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Saudi Arabia’s Oil Price War Is Backfiring


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Saudi Arabia’s Oil Price War Is Backfiring

By Tsvetana Paraskova - Mar 22, 2020, 12:00 PM CDT

Saudi Arabia and Russia must have anticipated an oil price crash when they broke up their three-year-long bromance to push up oil prices.    Two weeks later and nearly 4 million bpd of total promised additional oil supply to the market next month, and Riyadh and Moscow are now counting the cost and trying to adjust government spending. The friends-turned-foes expect sharp drops in oil revenues in the near term, not only because Brent Crude is barely managing to cling to the $30 mark these days, but also because the coronavirus pandemic is leading to huge demand destruction.  

Saudi Arabia announced this week that it is reducing government expenditures by US$133 billion (50 billion Saudi riyals), or nearly 5 percent of its budget spending for 2020 after the government approved “a partial reduction in some items with the least social and economic impact.” 

These measures were approved “in light of the noticeable development in the public finance management, and the existence of the appropriate flexibility to take measures in the face of emergency shocks with a high level of efficiency,” says Saudi Minister of Finance and Acting Minister of Economy and Planning, Mohammad Al-Jadaan, the official Saudi Press Agency reported. 

The Kingdom “has taken measures to reduce the impact of low prices of oil, and additional measures will be taken to deal with the expected drop in prices,” Saudi Arabia says, nothing that additional expenditures could be re-evaluated and potentially cut.  

Related: The Reason Why Russia Refused To Cut Oil Production Even before the collapse of the OPEC+ talks, Saudi Arabia’s finance ministry had asked government agencies to propose a 20-30 percent cut in their budgets due to the oil price slide, Reuters reportedlast week, citing four sources with knowledge of the plans.  

It looks like Saudi Arabia bets on tapping cash from its sovereign wealth fund to patch up government finances with oil prices three times lower than their break-even oil price. 

According to Fitch Ratings, Saudi Arabia needs oil prices at $91 a barrel in 2020 to balance its budget, all else being equal. 

“For countries in the Gulf Cooperation Council (GCC), we estimate that a change of USD10 in the price per barrel of oil tends to affect government revenues by 2%-4% of GDP,” Fitch said last week. The rating agency’s statement came a day after oil prices crashed by 25 percent as Saudi Arabia – a GCC member, OPEC’s top producer, and the world’s top oil exporter – vowed to significantly boost supply and slashed the price for its oil in a dramatic shift in its oil price-fixing policies of the past three years. 

The Kingdom is signaling that it can adapt to today's lower oil prices, but analysts are not buying this claim. 

At $30 a Brent barrel, the Saudi wealth fund will deplete fast and reduced government spending will stall projects, and the already suffering private non-oil sector will suffer further. That’s the near-term damage. 

The longer-term damage is the lack of funds for the ambitious Vision 2030 plan of Saudi Crown Prince Mohammad bin Salman, which was already going downhill even before the oil price collapse as the promised multibillion foreign investment and Saudi investment in “diversifying away from oil” weren’t exactly flowing to the Kingdom. 

“I think we are beginning to see that the vision 2030 is not going well,”   Jean-François Seznec, Non-Resident Senior Fellow at Atlantic Council, said on an Atlantic Council press call last week. 

There is a growing amount of tension among the population, even among the crown prince’s main supporters, Seznec said. 

“But he needs to make a big impact. Now, his big impact is to force the Russians to give up and agree to the cuts, and if at the same time it destroys the U.S. shale industry so much the better,” Seznec noted. 

Related: Big Oil Prepares To Suffer In 2020

The Russians are also bracing for an oil price war, promising up to a 500,000 bpd production increase and assuring the market they have enough resources to cover budget shortfalls at $25-30 oil for six to ten years.   

The coronavirus pandemic and the lower economic activity, coupled with oil prices half the level before Russia and Saudi Arabia broke up the OPEC+ pact, will weigh on Russia’s revenues and budget, too. 

Russia’s revenues from oil and gas will be US$39.5 billion (3 trillion rubles) lower than planned, Russian Finance Minister Anton Siluanov said this week, adding that Moscow now expects a budget deficit. 

Analysts argue that Russia is in a better fiscal, financial, and political leadership position than Saudi Arabia to win the oil price war

Yet, there will undoubtedly be economic pain for both sides in this war, which is already claiming the first collateral victims—U.S. shale, Canada’s oil industry, and the UK’s offshore oil and gas sector. 

It’s now a game between Saudi Arabia and Russia of who will blink first, and in this game, the Saudis seem to have overestimated their fiscal buffers and underestimated the coronavirus-hit enormous demand destruction. 

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Is Saudi Arabia To Blame For The Looming Economic Recession?

By Arthur Berman - Mar 17, 2020, 8:00 PM CDT

Saudi Arabia has repeated the blunder it made in November 2014 by increasing oil production during an oil-price collapse. In 2014, it led to a depression in the oil industry. This time, it may be the tipping point for a global economic depression.

On Saturday March 7, discussions between Saudi Arabia and Russia ended with no agreement to cut production. On Sunday, Saudi Arabia announced price cuts and its intention to boost production. The largest single-day fall in oil prices occurred the next day (Figure 1).

 

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Figure 1. The largest single-day Brent price decrease on March 9, 2020 showing standard deviation (SD) limits above and below the norm. (Source: Quandl and Labyrinth Consulting Services, Inc.)

Things were not looking good for oil prices before then. Prices had peaked in early January with the assassination of Iranian General Soleimani, the announcement of a U.S. – China trade agreement and an OPEC+ production cut. As I wrote in late December, the price rally was doomed because it was based on sentiment and not market fundamentals.

Then the Coronavirus outbreak became public. I wrote in early February that Coronavirus would crush oil prices. It did. The Saudi price cut in March compounded and accelerated the collapse of oil prices and of broader markets.

Why It Happened

Mohammed bin Salman (MBS), the Crown Prince of Saudi Arabia delivered an ultimatum to Vladimir Putin, the president of Russia, to cut oil production on his terms. Mr. Putin doesn’t accept ultimatums so he ignored it. MBS cut prices and announced a production increase.

The events of the past week were an axiomatic response by Saudi Arabia taken from earlier playbooks. Between 1981 and 1985, the Saudis cut their production by 6.8 mmb/d hoping to stop the decline of oil prices in the face of new supply from the North Sea, Siberia and Mexico (Figure 2). King Fahd got tired of cutting without much help from OPEC allies and with no resulting price relief. He fired oil minister Ahmed Yamani, cut prices and increased production. Related: Largest Oil Glut In History Could Force Crude Prices Even Lower

Figure 2. Saudi Arabia oil production fell by 6.5 mmb/d from 1981 to 1985. (Source: EIA, BP and Labyrinth Consulting Services, Inc.)

 

1584485897-o_1e3lbg23j1cpc1jte7c418af16s

In 2014, world oil prices were again collapsing. Saudi oil minister Ali al Naimi asked Russia to join OPEC in cutting production. Russia refused. Saudi Arabia cut prices and increased production. See the pattern?

The guiding principle of Saudi oil strategy over the last three decades has been to never again make the mistake it made by cutting production alone in the early 1980s. Analysts and journalists who say that there is a price war or a war on shale should study history instead of inventing mindless memes.

Global Depression

 “The coronavirus epidemic will lead to “a global recession of a magnitude that has not been experienced before.”
Li Edelkoort

The prolonged hiatus in economic activity particularly in the United States and China makes a global depression practically unavoidable.

Energy is the economy and most of the world’s energy comes from oil. The present devaluation of oil will spread to other commodities and currency. Although oil price devaluation was inevitable because of coronavirus, the recent Saudi price cut and production increase has accelerated and compounded its effect on the global economy. It may become a Lehman moment.

GDP will fall as less oil is consumed. That is empirical–GDP and oil consumption have an R2 correlation of 0.96 (Figure 3). What may not be well understood is how much the U.S. and China dominate this relationship. Related: Saudi Arabia’s Oil War Could Bankrupt The Kingdom

Figure 3 shows two charts using the same data. The graph on the left has logarithmic scales and the graph on the right has cartesian scales.

Figure 3. Gross Domestic Product (GDP) is proportional to oil consumption.

 

1584485908-o_1e3lbgel51avah92nto1qhbvlo8

The graph on the left has logarithmic scale and the graph on the right has cartesian scales.
Source: EIA, World Bank and Labyrinth Consulting Services, Inc.

The left-hand graph shows the correlation. The right-hand graph shows the disproportionate weighting of China and the US on both GDP and oil use. Together, they account for 32% of world GDP and 34% of oil consumption.

