The Energy Report 10/26/18
Oil has become unglued from strong demand and tight supply figures as global stock markets shake with fear. Great earnings from oil companies like ConocoPhillips don’t matter after Amazon misses, raising fears about a global economic slowdown. Oil prices are still being weighed down by stock market worries and get little help from bullish oil data and bullish news stories. Not only did you have Saudi Arabia backtrack from their “pump all you can” policy, you also had great earnings from energy companies and as of right now that does not even matter. You even have a report that the Chinese Government is telling China oil companies to stop buying oil from Iran, at least temporarily, because they want to use it as a barging chip in U.S. trade negotiations with the United States.
Maybe Amazon should get in the oil and refining business. ConocoPhillips’ earnings quadrupled as third-quarter earnings came in at 1.9 billion, or 1.59 per share, up from $400 million, or US 0.34 per share, compared to earnings for the third quarter of last year. Yet, while oil companies are finally starting to prosper, the sharp crude oil price drop may cause many to rein in spending plans.
The sharp crude oil price drop caused Saudi Arabia to think twice about raising oil output. OIL Price reported that the Saudi Arabia’s Energy Minister Khalid al-Falih told state TV channel al-Ekhbariya as quoted by Reuters, to offset recent increases. “We (have) entered the stage of worrying this increase,” the official said, adding any reduction in supply would go towards ensuring the stability accomplished because of the OPEC+ production-cutting pact sealed at the end of 2016. The minister’s remarks are somewhat surprising as they come amid worry about loss of supply from Iran once U.S. sanctions enter effect next month. However, there has also been new concern among market players: that global economic growth may be slowing down and will continue to slow down, ultimately hurting oil demand. What makes the comments confusing, however, is the fact they come on the heels of earlier statements by Falih that Saudi Arabia is ready to increase production to up to 12 million bpd and invest in boosting its spare capacity.
“I don’t rule out that the Kingdom’s production, which has been 9-10 (million barrels per day) over the last decade or so, will be a million to two million (barrels) higher,” the energy minister told the Saudi Gazette just this Tuesday.
The Wall Street Journal reports that China is cutting some of its oil trade with Iran after vowing for months to resist U.S. sanctions on the exports, providing Washington with an unexpected boost to its efforts to isolate the Islamic Republic. The move comes as Saudi Arabia, seeking to damp a foreign-relations crisis, said this month that it would increase oil supply, pushing down prices and giving traders further options outside Iran. The shift by Beijing, Iran’s top customer, gives the U.S. a building block in an economic barrier around Iran as it prepares to renew sanctions on the country’s energy sector in early November. China’s largest oil refiners, China National Petroleum Corp. and China Petrochemical Corp., haven’t booked any Iranian cargo for November, according to people familiar with the matter. China has been importing about 600,000 barrels of Iranian crude a day.
Shale oil production has been the market supply savior, but as I have warned before, shale still has limitations. Russel Gold in the Wall Street Journal says “The Shale Boom Calmed Oil Markets, but for how much longer?” He writes that “Supply worries are back: As U.S. bonanza nears limits, the world is thirstier than ever for crude. For the past decade, enough oil has flowed from America’s shale boom to allay worries that demand for the world’s most important commodity would outstrip supply. Now, new volatility in global oil prices—which are up 15% since the start of the year—signals that the calming effect of the shale bonanza is reaching its limits.
He writes that “While[shale] this has helped the world meet rising demand for years, it cannot go on forever. Signs are mounting that shale won’t keep growing at the same rate in the U.S. Drillers face pipeline bottlenecks moving crude out of West Texas.” This week, Halliburton Co. Chief Executive Jeff Miller said its oil-producing clients were facing “budget exhaustion” and he expected some to take extended breaks from drilling new shale wells. That is coinciding with warnings of plateauing, or even declining, production elsewhere in the world.” A great article and a must read about the supply squeeze that is still coming even if we are worried about a slowdown in demand in the short term.
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network