prince told Bloomberg that his country would participate only if Iran did as well. Meanwhile, dovish comments from Fed Chair Janet Yellen had provided oil prices a lift, but that was more or less offset by strong economic reports on Friday, which might increase the chances of a rate hike at some point.
Saudi Arabia seeks non-oil income. Saudi Arabia is at a crossroads, with tremendous political and economic upheaval due to low oil prices. With a massive war chest of cash reserves, the Saudi government has been able to muddle through the crash in oil prices. However, it is planning big changes for the economy in order to close its $98 billion budget deficit. Saudi Deputy Crown Prince Mohammed bin Salman told Bloomberg last week during a five-hour interview that the government was looking to raise $100 billion in non-oil revenue by the end of the decade, nearly triple today’s level. The government wants to trim subsidies, impose a value-added tax, as well as spin off parts of Saudi Aramco in an IPO. It also wants to create a $2 trillion sovereign wealth fund with the intention of diversifying the country’s income for the long haul.
Iran boosts oil exports. Iranian oil minister said that Iran increased oil and condensate exports by 250,000 barrels per day in March, allowing the OPEC member to top 2 million barrels per day in exports. Iran said that it would not participate in the OPEC freeze deal until it boosted exports to pre-sanctions levels, which would mean adding another 1 mb/d to its export total.
Another oil and gas bankruptcy. Goodrich Petroleum (OTCMKTS: GDPM)announced on Friday plans to file for bankruptcy protection in the next few weeks. Goodrich came to an agreement with junior creditors for a debt-for-equity swap. The deal will result in $175 million in debt for 100 percent of the company. Senior creditors would be paid in full. The prepackaged bankruptcy could allow Goodrich to emerge from bankruptcy with its drilling operations largely unaffected.
Mexico’s oil reserves declined in 2015. With precious few new oil and gas discoveries made in 2015, Mexico saw its proven oil and gas reserves decline by 21 percent to 10.24 billion barrels of oil equivalent. The fall can be attributed to the collapse in oil prices, which makes some oil reserves not economical to produce, forcing their reclassification as no longer “proven.” Mexico is proceeding with its energy reform campaign, auctioning off oil and gas tracts to international companies. Meanwhile, state-owned Pemex could see production fall by another 100,000 barrels per day this year because of a dearth of investment stemming from severe spending cuts.
Petrobras (NYSE:PBR) stock plunges on rumors of retail price change. Reutersreported that Brazil’s state-owned oil company Petrobras is considering cuttings retail gasoline and diesel prices, which would reverse price increases made last year. The move would reflect falling oil prices as well as the deep recession that Brazil finds itself in, with falling demand for fuel. However, the move would be hugely damaging to the oil company, which already has the highest pile of debt out of any oil company in the world. Petrobras’ shares fell by 10 percent on the news.
BP (NYSE: BP) Deepwater Horizon settlement approved. A federal judge in New Orleans issued a final approval over the $20 billion settlement between the British oil giant and five states in the Gulf of Mexico for damages related to the 2010 well blowout and oil spill.
Rising oil prices could be good for the U.S. economy. Goldman Sachs published a new study that found that the prospect of rising oil prices could provide a boost to U.S. GDP through several avenues, including increased capex from the oil and gas industry as well as an improved trade deficit. The contrarian argument goes like this: oil production is more elastic than oil demand, meaning that when prices fall, the industry curtails production by more than consumers increase their demand. The effect is that a dip in production is made up through higher imports, which hurts the U.S. trade balance. Consumers still win, but the overall U.S. economy takes a hit. The counterintuitive conclusion suggests that the U.S. economy may actually prefer higher oil prices.
Unaoil corruption report. A major investigative report from The Huffington Post and Fairfax Media alleges that a company based in Monaco, Unaoil, was responsible for a large bribery network that resulted in oil contracts awarded for a long list of major companies, both in the U.S. and around the world. The report says that Unaoil bribed officials in a variety of countries in Africa, the Middle East, and the Soviet Union. In response to allegations that Iraqi officials, for example, were involved in accepting bribes in exchange for awarding contracts, Iraq’s Prime Minister Haider al-Abadi ordered “immediate” action by the anti-corruption commission and judiciary to look into the matter. The fallout from the report is still being felt as officials and companies from around the world learn about the bribery ring.
TransCanada (NYSE: TRP) shut down Keystone pipeline due to leak.TransCanada shut down its Keystone pipeline due to signs of an oil leak in South Dakota, the company said on April 4. TransCanada said that the 500,000 barrel-per-day pipeline was shut immediately after reports from a landowner about a leak. The company says the spill covered a “small surface area” and that it observed no significant impact to the environment. The pipeline runs from Canada to the U.S. Gulf Coast. The existing Keystone pipeline is separate from the now-defunct Keystone XL pipeline, a proposed conduit that became controversial over the potential for oil spills as well as for its effect on climate change.