China’s oil consumption is probably down 4 mmb/d for the first quarter of 2020. If it returns to normal by Q2 (unlikely), that implies ~1% drop in annual global GDP. Things won’t normalize in China and the U.S. contraction will compound lower consumption well beyond Q1 not to mention lower consumption in the rest of the world. There are lots of reasonable objections to using this correlation deterministically but it offers a high-level perspective about where the economy is probably going. That’s why it is difficult to imagine an outcome other than depression.

The last time that there was a global surplus of this magnitude was never

There will be a lag between falling prices and demand, and a corresponding decrease in production. Meanwhile, inventories will build and some expect that global storage capacity will be exhausted by summer. Is that reasonable?

Figure 4 shows the accumulation of comparative inventory accompanying the last oil price collapse in 2014. 5 months elapsed from the beginning of price decline until C.I. reached the 5-year average. It was another 18 months before peak storage and minimum price were reached. Despite analyst expectations, neither U.S. nor global storage capacity were filled.

 

1584485943-o_1e3lbhg2oc8rh17ga23c1t168.j

Figure 4. Eighteen months from five-year average to comparative inventory peak, October 2014 to February 2016. (Source: EIA and Labyrinth Consulting Services, Inc.)

Comparative inventory is just below the 5-year average currently. Assuming a similar rapid fill rate, maximum storage levels would not be reached until July 2021. Today’s WTI settle price of $28.70 is almost as low as the minimum level reached 4 years ago suggesting that price may have much farther to fall before finding a bottom.

It seems unlikely that the virus will be contained before the second half of 2020 at the earliest. That is why I expect an economic depression and oil-prices of $20 or lower before long.

Tipping Point

When the normal spread of a disease transforms into an epidemic, it is called a tipping point. It is that moment when a small change tips the balance of a system and brings about a large change.

We are there. I’m not talking about coronavirus. I’m talking about the tipping point of our civilization.

Humans have not evolved emotionally since hunter-gatherer times on the African savanna. We believe that the planet’s space and resources are ours to use however we want regardless of implications for the earth and its other species.

We have developed an economic system that values economic growth above all else. Oil, more than any other factor, has super-charged our economic growth over the last century. When growth began to slow as oil became more expensive, we turned to debt, a call on some future energy surplus. The Financial Collapse of 2008 was a signal that we needed to de-leverage our debt. Instead, we devised clever ways of papering over the debt problem with more debt.

Now, the coronavirus has abruptly stopped the machinery of growth. Contagion – man’s primordial  fear – is spreading. Markets are collapsing and there are no solutions in sight. The most social of species is facing isolation.

We have crossed a threshold. It cannot be successfully crossed in fear. The virus will pass and this is not the end of times. Still, things will not return to the way they were before the tipping point was reached. We must finally seek balance with each other and with the planet, and, hopefully learn to live with less.

 

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Refiners Race To Reduce Rates As Fuel Demand Falls Off A Cliff

Mar 20, 2020, 3:30 PM CDT Refinery

Refining operations in Europe and elsewhere in the world are being curtailed as gasoline and jet fuel demand is falling off a cliff due to the enormous demand destruction in the spreading coronavirus pandemic.

In Europe, oil majors are shutting down refinery units as major economies are under lockdown and flights are severely restricted, Reuters reported on Friday, quoting sources and industry data provider Genscape.

“Horrendous margins and even worse physical markets,” a source familiar with the operations of INEOS’s refinery in Grangemouth in the UK told Reuters.  

 

Earlier this week, INEOS shut down the 35,000 barrels per day crude unit at the refinery, according to Genscape data cited by Reuters.

BP, for its part, is said to have shut the 70,000-bpd crude processing unit at its refinery in Gelsenkirchen in Germany. In France, Total is delaying the restart of a 102,000 bpd refinery close to Paris after a planned maintenance, Thierry Defresne, a delegate for the CGT union, told Reuters.

Across Europe, lockdowns in Italy, Spain, and France are crushing oil demand and German traffic is down 40 percent, Giovanni Serio, head of research at the world’s largest independent oil trader Vitol, told Reuters on Friday. If the UK takes more measures to curb domestic travel, around 40 percent of Europe’s 7-million-bpd demand is at risk, Serio told Reuters.

 

Global oil demand is set to plunge by more than 10 percent from the typical 100-million-bpd consumption, as the raging coronavirus pandemic forces countries into lockdown, the executive said.

Falling demand, including jet fuel demand, may force Japanese refiners to cut run rates, Takashi Tsukioka, president of the Petroleum Association of Japan (PAJ), said on Thursday. Japanese refiners are stocked with crude for April and don’t have much room to take extra barrels from Saudi Arabia, regardless of how cheap the flood of additional supply will be, Tsukioka told a news conference, as quoted by Reuters. 

 

 

 

https://oilprice.com/Latest-Energy-News/World-News/Refiners-Race-To-Reduce-Rates-As-Fuel-Demand-Falls-Off-A-Cliff.html

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One-two punch of new virus, falling oil prices threaten Iraq

The economic fallout from the new coronavirus coupled with a sudden drop in oil prices threatens to catapult Iraq into an unprecedented crisis

 
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In this Tuesday, March 10, 2020 photo, people shop in the main Shurja market, in central Baghdad, Iraq. The economic fallout from the new coronavirus coupled with a sudden drop in oil prices threatens to catapult Iraq into an unprecedented crisis. The crude-exporting country is struggling to finance measures to contain the COVID-19 pandemic amid a leadership void in the federal government. (AP Photo/Hadi Mizban)

BAGHDAD -- The economic fallout from the coronavirus coupled with a sudden drop in oil prices is threatening to catapult Iraq into an unprecedented crisis.

The crude-exporting country is struggling to finance measures to contain the pandemic amid a leadership void in the federal government, and the unexpected oil price war between Russia and Saudi Arabia is further exacerbating budget shortfalls as losses accrue daily in trade, commerce, tourism and transportation. 

“This epidemic is striking our economy more than it is striking our health,” said Thamir Gharib, a hotel owner in Karbala. The Shiite holy city in southern Iraq that hummed with religious pilgrims all year long is now ghostly quiet. 

Gone are the dozens of buses primarily from neighboring Iran, the Gulf and Europe carrying visitors to the Imam Hussein shrine and filling up Karbala's hotels and restaurants. 

Revenues from tourists who traveled to holy sites in Iraq accounted for nearly 8% of the country's GDP, according to figures from the World Travel and Tourism Council. But as the global pandemic takes hold of the country, religious tourism has ground to a halt and Gharib's hotel doors — like others in Karbala and the nearby city of Najaf — are shuttered. 

A potentially weeks-long curfew went into effect in the capital Baghdad on Tuesday night, further compounding economic losses.

“If we calculate the damages with the fall of oil prices, it's no less than $120-130 million per day,” said Mudher Saleh, financial adviser to the prime minister. 

"It is necessary to legislate an emergency budget in the short term that provides financial sustainability at this stage to meet the necessary needs,” he added.

But Iraqi officials appear to be slow to heed these calls amid a deepening political crisis as rival blocs sparred for weeks over the naming of the next prime minister, precipitating a void in the country's top leadership. On Tuesday, former governor of Najaf, Adnan al-Zurfi, was named premier-designate but it remained to be seen whether political blocs will approve his Cabinet line-up.

Prime Minister Adel Abdul-Mahdi's government has been functioning in caretaker status since his December resignation under pressure from mass protests. Previous premier-designate Mohammed Allawi withdrew his candidacy amid delays and political dysfunction.

“The prime minister has absolved himself of political leadership and is acting as an administrator. Politically we don't have any leadership or consensus,” said Sajad Jiyad, a Baghdad-based analyst.

Other officials expressed optimism that oil prices would bounce back in a matter of months and that Iraq could rely on central bank reserves in the meantime. Based on assessments from the bank and the Finance Ministry these reserves stand between $45-60 billion.

Decision-making is further hampered by the fact that government orders to contain the virus will impact the ability of parliament to pass legislation.

“Sessions are impossible as all internal flights are cancelled and no public gatherings are allowed,” said Kurdish lawmaker Sarkawt Shamseddine.

Oil prices were already suffering shock from the virus outbreak and plunged further when Saudi Arabia began heavily discounting its crude and announced plans to increase output. The move came after Russia refused to sign on to a plan proposed by the Saudis to cut output and manage global oil supplies at an OPEC meeting earlier this month. 

Oil currently trades at around $26 per barrel, the lowest in 18 years and about half of what Iraq has projected to fund the state budget for this year. If prolonged, Baghdad will be unable to pay public sector employees and deliver basic services. Iraq's deficit, which is estimated at $40 billion, would also double, Iraqi officials said.

