U.S. Shale Revolution & Free-Market Economics Dominate Oil Prices
In this newsletter:
1) Shale Shocked: Crude’s Collapse Sends Shockwaves Across Global Markets
Bloomberg, 14 November 2018
2) U.S. Shale Revolution & Free-Market Economics Dominate Oil Prices
Olivier Jakob, Financial Times, 14 November 2018
3) U.S. Expected To Produce Half Of Global Oil And Gas Output By 2025
The Wall Street Journal, 13 November 2018
4) U.S. LNG Exports Are About To Reshape The Global Market
Stratfor, 9 November 2018
5) China To Boost Shale Oil, Gas Production
OilPrice.com, 7 November 2018
Full details:
1) Shale Shocked: Crude’s Collapse Sends Shockwaves Across Global Markets
Bloomberg, 14 November 2018
Investors have gone from contemplating the prospect of oil at US$100 to sub-US$50 in less than two months. No wonder global markets are playing catch-up.
From stocks and bonds to currencies, assets worldwide are gripped by a crude awakening. Monday saw oil’s largest one-day drop in three years, securing its longest losing streak on record.
Early trading jitters on Wednesday suggested the sell-off may not be over, though West Texas Intermediate later climbed after OPEC President Suhail Al Mazrouei said the group and its allies would do what is needed to balance the market.
The Stoxx Europe 600 Index dropped on Wednesday, with oil and gas companies among the big losers. There could be more pain in store. The performance of energy shares relative to the broader index has yet to hit year-to-date lows despite elevated price swings in the oil-market complex.
In the U.S., energy stocks were the biggest drag on the S&P 500 Index on Tuesday as the benchmark gauge reversed a gain of more than 1 per cent to finish in the red. The jump in volatility of the oil price will feed into already bruised U.S. stocks, according to Macro Risk Advisors.
About US$80 million flowed out of the SPDR S&P Oil and Gas Exploration and Production exchange-traded fund, ticker XOP, on Tuesday. That was the third day of withdrawals and the largest in more than two weeks.
Short interest in XOP is at its highest in more than a year, with nearly a quarter of shares outstanding lent out. The ETF tracks an equal-weighted basket of U.S. oil and gas firms.
CREDIT PAIN
The corporate bond market had taken the slide in crude on the chin but Tuesday’s rout may force investors to pay closer attention.
U.S. investment-grade debt was already facing the worst year since 2008, and energy securities make up some 15 per cent of the BBB rated universe.
The energy sector also accounts for about 15 per cent of the entire U.S. high-yield bond index — that gauge posted the biggest drop in six weeks on Tuesday. Yields on sub-investment grade debt in the sector have surged since the start of October.
However, as Ye Xie of Bloomberg’s Markets Live blog notes, a regression of oil prices and the high-yield credit spread since 2010 shows that WTI between US$50 and US$70 looks like a sweet spot for junk bonds. The spread tends to widen below US$45, his analysis shows.
Meanwhile, tumbling prices are undercutting market gauges of headline inflation expectations in Germany and the U.S., close to notching 2018 lows. Any slowdown in price growth could mean a less hawkish outlook for monetary policy.
Full post
2) U.S. Shale Revolution & Free-Market Economics Dominate Oil Prices
Olivier Jakob, Financial Times, 14 November 2018
Back in 2015, we coined the term “shale price band” to describe the economic reality of US crude oil production. Our theory is that the price of US crude in the era of shale oil, will stay in a price band between $40 a barrel and $60 a barrel.
A price move below $40 a barrel will trigger a supply reduction as projects become uneconomic, while a move above $60 a barrel will accelerate the pace of US crude oil production growth to a level that will ultimately crash prices back down to the band in order to temper production.
The US benchmark West Texas Intermediate stayed in the band during 2015, breaking below it in early 2016 only to quickly rebound.
It stayed within the band until early 2018 when the supply cuts of the expanded “Opec+” group finally managed to reduce crude oil stocks and support a true break of the $60 a barrel resistance in WTI.
With that break, some analysts were quick to claim that the “shale price band” was disintegrating and decisively broken and that oil prices would spike to $100 a barrel or above by 2019.
As US crude oil production was not immediately responding to the spike in prices, it was wrongly assumed that supplies were no longer able to keep pace with global demand growth, and that prices would no longer be capped.
Yet, as we approach the end of 2018, the price of WTI has crashed back to our “shale price band”, the crude oil market structure is signalling that supplies are more than ample, and Opec is starting to worry about the return of a prolonged crude oil supply glut.
There are always different factors that influence the price variations of crude oil, but one of the main inputs behind the recent price rout has been the return of much higher than expected US crude oil production.
This time a year ago, Opec forecast that US oil output in 2018 would be 540,000 b/d higher than in 2017.
But in its latest monthly report, it now sees US production rising 1.5m b/d higher than a year ago, matching global demand growth that it calculates at broadly the same level. The shale band has reasserted itself. […]
By trying to control supply and support prices, Opec and its new partners have created better economics for the US producers and are back to facing a wave of supply increase that they did not expect and are struggling to control.