Iraq relies on oil exports to fund over 90% of state revenue. The proposed 2020 budget projected revenues at $56 per barrel but political deadlock has delayed its passing, casting more uncertainty over Iraq's economic future.

Already, the economic challenges are having an impact. Last week, Health Minister Jaafar Allawi said in televised comments that $150 million per month was still needed to purchase equipment and materials to fight the virus. To meet these needs the Finance Ministry said it was accepting donations from banks, government and private institutions. Kuwait has pledged $10 billion. 

Meanwhile, virus cases continue to rise, with 13 dead among 192 confirmed infected, according to the Health Ministry. The vast majority of people recover from the new virus, although it can kill the elderly or those with other underlying illnesses.

Transport, trade, tourism and commerce are among the sectors hardest hit by the pandemic, according to senior Iraqi officials, experts and businessmen.

The movement of goods has decreased by at least 30%, said Iraq's Transport Minister Abdullah Laibi. Crucial imports of goods from neighboring countries Turkey and Iran are down by two-thirds.

Prices in the local market are already seeing an effect. Ahmed Rahim, 25, a grocer in Baghdad said the price of Iran-imported onions for example has nearly doubled. 

The construction sector in northern Iraq, which relies heavily on Iranian labor has also halted big commercial projects in the wake of border closures.

International companies have been unable to rotate staff in and out of the company due to flight suspensions.

In response, many Chinese oil companies across Iraq have declared their inability to fulfill contracts because of the unexpected pandemic, according to an industry official. The official spoke on condition of anonymity in line with regulations.

China, where the virus first originated, is deeply entrenched in Iraq's energy sector and is a major importer of Iraqi crude. Iraqi officials fear Beijing's falling demand for crude in light of the coronavirus might also impact state revenues. 

But as many ongoing Chinese projects in the country are funded on the back of future oil sales, officials said they expected Beijing to cut back on imports from other Middle East countries before reaching Iraq. 

Private businessmen in Baghdad's commercial centers said they have had to let go staff because of plunging revenues.

Muhammed Najm estimated sales from his perfume shop in the capital's main Shorja Market dropped by 60% in the wake of the coronavirus. 

“We do not have anything, and the state has no solutions," he said. 

———

 

https://abcnews.go.com/International/wireStory/punch-virus-falling-oil-prices-threaten-iraq-69702874

 

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Independent oil firms BW, Genel, DNO, Panoro slash investment

 

OSLO, March 18 (Reuters) - Independent oil firms BW Energy , Genel, DNO and Panoro announced investment cutbacks on Wednesday as they sought to preserve cash amid a crash in crude prices and disruptions from the coronavirus outbreak. 

DNO, with key operations in the Kurdistan region of Iraq as well as the North Sea, halted dividends and cut its planned capital expenditure (capex) for 2020 by 30%, or $300 million, to shore up its balance sheet, the company said. 

“Steps have already been taken to suspend most discretionary drilling and capital projects across the company’s portfolio and to focus instead on key projects in its core operating area in the Kurdistan region of Iraq,” DNO added. 

The company also initiated staff cuts and said it would discuss cost reductions with suppliers and contractors. 

Oil prices fell to multi-year lows on Tuesday as the outlook for demand darkened even as global output has surged. 

 

As the coronavirus led to travel restrictions, the company would reduce the number of active drilling rigs to two from six in Kurdistan, while scrapping its production guidance for 2020, it added. 

DNO said its ability to maintain spending was also impacted by delayed payments for oil exports from the government of the semi-autonomous region of Kurdistan (KRG). The last payment, received in January, covered last September’s exports. 

“Our estimates suggest that KRG is not able to pay oil companies below Brent oil price of $50-55 a barrel,” Sparebank 1 Markets analyst Teodor Sveen-Nilsen wrote in a note to clients. 

“At the current oil price, we expect the Kurdistan players to report very low or none cash payments from KRG,” he added.

 

London-listed Genel Energy, which is also involved in the Kurdish Tawke license, similarly noted capex would fall and that output could suffer from a lack of drilling, but said its mid-term production outlook was essentially unchanged. 

BW Energy will meanwhile postpone oil drilling and field development projects in Gabon this year and is cutting its 2020 budget for capex by 50% to $125 million, the company announced. 

Panoro, which operates in Gabon and elsewhere, said it would slash its capex by 40% and that the coronavirus outbreak could slow down its development in Tunisia, leading to a cut in output guidance of 6% for the year.

 

“The safety of our people and operations is our absolute priority, Panoro Chief Executive John Hamilton said in a statement.

“Our focus is on protecting our highly valuable reserves and resources and preserving cash until the extraordinary macro environment improves,” he added. 

Genel’s shares fell by 15.3%, DNO by 6.6% and Panoro by 8.2% at 0941 GMT, while BW Energy rose 0.4%.

 

 

https://uk.reuters.com/article/health-coronavirus-oil-investment/independent-oil-firms-bw-genel-dno-panoro-slash-investment-idUKL8N2BB3AJ?rpc=401&

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How Chevron Could Win Big On “The Worst Oil Deal Ever

Chevron Deal

Last week someone commented to me that Chevron could now buy Occidental Petroleum cheaper than it offered to acquire Anadarko.

There is an element of truth to the statement, but it is complicated by Occidental’s debt. So let’s review the numbers.

Eleven months ago, Chevron attempted to buy Anadarko in the sixth-largest oil and gas deal in history. The deal would have given Anadarko $33 billion, and it would have assumed Anadarko’s $17 billion debt for a total cost to Chevron of $50 billion.

Occidental then entered the bidding, ultimately offering to pay 78 percent in cash and 22 percent in stock in a transaction valued at $57 billion. In my opinion, this price would have destroyed the cost synergies Chevron had targeted with their original offer, so I wrote an article urging Chevron to walk away from the deal. The ultimately did, collecting a $1 billion breakup fee from Anadarko in the process.

The offer from Occidental was accepted, and Occidental’s share price has been in free-fall ever since.

 

Prior to making the offer last May, Occidental had a market capitalization of just under $50 billion. Today, Occidental has a market capitalization of under $13 billion. Thus, at least in theory, Chevron could start buying Occidental shares on the open market and potentially acquire a majority of the combined company — Occidental plus Anadarko — for a fraction of what they were willing to pay for just Anadarko.

However, it’s a little more complicated than that. For example, Chevron would have to announce their intention, and that would potentially drive Occidental’s share price higher.

So perhaps they could just make Occidental an offer. If Occidental’s current market capitalization is $13 billion, maybe it would make sense to offer them $50 billion — the original offer to acquire just Anadarko.

But if Chevron were to simply make an offer to acquire Occidental, the debt would be a potential issue. We can see this by comparing the enterprise value of Occidental a year ago to its value today. The enterprise value calculation includes the market capitalization plus the current debt, which an acquiring company would need to assume.

Related: April Could Be Worst Month Ever For Oil

 

A year ago, Occidental’s enterprise value was $54 billion. Today, its enterprise value is $80 billion. That is a result of the massive increase in debt Occidental took on as a result of the acquisition.

Part of that debt was the issuance of $10 billion of preferred stock to Warren Buffett, which earns his company an 8 percent dividend. Last week Occidental announced a steep dividend cut to preserve cash in the wake of the collapse in oil prices, but Buffett still gets his 8 percent.

Thus, on the surface, it might appear that Chevron (or any other major oil and gas company) could nab Occidental for a fraction of its market value a year ago. In reality, Occidental’s liabilities of nearly $80 billion (versus $22.5 billion a year earlier) would probably be a major obstacle in getting a deal done.

 

https://oilprice.com/Energy/Energy-General/How-Chevron-Could-Win-Big-On-The-Worst-Oil-Deal-Ever.html

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What Will It Take To See $65 Oil Again This Year?

By Tsvetana Paraskova - Mar 23, 2020, 12:00 PM CDT

Barrels

Right after Saudi Arabia-led OPEC and Russia broke up their pact to keep oil supply and prices in check, some in the U.S. oil industry were optimistic that oil prices would go back up to $65 by the end of the year regardless of the end of the production restrictions.

One of those was Jay R. Young, President and CEO of King Operating Corporation, an independent oil and gas operator in Texas, who argued in a post on Forbes that U.S. shale shouldn’t panic because prices would bounce back.  

In just two weeks, the situation on the oil market has changed dramatically and prices for the U.S. benchmark are in the low $20s. Not only has the Saudi-Russian oil price war depressed prices, but the falling oil demand with coronavirus-caused country lockdowns is heavily weighing on the outlook for this year’s global oil demand. Analysts see 10 million barrels of oil (bpd) or more of lost demand and right now no one expects oil demand to grow this year compared to last year’s muted growth.

“[M]y prediction is oil will bounce back! And it won’t be because of the emotional reactions Saudi Arabia and Russia took last night, poking out their chests over production cuts. It will be because of basic supply and demand and a lot of people will be scratching their heads saying, ‘Why didn’t I invest in the oil markets when prices were low?’” Young said in his post.

Fewer rigs and falling well productivity rates across the U.S. shale patch would reduce U.S. oil production, thus leading to higher oil prices by the end of 2020, Young says. Related: What Happens If Oil Prices Go Negative?

Growing U.S. oil production has frustrated the OPEC+ efforts to rebalance the market for the past three years. But the oil price crash is hurting the shale patch so much that companies are starting to cut budgets by 20-30 percent.

 

Production will slow down inevitably, but the huge demand destruction, which is just beginning in the world’s top oil consumer, the United States, is set to continue depressing oil prices at least until the coronavirus pandemic is contained.

Faced with such unprecedented demand flop, oil producing countries face a lot of pain in what promises to be an oversupplied market for the next months. In the U.S., the oil industry will suffer, in Saudi Arabia and Russia, the government finances will be hit.  

With demand falling off a cliff, oil at $65 by the end of the year would need millions of barrels per day taken off the market through another coordinated action among oil producers.

Saudi Arabia and Russia are currently not backing down from the oil price war, even though their finances will be hurt by oil prices much lower than their fiscal breakevens.

The question is, which oil producer will see this overproduction as a price too high.

The U.S. is also wading into the debate, with U.S. President Donald Trump saying last week that “at the appropriate time, I’ll get involved” in the Saudi Arabia-Russia oil price war.

 

Texas Railroad Commissioner Ryan Sitton spoke with OPEC’s Secretary General Mohammad Barkindo on Friday, and tweeted that “we all agree an international deal must get done to ensure economic stability as we recover from COVID-19. He was kind enough to invite me to the next OPEC meeting in June.” Related: Do Saudi Arabia And Russia Really Want To Kill U.S. Shale?

The chairman of the Texas Railroad Commission, however, is not in favor of capping production.

“A couple of operators have suggested pro-rationing oil as a solution. While I am open to any and all ideas to protect the Texas Miracle, as a free-market conservative I have a number of reservations about this approach,” RRC Chairman Wayne Christian said in a statement on Friday.

The U.S. also has other options to intervene in the Saudi-Russian feud, including by passing the NOPEC legislation which would remove the immunity of any oil producing nation to be sued under U.S. antitrust laws.

With oil demand expected to take a major hit in the coronavirus pandemic, oil price wars and a flood of oil supply from the former allies Saudi Arabia and Russia is the last thing oil bulls (if there are any left) need this year.

Oil at $65 currently looks as unachievable as $100 oil looked when oil prices were at $65 a barrel.

 

https://oilprice.com/Energy/Energy-General/What-Will-It-Take-To-See-65-Oil-Again-This-Year.html

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China CPECC wins $203.5m Iraq gas plant contract

 
China Petroleum Engineering and Construction Corporation (CPECC) has been awarded a major contract worth $203.5 million to build a sour gas treatment facility at Majnoon oilfield in Iraq.
 
The project, which is likely to be completed within 29 months, will have the capacity to treat 4.39 million cu m of sour gas per day, reported Reuters, citing a company statement.
 
Iraq's Majnoon oilfield, operated by state-run Basra Oil Company, is now producing around 240,000 barrels per day (bpd) and plans to boost output to 450,000 bpd in 2021.
 
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As OPEC Pursues Oil Supply War, Here’s Who Has Most Firepower

 

 
 
 
 
 
 
 
Bloomberg) -- With the shackles of OPEC’s output limits thrown off and a price war under way, the group’s biggest oil producers are preparing to churn out more barrels to protect market share.
 

But making up in volume for what they’re losing in price is looking increasingly difficult as the coronavirus pandemic eviscerates demand. What’s more, some producers, like Iraq and Libya, are facing political and security stumbling blocks to increasing production.

Here’s a list of where the spare capacity is located and what obstacles could block it:

Saudi Arabia

The world’s biggest crude exporter has historically maintained the largest amount of spare capacity, allowing it to add output to dampen price swings in the case of supply interruptions elsewhere. Now, state producer Saudi Aramco is bringing those extra barrels to bear as the kingdom unleashes a price war and plans to flood markets with crude.

 

Aramco is boosting production to its maximum capacity of 12 million barrels a day from an average of around 10 million over the last three years. The company said it will supply more than that -- 12.3 million barrels a day -- in April by tapping storage for some barrels and that it’s working to raise capacity to 13 million barrels daily.

Russia

Moscow, whose intransigence in the face of deeper proposed output cuts led to the collapse of the OPEC+ alliance, responded to Riyadh’s planned production hike with a similar declaration.

Energy Minister Alexander Novak said Russia had the ability to boost production by 500,000 barrels a day, to a record high potential output of 11.8 million barrels a day. Russia’s state oil company Rosneft PJSC plans to increase output by 300,000 barrels a day, probably as soon as April 1.

It is not clear how much of Russia’s production increase will result in higher exports. Before Russia entered the price war it intended to export around 1.85 million barrels a day by sea in March, less than the 2 million barrels a day it shipped in February.

Iraq

The second-biggest producer in OPEC may not have many barrels to add as it pumped near capacity even during the three years that the group implemented output curbs. Still, Iraq aims to export about 250,000 barrels a day more in April than it did in February from fields in the south and center of the country that are controlled by the central government.

Boosting central government sales to 3.7 million barrels a day, along with the roughly 450,000 barrels that the semi-autonomous Kurdish zone in Iraq’s north exported daily on average over the past year, would bring Iraqi exports to the highest since September, according to tanker tracking data compiled by Bloomberg.

Some obstacles could hamper the effort. The last time prices dropped this low, Iraqi production growth stalled as the government couldn’t pay international oil companies operating in the country. Now it is facing a coronavirus-related closure at one of its fields, and others are still operating normally.

United Arab Emirates

The Saudi ally was caught out by the collapse of the agreement between the Organization of Petroleum Exporting Countries and partners like Russia earlier this month. But it’s not losing any time reacting to Saudi and Russian pledges to add supply.

 
Abu Dhabi National Oil Co. will supply 4 million barrels a day of crude in April as the government producer speeds up plans to increase maximum capacity to that level. That will be some 1 million barrels more than the U.A.E. pumped in February and boost capacity from the 3.4 million available that month, according to data compiled by Bloomberg. Adnoc is accelerating plans to raise capacity to 5 million barrels a day, though it didn’t say when it will reach that goal.

Kuwait

Along with Saudi Arabia and the U.A.E., Kuwait is one of the Gulf countries with the most spare capacity. The country has been pumping on average some 400,000 barrels a day below its 3.1 million-barrel limit since OPEC+ started its output cuts in 2017.

Kuwait won’t meet its long-held target of 4 million barrels a day capacity by this year. The country will get a boost as it resumes some of the 500,000 barrels a day of maximum production available in the Neutral Zone area it shares with Saudi Arabia.

Oman

The biggest Gulf producer that’s not an OPEC member doesn’t have much fuel to add to the fire. The sultanate can pump as much as 1 million barrels a day and is likely to gradually ramp up to that level, according to an oil ministry official. The country’s long-term buyers have already asked about the availability of additional barrels, so any hike likely won’t hit the market directly.

Libya, Nigeria

The African producers have long pumped below their potential, hampered by internal strife and civil war. Should such difficulties subside, the producers could add more than 1 million barrels a day to the market, though it is considered unlikely in the short term.

Iran

Under U.S. sanctions that restrict its sales, Iran’s actual output is uncertain. The country is pumping about half its full capacity of near 4 million barrels a day, according to Bloomberg data. With coronavirus ravaging the country and sanctions still in place, it’s unlikely Iran can ramp up production or sales.

 

http://www.bnnbloomberg.ca/as-opec-pursues-oil-supply-war-here-s-who-has-most-firepower-1.1410887

 

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Here’s Why Big Oil Stocks Are Rallying

By Alex Kimani - Mar 24, 2020, 3:00 PM CDT

Under normal circumstances, a company's management suspending a share buyback program is construed to mean that it lacks confidence in the future or thinks the shares are overvalued, meaning the move does not usually go down well with investors.

But these are hardly ordinary times.

On a rare day for the battered energy sector, shares of leading oil majors are rallying hard after they suspended buybacks and cut CAPEX--but maintained the all-important dividend.

Chevron Corp. (NYSE: CVX) announced a 20% cut in its FY 2020 guidance for organic capital and exploratory spending of $20B to $16B as well as suspension of its $4B stock buyback program, in a strong response to the oil price crash.