Over the weekend, Saudi Arabia’s energy minister Khalid al Falih claimed that Opec should consider cutting more production in order to balance the market.
A new Opec cut can provide short-term price relief, but by supporting prices above the shale band, it will only force itself further outside of the equation, triggering more US output.
US crude oil production will easily be above 12m b/d next year, putting it well above the (as yet untested) supply capacity of Saudi Arabia. The US has become the leading world supplier of crude oil and that means that Opec is losing its capacity to control oil markets.
Recognising this, Opec has managed to increase the size of the supply-control group by including Russia and other nations since 2016. But even that is not enough to counter the force of rising US supplies.
Recent price and fundamental data suggest that the “shale price band” is far from dead.
Opec needs to realise that the oil market has changed. Under the old rules of Opec it was dominated by politics. Under the new rules of US energy exports it is dominated by true fast-responding free-market economics.
In the new world of US shale supplies, the oil market cannot be managed with the same Opec toolbox of 60 years ago. Now the band calls the tune.
Full post
3) U.S. Expected To Produce Half Of Global Oil And Gas Output By 2025
The Wall Street Journal, 13 November 2018
IEA says growth in American production will be primarily driven by fracking
Relentless American shale development is set to allow the U.S. to leapfrog the world’s other major oil and gas producers, with the potential for the country to account for roughly half of global crude and natural growth by 2025, the International Energy Agency said Tuesday.
In its annual World Energy Outlook report, the IEA said its main projection scenario through to 2040 foresees the U.S. accounting for nearly 75% and 40% of global oil and gas growth, respectively, over the next six years. Growth is expected to be driven primarily by shale fracking, which should lead U.S. shale oil supply to more than double, reaching 9.2 million barrels a day by the mid-2020s, the agency said.
“The shale revolution continues to shake up oil and gas supply, enabling the U.S. to pull away from the rest of the field as the world’s largest oil and gas producer,” said the Paris-based organization that advises governments and corporations on energy trends. “By 2025, nearly every fifth barrel of oil and every fourth cubic meter of gas in the world come from the United States.”
The use of hydraulic fracturing to drill for oil in shale rock—known as fracking—has dramatically reshaped the global oil industry over the past decade, and it has allowed the U.S. to rival the Organization of the Petroleum Exporting Countries for market share. Shale was largely behind a glut of American oil that flooded the market over four years ago, leading oil prices to fall to $30 a barrel from more than a $100 a barrel in late 2014.
U.S. shale oil production is expected to plateau in the mid-2020s, the IEA said in its central outlook scenario, ultimately falling by 1.5 million barrels a day in the 2030s as a result of resource constraints. After 2025, the report noted, the “baton gradually passes to OPEC to meet continued—albeit slowing—growth in global oil demand.”
The U.S. Energy Information Administration said earlier this month that U.S. crude production had climbed to 11.3 million barrels a day. That would put the U.S. on a par with Russia, which surpassed Saudi Arabia to become the world’s largest producer of crude last year.
OPEC’s own long-term forecast on the global oil landscape that was released in September said the cartel expects U.S. shale oil production to peak by the late 2020s, triggering renewed demand for the cartel’s crude after an expected decline and stagnation.
Full post
4) U.S. LNG Exports Are About To Reshape The Global Market
Stratfor, 9 November 2018
Highlights
By the end of 2019, the United States will become one of the world's three largest exporters of liquefied natural gas.
Qatar, which has been the globe's biggest LNG producer until now, will begin implementing a more aggressive strategy next year in the face of competition from the United States and Australia.
U.S. trading partners could promise to purchase American LNG as a way to reduce their trade surpluses.
China is unlikely to purchase LNG from the United States because of their trade war, choosing instead to buy Russian gas from Siberia.
The United States will ramp up its pressure on the European Union to buy more U.S. LNG and to improve its infrastructure so it can reduce the bloc's reliance on Russian energy.
The U.S. shale revolution has had a major impact at home, but its echoes have reverberated less elsewhere around the world, at least where natural gas is concerned. That, however, is about to change. By the end of 2018, the United States will launch nine liquefied natural gas export projects that will have a collective liquefaction capacity of 36.7 million tonnes per annum (mtpa). The expansion will boost the country's capacity to roughly 63 mtpa — a big step up from the mere 1.5 mtpa that existed before 2016.
It all adds up to a big year in 2019. And growth in U.S. LNG exports will continue beyond that because more processing and liquefaction facilities are expected to come online the following year. Producers are also considering additional final investment decisions to construct new facilities beyond that. The consequences of rising U.S. — as well as Australian — LNG exports have already begun to make waves throughout the market, meaning the geopolitical battle over LNG will be front and center next year, particularly among four countries: Qatar, China, Russia and the United States.
Qatar: Protecting Itself from the World
The United States and Australia are likely to be joined by others as countries around the world look for an increase in global natural gas demand in the 2020s. Last month, Royal Dutch/Shell and its partners made a final investment decision on its large LNG Canada project, which was its first such decision on a such a project in more than five years.