Chevron, however, has kept its dividend program intact with management reaffirming that it remains 'very secure:'

"The dividend is our number one priority and it is very secure," chimed CEO Michael Wirth on CNBC's Squawk Box. "We're taking actions to preserve cash. It will have some impact on production in the near term, but we've stayed with our financial priorities, which include protecting the dividend."

CVX shares have surged 16.8% at 12:00 pm ET on Tuesday. Chevron stock now sports a 9.52% yield--the highest in more than three decades--after the shares plunged nearly 50% YTD.

Chevron Corp. Dividend Trends

 

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Source: MacroTrends

Chevron will end the first quarter having spent just $1.75B of the $5B earmarked for buybacks in the current financial year with no plans for further repurchases. Meanwhile, much of the CAPEX cuts will come in the Permian Basin--a key engine of Chevron's production growth. Chevron expects to cut production in the basin by 20%, translating into 125,000 fewer barrels of oil equivalent per day--or 2.5% of the basin's total current production. Related: What Will It Take To See $65 Oil Again This Year?

However, Chevron says it expects its global production to remain flat compared to a year ago despite less spending on drilling--a clear demonstration that shale companies have learned to drill more efficiently.

"The flexibility of our capital program allows us to respond to these unexpected market conditions by deferring short-cycle investments and pacing projects not yet under construction. At the same time, we are focused on completing projects already under construction that will start-up in future years while preserving our capability to increase short-cycle activity in the Permian and other areas when prices recover," said Jay Johnson, Chevron's Executive Vice President of Upstream, in a company release.

Chevron, though, did not provide any glimpse into what to expect for the upcoming earnings despite bemoaning the impact of Covid-19 and a glut in supply.

Chevron is not alone in launching solid austerity measures.

On Tuesday, Royal Dutch Shell (NYSE: RDS.A) followed in the shoes of Europe's Big Oil; Italy's Eni SpA, French major Total SA and Norway's Equinor ASA (NYSE: EQNR) by suspending its share buyback program.

Shell has announced plans to lower operational costs by $3B-$4B p.a. over the next 12 months and cut FY20 CAPEX guidance to $20B compared to the previous guidance of ~$25B. The Dutch oil and gas giant has suspended its share buyback program after completing the current share buyback tranche and has also launched a divestment program of more than $10B of assets in the current financial year, depending on market conditions.

Europe's Big Oil--once regarded as a bastion of predictable shareholder paybacks--is now curbing investor returns and also trimming CAPEX as low oil prices continue to crash energy markets. The companies are saddled with debt, and many have been forced to significantly cut back on investments. Related: Saudi Arabia’s Oil Price War Is Backfiring

RDS.A shares have rocketed 21.2% at 12:50 pm ET on Tuesday's session and now sport a juicy forward yield of 14.0%.

Rising tide

 

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Source: CNN Money

They say a rising tide lifts all boats, and the entire sector is flying in early morning trade. The benchmark Energy Select Sector SPDR Fund (XLE) has rallied 13.5% at 12:30 am ET on Tuesday as crude oil prices surged on hopes the U.S.senate will soon approve a $2T coronavirus aid package that could potentially support oil demand. 

April WTI crude has climbed +5.1% to $24.56/bbl while May Brent has risen +3.9% to $28.08/bbl on expectations of a weaker dollar since the stimulus package will increase the money supply.

Exxon Mobil Corp.(NYSE: XOM), the biggest Western oil major, has no buyback program in place and is yet to announce new measures in response to the crisis. XOM, one of the heaviest CAPEX spenders, needs ~$77 a barrel to fund its ambitious capital spending and dividend from cash flows. Still, XOM shares have rallied 11.3% on at the time of this writing.

Not everybody is sanguine that the good times will last, though.

Whereas U.S. Treasury Secretary Steven Mnuchin has voiced confidence that a stimulus deal will be reached soon, Edward Moya, senior market analyst at broker OANDA, has warned that volatility is likely to remain high and the rally could end up being short-lived.

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Can The U.S. Convince Saudi Arabia To End The Oil War?

By Julianne Geiger - Mar 25, 2020, 6:30 PM CDT

US Secretary of State Michael Pompeo is applying verbal pressure to Saudi Arabia, encouraging the Middle Eastern country who started the oil price war to “rise to the occasion” and reassure the oil markets, the State Department has said, according to the Arab News.

Pompeo spoke to Saudi Arabia’s Crown Prince Mohammed bin Salman (MbS) before a G20 conference call, urging at least action through words, at a time when oil prices are particularly vulnerable—not just because of the oil price war, but also because of the depressed demand stemming from the coronavirus.

But the words seem laughable, given that the low oil prices are precisely what Saudi Arabia is hoping to achieve.

Saudi Arabia has, for years, been doing the lion’s share of the production cutting that OPEC agreed on to hold up oil prices, at great cost to its own finances. Meanwhile, other OPEC nations such as Iraq, have done precious little to toe the OPEC line, and Saudi Arabia has had to cut more to offset the noncompliant members. Russia, too, has failed to live up to its part of the production cuts.

When the OPEC+ deal fell apart a couple of weeks ago, it was Russia’s reluctance to cut more and for longer—as if they had restricted production to any great extent in the first place, overproducing nearly—if not every—month throughout the deal. Its rationale for refusing to cut and to cut more are not without merit. First, Russia’s oilfields cannot be turned on and off as easily as others, such as US shale. Second, cutting back production to manipulate the prices only works if the world’s largest producer—the United States—were to play along too. And it’s not. Cutting back production further, Russia contends, opens the door for US shale to take even more market share.

Related: Cesium - The Most Important Metal You’ve Never Heard Of

The refusal was the last straw for Saudi Arabia, and it responded by playing hardball, threatening to increase its production as of April 1, when the current OPEC production agreement is set to end. Saudi Arabia is likely hoping that the low oil prices will be Russia back to the table. Russia, likewise, is hoping Saudi Arabia won’t have the staying power to hold the line at $20-something oil.

For now, this is precisely the situation Saudi Arabia was hoping for—pain for other oil producers to bring about a change in action. Saudi Arabia, however, probably didn’t expect the prices to drop off quite so quickly, helped by the devastating effects of the global COVID-19 pandemic.

Without some incentive, and there may be one that the United States is offering, MbS has little reason to undo the damage it has intentionally inflicted in the oil markets.

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Saudi Arabia’s Deficit To Soar As Oil Price War Rages On

By Irina Slav - Mar 23, 2020, 10:00 AM CDT

Saudi Arabia could book a budget deficit of as much as $61 billion this year under the double blow of the coronavirus pandemic and the global oil glut, research from financial firm Jadwa Investments has suggested.

This would represent almost 8 percent of the Kingdom’s GDP, Arabian Business reported, adding that the budget revenue for the year will be a bit lower than what the government projected in its budget draft, at $210 billion (791 billion riyals).

Spending, on the other hand, will come in at $270 billion (1.02 trillion riyals).

"Overall, it is worth noting that, at this moment in time, the range of potential effects of Covid-19 on the kingdom’s economy are highly uncertain," the Saudi firm said as quoted by Arabian Business.

Some 511 cases of Covid-19 have been diagnosed so far in the Kingdom. According to Jadwa, as negative as the pandemic is for oil prices, there is space for optimism, mostly because governments are pledging fiscal stimulus and other support measures for national economies. According to the Saudi company, this should lead to a rebound in oil demand and this, in turn, will help Saudi Arabia achieve significant economic growth, from 0.3 percent for 2019 to as much as 6.3 percent. Related: Largest Oil Glut In History Could Force Crude Prices Even Lower

How realistic this is remains to be seen, as many analysts expect crude oil price to fall even further, not least because of Saudi Arabia’s commitment to boost production past the 12-million-bpd mark starting next month. Under the weight of the combination between a pandemic and a rising supply of oil, Brent and West Texas Intermediate have both dropped below $30 a barrel, with Brent at $28.52 and WTI at $22.84 a barrel at the time of writing.

Meanwhile, analysts are warning that global oil storage is filling up and this could push prices further down, possibly as low as $10 a barrel. There are some 750 million barrels of oil in storage globally, according to calculations from data analytics company OilX, and this could rise to 1 billion barrels.

 

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Oil Majors Slash Spending Amid Price Plunge

By Tsvetana Paraskova - Mar 23, 2020, 1:00 PM CDT

Shell became the latest oil major to announce significant spending cuts to protect its balance sheet from crashing oil prices, joining other majors such as Exxon in the drive to optimize costs at oil below $30 a barrel.  

On Monday, Shell said it was reducing its underlying operating costs by US$3-4 billion per year over the next 12 months compared to 2019 levels. The supermajor will also cut capital expenditure to US$20 billion or below this year, down from originally planned level of around US$25 billion, and will slash working capital. 

“As well as protecting our staff and customers in this difficult time, we are also taking immediate steps to ensure the financial strength and resilience of our business,” Ben van Beurden, Chief Executive Officer of Shell, said in a statement. “The combination of steeply falling oil demand and rapidly increasing supply may be unique, but Shell has weathered market volatility many times in the past,” the executive added.

Shell’s board has also decided not to continue with the next tranche of the share buyback program after the current share buyback tranche is completed.

Another major operator in Europe and the North Sea, Aker BP, also said on Monday it would slash capital expenditure and put on hold development at fields that have not been sanctioned yet. Aker BP is slashing exploration spending by 20 percent in 2020, with further significant reductions planned for 2021-22. Aker BP expects its 2020 capex to be reduced by 20 percent to around US$1.2 billion, while capex in 2021-22 is expected to drop well below US$ 1 billion.   

U.S. oil producers were the first companies to react to the crashing oil prices, announcing capital spending and dividend cuts by the hour as many of their operations are unsustainable and deep in the red at $30 a barrel WTI Crude.

Oil supermajors aren’t immune to the price crash, as recent announcement show. ExxonMobil said last week it was looking to “significantly reduce spending as a result of market conditions caused by the COVID-19 pandemic and commodity price decreases.”

The U.S. supermajor has already started to notify contractors and vendors that it would be reducing expenditure in the near term, spokesman Jeremy Eikenberry said on Sunday, as carried by Reuters.  

France’s Total also announced on Monday organic capex cuts of more than US$3 billion, equal to more than 20 percent,  with 2020 net investments now cut to less than US$15 billion.  Total also suspends its buyback program, after it had announced a US$2 billion buyback for 2020 in a $60 a barrel environment.  

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Russia’s Unexpected Advantage In The Oil Price War

By Tsvetana Paraskova - Mar 25, 2020, 3:00 PM CDT

Russia

While the ruble is now at its lowest level against the dollar in four years, the cheaper ruble has a silver lining for Russia’s oil producers in the oil price war for market share with Saudi Arabia. The collapse of the OPEC+ deal and oil prices has hit Russia’s financial markets and currency, leading to a sharp drop in the ruble versus the U.S. dollar. The lower the ruble slides against the U.S. dollar, the lower the production costs of Russian oil companies in U.S. dollars are. 

To be sure, a crumbling ruble is not the preferred outcome of the oil price collapse for Russia’s monetary system and foreign currency reserves. Still, it could help Russian oil firms to have lower costs in U.S. dollars for their operations. 

According to calculations by Reuters, the lifting cost per barrel of oil equivalent of Russia’s largest oil producer, state-controlled Rosneft, is now lower than the costs of Saudi Arabia’s oil giant Aramco. And this is due to the falling ruble against the dollar. On the other hand, Saudi Arabia’s currency, the riyal, is pegged to the dollar at a fixed exchange rate, so the dollar costs for Saudi Aramco are the same before and after the oil price collapse and the collapse of the OPEC+ coalition. 

Last year, the average lifting cost in dollars per barrel of oil equivalent of Rosneft was $3.10. This compared to a $2.80 cost per barrel for Saudi Aramco, as per company financials cited by Reuters. 

The crumbling ruble has now cut Rosneft’s cost to $2.50 per barrel, while Aramco’s cost is the same because of the fixed exchange rate with the riyal peg to the dollar, Reuters calculations show. 

Related: The Real Reason Oil Prices CrashedLast week, Rosneft’s chief executive Igor Sechin, the most vocal critic in Russia of the now-collapsed OPEC+ pact, said that Rosneft’s operating costs are comparable to those of Saudi Aramco. Rosneft could even have higher efficiency because, unlike Saudi Arabia, it is not dumping the price of its oil. 

“Our operating costs are comparable to those of Saudi Aramco. Our cost is $3.10 per barrel, theirs is somewhere in the $2.50-2.80 range,” Sechin told news channel Rossiya 24.

 

“We can work efficiently and without dumping prices, as they [Saudi Arabia] do. Therefore our efficiency could even be higher than theirs,” Sechin said. 

Not everyone in Russia is as certain as Sechin that their company is beating Aramco in terms of low costs of production at a time of crumbling oil prices. 

Leonid Fedun, vice president of Russia’s second-largest oil producer Lukoil, described the oil price crash as “catastrophic” in an interview with Russian television channel RBC last week. 

Oil at $25 a barrel is catastrophic, Fedun said, adding that the OPEC+ deal collapse and the Saudi-Russian “war until exhaustion” that follows are the main reasons for the lowest oil prices in years. 

Admitting that the coronavirus pandemic hits economies and oil demand everywhere, Lukoil’s Fedun said that if OPEC and Russia had agreed to continue the cuts and cooperation, oil prices would now have been at around $50 a barrel. 

Asked to comment on Fedun’s assessment of ‘catastrophically’ low oil prices, the Kremlin spokesman Dmitry Peskov said on Friday that the oil price collapse was not “catastrophic” but a “very unpleasant pricing environment.” 

Russia has sufficient buffers to cope with the situation, Peskov told reporters, reiterating the official Russian position that it can live with oil prices so low for up to ten years.  

 

Last week, Moscow admitted that its revenues from oil and gas would be US$39.5 billion (3 trillion rubles) lower than planned due to the tumbling oil prices and that Russia’s budget would be in deficit this year. 

The collapse in oil prices and the outlook for severe demand destruction in the coronavirus pandemic may have some Russian companies rethink earlier policies to boost production as of April 1 when the OPEC+ pact expires, comments from a Russian oil executive suggest. 

Related: The Boldest Permian Plays To Watch As The Oil Market Circles The Drain

On Monday, executives from Russia’s top oil firms met with energy minister Alexander Novak for the second time in three weeks since the OPEC+ breakup and the price collapse.  

Tatneft’s CEO, Nail Maganov, who boasted two weeks ago that even $8 oil is not critical for the company, told reporters after Monday’s meeting that it may not be economically feasible for Russian firms to boost production from April, due to the coronavirus pandemic. 

“If it weren’t for the coronavirus, there would have been economic sense to increase production. Hardly anyone could have predicted such a collapse in prices,” said Maganov, quoted by TASS. 

Russia is reportedly confident of beating the Saudis in the pump-at-will-for-market-share game. But in the end, the game could turn out to be whose state finances will withstand the self-damaging price war amid demand so depressed that even taking 10 million bpd off the oil market now would not balance it. 

 

https://oilprice.com/Energy/Energy-General/Russias-Unexpected-Advantage-In-The-Oil-Price-War.html

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Demand Destruction Foils Saudi Arabia’s Plan To Flood Europe With Oil

Mar 26, 2020, 4:30 PM CDT Saudi

Saudi Arabia has promised a flood of cheap oil to Europe as it aims to hit its former ally Russia in its own backyard, but it looks like demand for the ultra-cheap Saudi crude doesn’t exist after all.

Despite the flood of cheap oil Saudi Arabia has promised, some refiners in Europe, including supermajor Shell, are set to take less crude from the Kingdom in April amid plummeting demand in the coronavirus pandemic, Reuters reported on Thursday, quoting industry sources.

 

Saudi Arabia, the world’s biggest oil exporter and OPEC’s top producer, has pledged to flood the market with oil in April after Russia refused to back deeper cuts proposed by the Saudi-led OPEC in response to the demand slump. The Kingdom is intent on unleashing growing crude oil volumes on the global market, aiming to significantly boost its crude oil exports to a record-breaking more than 10 million bpd in May.

In Europe, Saudi Arabia appears to be going after Russia’s oil market share with deeply discounted Arab Light crude at up to three times the usual volumes. Saudi Arabia hasn’t seen Europe as a core market in recent years because it has prioritized continuously growing demand in Asian markets. But in the war of market share, the Kingdom is now looking to squeeze Russian oil out of Europe by offering deep discounts which make its Arab Light crude priced at as low as $25 a barrel at Rotterdam, much lower than the price of Urals.

 

Regardless of the cheap extra Saudi crude oil, refiners in Europe plan to cut allocations for Saudi oil by as much as 25 percent for April, Reuters sources said, as many major economies – including Germany, France, Spain, Italy, and the UK – are in lockdown mode to try to slow the spread of the coronavirus. The widespread lockdowns are leading to a massive slump in oil demand in Europe’s biggest economies. Refining operations in Europe and elsewhere are scaling back as gasoline and jet fuel demand falls off a cliff due to the pandemic.

It’s difficult to “nominate a lot” amid refinery processing cuts, a trade source told Reuters.    