For years, Qatar has been the globe's LNG export leader. In 1997, the tiny Gulf state exported no LNG, but by 2011, it led the world, with an installed capacity of 77 mtpa. But in 2005, Doha implemented a moratorium on developing new parts of the North Field, the world's largest gas supply, due to concerns about oversupply and overproduction.
But increasing pressure from Australia (in parallel with U.S. growth, the country also hiked its LNG capacity by 62.3 mtpa from 2015 to 2018), the United States and elsewhere forced Doha to announce in April 2017 that it would lift that moratorium in an effort to boost its export capacity from 77 to 100 mtpa. But just two months later, three of Qatar's neighbors — Saudi Arabia, the United Arab Emirates and Bahrain — imposed an economic blockade in anger over its independent streak in foreign policy. That diplomatic course was made possible by Doha's windfall from LNG, which gave it the economic freedom to politically distance itself from its neighbors, especially Riyadh.
Since 2017, pressure from its global LNG competitors and local political rivals has prompted Doha to become more aggressive in the energy sector and enact reforms to make it more nimble. Qatar's problem has never been that its LNG exports and natural gas developments are expensive; by contrast, production is relatively easy in the North Field. But Doha must take advantage of its comparatively cheap production costs to entice international oil and gas companies to invest in Qatar instead of more expensive markets, even if the latter includes more politically stable countries such as Australia and the United States. And in order to meet its new export growth targets, Qatar must find new destinations — and the conclusion of a number of long-term LNG contracts in the first half of the 2020s will compound its task.
The U.S. emergence has also kick-started a gradual shift in Asian LNG markets, as well as a more rapid trend toward short-term contracts and gas-on-gas pricing, in which contracts are based on spot natural gas prices, instead of traditional oil prices. This has forced Qatar to explore ways to reorganize its energy sector to compete. The all-important Qatar Petroleum merged its two natural gas companies — Qatargas and RasGas — earlier this year. And after a Cabinet reshuffling on Nov. 3, Qatar Petroleum CEO Saad al-Kaabi became the country's new energy minister and will oversee some of the changes he's been pushing. At the same time, Sheikh Abdullah bin Hamad al-Thani, the brother of Emir Tamim bin Hamad al-Thani, has also become the new chair of Qatar Petroleum.
The World: Protecting Itself from Trump
One fly in the ointment for the U.S. LNG industry is the country's new trade wars. Before making final investment decisions on LNG export facilities — which can cost more than $10 billion and as much as $50 billion to $60 billion, in extreme cases — investors want a degree of certainty about long-term contract and destination opportunities. Washington's trade war with Beijing has made this more difficult, especially for LNG exporters, because China is the world's second largest LNG importer (trailing only Japan) and will be the major driver of LNG import growth over the next five to 10 years.
Full post
5) China To Boost Shale Oil, Gas Production
OilPrice.com, 7 November 2018
China’s biggest energy producers are tapping more tight oil and gas wells, aiming to increase domestic oil and natural gas production at the world’s largest crude oil importer and what will soon be the world’s top natural gas importer.
As part of a government push to boost domestic energy supply, China National Petroleum Corporation (CNPC) and Sinopec are raising investments to increase local oil and gas production and are accelerating drilling at tight oil and gas formations in western China, the companies have recently announced.
Oil demand continues to grow in China, while domestic production has been declining in recent years. This has led to additional—and costly—imports, making China the world’s largest crude oil importer. For natural gas, a similar trend is apparent. A government drive to have millions of residents switch to natural gas from coal has resulted in China surpassing South Korea last year to become the world’s second-largest liquefied natural gas (LNG) importer behind Japan.
China’s natural gas production has been rising in recent months, but the growth rate hasn’t been even close to meeting the booming demand due to the cleaner-fuel/cleaner-air government policies.
Domestic oil production, on the other hand, has been falling due to the depletion of mature conventional oil fields. Desperate to meet this need, Chinese President Xi Jinping has ordered the state-held companies to boost domestic production of oil and gas, and firms are starting to follow the policy.
CNPC’s drilling cycle at one of its biggest oil discoveries in recent years, the Mahu field, has dropped 40 percent from last year, Reuters quoted the company’s newspaper as saying on Monday. The drilling cycle decline implies a faster rate in completion of the wells, according to Reuters.
PetroChina, controlled by CNPC, is betting big on boosting natural gas production in line with the Chinese policy to increase its gas production and industrial and residential gas use.
Sinopec, for its part, said in its official newspaper that it plans to drill 66 new natural gas wells and install 23 gas drilling stations during the winter to raise natural gas supply from its fields in southwestern China.
Sinopec’s domestic crude oil production inched up by 0.2 percent between January and September, while natural gas output increased by 5.9 percent, the company said in its earnings release last week.
Full story
The London-based Global Warming Policy Forum is a world leading think tank on global warming policy issues. The GWPF newsletter is prepared by Director Dr Benny Peiser - for more information, please visit the website at www.thegwpf.com.
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