 

 

https://oilprice.com/Latest-Energy-News/World-News/Demand-Destruction-Foils-Saudi-Arabias-Plan-To-Flood-Europe-With-Oil.html

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Iraq Wants 30% Capex Cut From Foreign Oil Firms

By Tsvetana Paraskova - Mar 27, 2020, 2:30 PM CDT

Iraq, one of the oil producers worst hit by the oil price crash, is proposing that all foreign oil firms operating in OPEC’s second-largest producer cut their budgets by 30 percent on the condition that crude production levels do not suffer, Reuters reported on Friday, quoting local officials and industry sources.

Iraq is struggling at oil below $30 a barrel, and its oil ministry is having trouble repaying international oil companies that develop major oil fields in the southern part of the country. Foreign firms who develop Iraqi oil fields do so under service contracts and are being paid a fixed fee in U.S. dollars for their oil production.

Now that Iraq’s fellow OPEC member Saudi Arabia signals a wave of extra oil supply to the market and the coronavirus pandemic batters global oil demand, oil prices in the $20s are utterly unsustainable for Iraq’s oil revenues and total budget income, much of which depends on income from oil exports.

The foreign oil firms have received the letter from Iraq asking for a 30-percent cut in budgets, but they have not made a decision yet, a source with a foreign oil company told Reuters.

Foreign oil operators in Iraq are also looking for savings from their suppliers.

ExxonMobil, for example, has already asked all its suppliers in Iraq to cut costs, the U.S. supermajor said in a letter to those suppliers seen by Reuters.

Iraq, which relies on oil revenues for 95 percent of its budgetary income, is one of the least diversified economies in the Middle East. It will likely have to enforce strict austerity measures after its fellow OPEC member and the cartel’s de facto leader, Saudi Arabia, launched an all-out oil price war with Russia.    

According to Moody’s, Iraq is one of the most vulnerable oil producers in this price crash and could see its fiscal revenues and exports drop in 2020 by more than 10 percent of GDP this year.

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Saudi Arabia And The U.S. Could Form The World’s Newest Oil Cartel

By Irina Slav - Mar 24, 2020, 10:00 AM CDT

Barrels

The United States and Saudi Arabia have been discussing the idea of setting up an oil accord, Bloomberg reports, citing Energy Secretary Dan Brouillette. Such an agreement would effectively amount to a cartel, which, by definition, is a group of independent market participants agreeing to act together to influence the market in a way favorable to them.

For now, however, this is just an idea that some officials in the Trump administration support. The chance of it becoming anything more is unclear, according to Brouillette.

“There are many, many ideas that are floated around the policy space, that is one of them,” the U.S. Energy Secretary told Bloomberg in an interview. 

 

“I don’t know that it is going to be presented in any formal way.”

The U.S. oil industry has suffered a heavy blow from the combination of the coronavirus outbreak and the price war that Saudi Arabia started after Russia refused to cooperate on deeper production cuts. Producers are slashing spending plans, suspending share buybacks, and some have already asked oilfield service providers for substantial discounts to their services.

West Texas Intermediate, the U.S. benchmark, has shed about 60 percent of its value since the start of the year. 

 

According to Reuters’ John Kemp, it has further to fall unless the economic outlook for the country—and the world—improves sharply and quickly. This outlook is not good news for either the shale industry or the supermajors in the U.S., which makes the administration’s moves concerning Saudi Arabia only logical. But nothing is certain yet.

“As part of the public policy process, if you will, our interagency partners often get together and talk about a number of different items, but we’ve made no decision on this,” Brouillette told Bloomberg.

“At some point we will engage in a diplomatic effort down the road. But no decisions have made on anything of that nature.”

 

https://oilprice.com/Energy/Crude-Oil/Saudi-Arabia-And-The-US-Could-Form-The-Worlds-Newest-Oil-Cartel.html

 

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The Oil Glut Is About To Get Even Worse

With only a week to go before OPEC+ countries start flooding the world’s total oil production with an estimated extra 2.5 million barrels per day (bpd) amid the Covid-19 crisis, building one of the biggest oil supply gluts the world has ever seen, UK operator INEOS has decided to postpone its scheduled maintenance for the North Sea Forties pipeline system (FPS) in a move that Rystad Energy calculates will add several hundred thousands of extra barrels to the market every day.

Based on this development, Rystad Energy has raised its North Sea oil production forecast by 330,000 bpd to 2.96 million bpd for June 2020 and by 190,000 bpd to 3.04 million bpd for July 2020.

“This just adds another ripple to the growing oversupply pool of global liquids – an overhang for 2Q20 that is already so incomprehensibly massive that it will eventually force shut-ins as oil prices fall below short-run marginal costs and logistical challenges arise,“ says Rystad Energy oil market analyst Milan Rudel.

 

North Sea

E&P companies are trying to keep oil flowing during the coronavirus outbreak while cutting back on all other activities – including maintenance. Turnarounds increase human-to-human contact adding maintenance crews typically results in more people working at the platform and more rotation.

“Given the current struggle, E&Ps are understandably trying to mitigate the coronavirus risk by implementing their version of social distancing,“ adds Rudel. Related: Saudi Arabia And The U.S. Could Form The World’s Newest Oil Cartel

Although INEOS has not yet officially decided on a new date for the FPS maintenance, except stating that it is postponed until August 2020 at the earliest, we see a case for delaying the turnaround to 2021. We incorporate a two-month delay to mid-August 2020 in our base case.

The FPS carries oil from UK and Norwegian fields in the central North Sea to Cruden Bay in Scotland. In addition, we also expect maintenance of the Scottish Area Gas Evacuation (SAGE) pipeline to be delayed in line with FPS maintenance, as several fields connected to FPS feed gas into the SAGE system. Thus, we also revise our maintenance forecast for Grane (Edvard Grieg and Ivar Aasen), Alvheim, Flotta (Golden Eagle), Beryl and Gryphon crude streams accordingly.

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Why This Is Not The Right Time To Buy Energy Stocks

By Editorial Dept - Mar 27, 2020, 12:31 PM CDT

If there is one thing that history teaches us (other than that we don’t learn from history) it is that following a drop as severe and rapid as this in the stock market and commodity prices, there will be some incredible opportunities once things start to recover. The energy sector has been one of the hardest-hit areas of the stock market, so it is likely that some of the biggest opportunities will be there. That doesn’t mean, however, that investors should look to rush in and buy energy stocks indiscriminately.

I know that after a strong three-day rally FOMO will be running high, but patience and selectivity are essential at times like these, and right now is not a good time to buy.

For one thing, crude looks to be revving up for another test of the double low just above $20 that formed over the last couple of weeks. That may or may not hold but buying energy stocks just before we find out that important piece of information makes no sense at all. If it does hold, there will still be plenty of upside left after that is known, if it doesn’t there will be much better entry points before long.

In addition, if we look at the S&P 500 from an Elliott Wave perspective, things there look pretty bad right now.

The pattern so far has a classic Elliott look. A first wave was followed by a fifty percent retracement, then a bigger wave, also followed by a fifty percent retracement. In theory, that means that the fifth wave, the…

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Rig Count Crashes Most In 4 Years As Oil Shock Rocks U.S. Shale

By Julianne Geiger - Mar 27, 2020, 12:15 PM CDT

Baker Hughes reported that the number of oil and gas rigs in the US fell again this week by 44, falling to 728, with the total oil and gas rigs clocking in at 278 fewer than this time last year. It is the largest single-week drop since February 2016.

In the runup to the published rig count, analysts were predicting that the results would show a steep drop off in the number of active rigs, and three of the biggest drilling operators in Texas made significant budget cuts, indicating that the industry is bracing for tougher times ahead. 

The number of oil rigs decreased for the week, by 40 rigs, according to Baker Hughes data, bringing the total to 624—a 192-rig loss year over year.

The total number of active gas rigs in the United States fell by 4 according to the report, to 102. This compares to 190 a year ago. 

The miscellaneous rig count stayed the same this week, for a total of 2 miscellaneous rigs.

Despite the sharp drop off in rigs, the EIA’s estimate is that the United States produced 13 million barrels of oil per day on average this week, just 100,O00 bpd off the all-time high.

The number of rigs in the most prolific basin, the Permian, fell by 23 this week to 382, compared to 454 rigs one year ago. The second largest basin, the Eagle Ford, lost 4 rigs this week, for a total of 63 rigs, compared to 78 a year ago.   Related: Not Even The $2 Trillion Stimulus Package Can Save Oil Markets

The WTI benchmark at 12:15 pm was trading at $21.26 (-5.93%) per barrel—almost $3 per barrel below last week levels as market fears entrench deeply that the industry will get squeezed beyond repair between oversupply coming from Saudi Arabia and Russia, and lack of demand coming from the Covid-19 lockdowns that are widespread throughout the world’s largest oil consuming nation, the United States.

Further pressure was put on oil prices today when it became clear that the $2 trillion stimulus bill might not sail through the House unopposed, as fiscal hawks threaten to delay the process.

The Brent benchmark was trading at $27.33 (-4.61%)—roughly $2.50 per barrel below last week’s levels.  

Canada’s overall rig count decreased by 44 rigs as well this week, to a total of just 54 rigs. Oil and gas rigs in Canada are now down 34 year on year. 

WTI was trading down by 4.42% on the day at 1:08pm EDT, with Brent trading down 3.60%.

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Economic Activity Hits A Decade-Low

By Editorial Dept - Mar 27, 2020, 12:30 PM CDT

Friday, March 27, 2020

1. Economic activity plunges to decade-low

- The U.S. economy contracted at the fastest rate in March since the depths of the financial meltdown a decade ago.

- IHS Markit’s purchasing managers index saw manufacturing activity drop to a reading of 47.6, while the services index plunged to 39.1. Anything below 50 is a signal of contraction. The composite of those two fell to 40.5 in March, down from 49.6 in February.

- In the eurozone, the comparable index fell to 31.4 in March from 51.6 in February.

- “We are confident that the speed of the collapse now is faster than after the crash of September 2008, at which point the economy had already been in recession for a year; this is an overnight stop,” Ian Shepherdson, chief economist at Pantheon Macroeconomics said in a note to clients. “We expect a further decline in April, which ought then to be the floor, or close to it.”

2. Oil majors begin cutting

- Much of the financial stress in the U.S. shale sector has been concentrated in small and medium-sized drillers. But even the oil majors are drilling unprofitable wells with oil in the $20s.

- This week, they began to reverse course, after ramping up drilling in the Permian over the last few years. Chevron (NYSE: CVX) announced that it would cut its spending by $4 billion, and spending in the Permian by half.

- ExxonMobil (NYSE: XOM) has a dividend yield at about…

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Calls mount for new OPEC+ deal as oil prices and demand slide

SULAIMANI — Oil producers need to resume cooperation in an effort to stabilize the global market, Russian and OPEC officials said, as the industry reels from a demand and price collapse caused by the coronavirus pandemic and an emerging price war.

A three-year supply pact between the Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, fell apart this month, prompting OPEC to remove limits on its output, Reuters reported on Friday (March 27).

The resulting supply boost has coincided with plummeting demand as governments around the world implement national lockdowns to slow the spread of the virus. That twin-pronged assault on prices has sent Brent crude to a 17-year low below $25 a barrel and hammered the income of oil producers.

One of the reasons for the breakdown of the deal between OPEC and other producers, a group known as OPEC+, was Russia’s reluctance to support bigger curbs to output.

But there are signs that resolve could be softening, with a senior Russian official telling Reuters that a new OPEC+ deal might be possible if other countries join in.

“Joint actions by countries are needed to restore the [global] economy ... They (joint actions) are also possible in the OPEC+ deal’s framework,” said Kirill Dmitriev, the head of Russia’s sovereign wealth fund.

He and Energy Minister Alexander Novak were Russia’s top negotiators for the previous OPEC pact, which officially expires on March 31.

Dmitriev declined to say what nations could be included in a new deal.

Though the United States is the largest oil producer not included in OPEC+, the idea of Washington cooperating with other oil exporters has long been considered unlikely, not least because of US antitrust laws.

However, the unprecedented situation in which policymakers find themselves appears to be bringing previously unthinkable ideas into play.

Forging a US-Saudi oil alliance is one of “many, many ideas” being floated by US policymakers, US Energy Secretary Dan Brouillette told Bloomberg TV on Monday. It is uncertain if the idea will become a formal proposal, he said.

US President Donald Trump last week said that he would get involved in the oil price war between Saudi Arabia and Russia at the appropriate time.

Adding further pressure, the head of the International Energy Agency, an adviser to the United States and other industrialized countries, on Thursday called on Saudi Arabia to help stabilize the market.

OPEC, meanwhile, wants to look at ways to support the market. Algeria, which holds the OPEC presidency at present, has called for a meeting of the group’s Economic Commission Board to be held no later than April 10.

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The Cheapest Way For Trump To Save U.S. Oil

By Lourcey Sams - Mar 27, 2020, 5:00 PM CDT

The President of the United States has the power, at his sole discretion without any other authority, to place a fee on imported oil or products. It becomes variable when a base price (floor price) is set and a fee is paid on any imports where the price on imports is below the base price. If the base price for oil was set at $50.00 per barrel and the import price is $30.00 per barrel, then an import fee of $20.00 per barrel would be paid to the United States Treasury. Likewise, if the import price (world price) is $50.00 a barrel, then no fee is paid.  Thus, the fee is variable depending on the price paid for an imported barrel. 

Covid 19 and the Oil Price War

Recently, two events, the Covid 19 pandemic and an oil price war between Saudi Arabia and Russia have had an unprecedented effect on the price of oil. Covid 19 has had a shock on demand unlike any event since 2001. This, together with Russia and Saudi Arabia flooding the market with excess crude, has sent prices sharply downward. Each event alone would have had a negative effect on oil price, however, together they have shocked the market. The impact the fundamentals of a variable import fee would have on oil price would be somewhat tempered by these two-events combined at the same time. It is the author’s belief Covid 19 will dissipate and world demand will normalize in the short term. The price war could be longer term. Irrespective, a variable import fee would have a positive effect on the oil price, yet it would be far more effective under normal market conditions.

The Effects of the Fee

The majority of the oil in the world is owned by a government and therefor a government will set the price of oil. The United States is the largest consuming nation in the world, however, because our oil is owned by private industry, the United States does not currently have a role in setting the price. We have long been held hostage to the policies of OPEC and other governments. It is estimated that the current consumption in the U.S. is approximately 20 million barrels per day. Production estimates range between 11 and 13 million barrels per day, meaning a deficit between 7 to 10 million barrels per day. If an import fee with a base price of $50.00 per barrel is placed on oil and the US imports of 7 million barrels per day then the price of the imported barrel would be $50.00 (price plus fee). Any seller would seek this price and prefer to sell to the U. S. as opposed to selling at a lower price set by some financial market indices. Likewise, other consuming nations, seeking to maintain supply, would pay a higher price to purchase oil. Purchasers in the U. S., required to rely on imports would in turn pay a higher price for domestic oil than market indices. As such, the world oil price would seek a level set by the United States base price (floor price) as set by the import fee. Accordingly, the United States, would become a vital participant in determining the world oil price. Related: Oil Price Crash Opens A Window Of Opportunity For Renewables

Is the United States Truly in Balance?

Prior to the crisis of Covid 19 and the price war, there was considerable evidence that production in the United States was beginning to decline. Capital expenditures in 2019 were considerably reduced. The US rig count in the year prior to the current crisis was down over 250 rigs and the Permian Basin rig count was down approximately 55 rigs. Decline curve analysis for both the Delaware Basin and Midland Basin showed a decline prior to the two crises. Texas Railroad Commission data also indicated an oil production decline. It has been reported that the United States was near or at energy independence. The U.S. Energy Information Administration (EIA) states on their website “EIA is not able to determine exactly how much crude oil may originally have been imported from other countries, placed in storage, and then exported. The United States also produces and exports petroleum products, but EIA is unable to track how much of these petroleum exports are made from domestic produced or imported crude oil. Also, some U. S. crude oil exports are refined into petroleum products in other countries, which may be exported back to, and consumed in, the United States.” In other words, the U. S. is a net importing country. Remove U. S. crude oil imports and the U.S. would be unable to produce current petroleum refined products for consumption or export. This deficit will only balloon in the current environment. Capital expenditures were already considerably reduced in 2020 prior to the current crisis, but with recent announced reductions and cuts, it becomes alarming. Further, most of the recent increase in production in the U. S., is attributable to the “shale” plays. Shale production is not truly reserved based. Large capital expenditures result in high deliverability with hyperbolic declines. Massive reduction in capital expenditures will result in large production declines and a wider deficit.

Benefits and Energy Security

A variable import fee on United States imported oil or products with a floor price of $50.00 will set the U. S. price and hence the world price at $50.00. This would provide a stabilizing effect on the U. S. oil industry. Capital budgets could be set at reliable numbers with confidence. Bank debt would be secured and reliable. Jobs could be saved within predictable cash flow. In short, a critical oil industry would be stabilized. The United States needs energy security and a stable growing domestic industry is needed to provide energy security. The U. S. military presence in the Middle East is to provide a stable flow of oil and to provide energy security. Recent innovations by the U. S. oil industry have shown we can go a long way toward energy independence and energy security. The price war has as much to do about market share and eliminating the U. S. competition than any other factor.

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