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OpEd: Oil producers gambling on price shifts and prudence

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(FinancialPress) — Gambling is an interesting study of the mathematics of determining chance and the study of human psychology.

The drama of self-preservation unfolding in front of us— as we watch a group act reflexively to provide for their own people and at least protect their status quo.

We are today watching Saudi Arabia’s attempts to manipulate oil prices.  Saudi desires to keep their position as the “Swing Producer” of oil ,while keeping domestic issues in check.

A tough, tough job indeed.

All of this while trying to divest of a small share of ownership in state-owned Aramco  to keep social programs alive, and ultimately stem civil unrest.

This effort is running against a push by U.S. companies compelled to drill more wells in the tight shale plays in the States, all while driving other producers to cheat on their agreed production restraint.

OPEC and an assortment of non-OPEC producers are doing the same thing to the delight of consumer countries.

Keep prices low enough to keep their domestic needs fulfilled and not lose market share while fighting increased production by their competitors.

Agree to cut backs, but you can buy cheaper oil if you cannot upset their partners in OPEC or the coalition.

All of the producing countries are attending this dance in their own way.

It’s like herding cats.

As the article written by Joe Gemino in Morningstar this morning points out (see http://news.morningstar.com/articlenet/article.aspx?id=826337&SR=Yahoo&yptr=yahoo).

There’s a significant reason to bet that pricing won’t stabilize at the magic $60/barrel—A number floated as pilotable in issuing the IPO for Aramco.

Can the threat by Saudi to pull out of OPEC bring the other producers back in line enough to offset the Shale Oil frenzy from impacting supply?  Is this going to put upward pressure to hit that magic number?  Both are necessary questions.

China, an oil-producing country albeit minor, may well be the one to watch.  They have been busy shoring up their supply needs from strategic purchases such as buying stored oil in South Africa (see https://www.bloomberg.com/news/articles/2017-09-20/oil-traders-empty-key-crude-storage-hub-as-global-demand-booms ) or the import of more oil from Siberia (see https://www.reuters.com/article/us-china-silkroad-russia-pipelines/china-to-complete-russia-oil-gas-pipeline-sections-by-end-2018-vice-governor-idUSKBN18819I ).  Siberian volumes will start hitting the planned numbers late next year.

Mathematically the chances of hitting $60/barrel and maintaining will be challenging.

The wildcard will always be the impact of weather, or other events, that interrupt the supply chain. To my knowledge the prediction of weather is not very accurate nor the events in the Middle East.  That being said it has been fun to watch.

Energy

Oil prices up on expectations of production cut extension

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(FinancialPress) — A major meeting set for the upcoming week has oil on the rise, as traders look towards it to cement an extension on production cuts – even when gains were capped by rising U.S. output.

Brent crude was up $0.47, reaching $62.69 a barrel by 09:32 GMT. U.S. light crude oil rose $0.32, up to $56.74.

Brent moved within range, with analysts expecting it to move between the $61 and $63 price gap. This happens as the market looks forward to what comes of the OPEC (Organization of the Petroleum Exporting Countries) meeting set for November 30th.

The Organization, allied with other non-members that have Russia at the helm, has managed to orchestrate an effort to end globe-wide oversupply with output restrictions – hoping that this will help prices get off of their current slump. Next week‘s meeting is expected to erase the March 2018 expiry date and thus extend the agreement.

Ole Hansen, Saxo Bank senior manager, stated on the topic: “There’s a general belief that anything but an extension could have a significant negative impact … So the market is just waiting for confirmation that OPEC wants to move on with the extension.“

The fact that storage levels remain consistently high even in light of the recent measures feeds expectations of the OPEC and its allies extending the cuts. However, some believe not all participants will be willing to continue to restrict their production.

Even so, that‘s not the biggest headache OPEC is experiencing – it‘s actually the rise of U.S. drilling that‘s being led by shale oil producers.

But the biggest headache for OPEC has been a rise in U.S. drilling, led by shale oil producers.

Westwood Global Energy Group, which specializes in energy consultancy, noted that the rising rig count is an inaccurate measure of how quickly U.S. output would climb – as producers become even more productive per well. Rig count has risen from 316 rigs in mid-2016 to 738 last week.

“Westwood Global Energy forecasts an 18 percent increase in active rigs in 2018, but more rapid demand growth in certain service areas as operators focus on efficiency and delivering more for less,” the consultancy said.

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Energy

Oil manages to stabilize after prior day‘s slump

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(FinancialPress) — Crude oil is beginning to slide after reaching 2-year highs through the first days of November. It experienced a slump in Wednesday‘s session, on the heels of a surprise jump in U.S. supplies. On Thursday, however, prices experienced little change
January Brent crude went down by 13 cents (0.2%) to $61.74 a barrel. December West Texas Intermediate crude, which originally experienced a minor gain, ultimately had 6 cents shaved off of its price (0.1%), to reach $55.27. In the prior session, WTI dropped a heavier 37 cents (0.7%), reaching a price of $55.33 – its lowest close since early November.
U.S. domestic crude supplies rose by 1.9 million barrels by the end of the week of Nov. 10th, as informed by the country‘s Energy Information Administration. This prove the prediction by S&P Global Platts analysts wrong – as it forecasted a drop of 1 million barrels in supply. The American Petroleum Institute (API) reported a 6.5 million barrel a week rise on late Tuesday.
Gasoline stockpile also rose to the tune of 900,000 for the week. Meanwhile, according to the EIA, distillate stockpiles, fell 800,000 barrels. The survey forecast by S&P Global Platts indicates dips in distillates stockpiles of 2 million barrels, and 1 million barrels for gasoline.
Tama Varga, a PVM analyst, said that the recent oil slump is being seen by some traders as “as a healthy and inevitable correction triggered by bulls taking profit,” on a Thursday note. He added that while sentiment looks bearish at the moment, they may believe that the positive trend for crude “should resume shortly“.
Up to the date, WTI has risen 3% overall – propelled by a rally begun in June. Crude hit a two-year high in its benchmark in early November, and recently began pulling back.

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Energy

Venezuela can no loger pay its debts; oil could be seized

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(FinancialPress) — Venezuelan President Nicolás Maduro finally admitted, during a Thursday televised speech, that his government can no longer keep up with the payments of its piling debt. Venezuela is now officially working towards restructuring its debt payments, as is PDVSA – the state-run oil company.

Considering that the country has only $10 billion left in the bank, the $1.1 billion payment made by the oil company on Thursday is very substantial to the country‘s reserves. Maduro said in the speech that “After this payment, starting today, I decree a refinancing and a restructuring of the external debt.“

A deep humanitarian crisis is already whipping the embattled South American nation, as people experience deep shortages of food and medical supplies. Basic items are becoming less and less attainable for the population, as prices skyrocket and wages fail to rise at  a rate that would paliate the inflation. The bolivar – Venezuela‘s currency – is now worth less than a tenth of a U.S. penny.
Should Maduro‘s government fail in its attempt to restructure debt owned by bondholders — a very real possibility, as often it means that they‘d agree to be paid less money —, the country will enter into default.
A potential default could trigger a series of very unfortunate events. Those same bondholders could choose to seize Venezuelan oil as collateral.
Seeing that oil is the only significant external revenue source the government has, this would cut the financial means it has to acquire medical supplies and food. While the country has vast farmlands, it was mismanaged by their office which forces the country to import almost the totality of its food products.
Even if it were a viable course of action, debt restructuring is a long and excruciating process. Venezuela‘s neighboring country Argentina battled in international courts for 15 years to get resolution over its unpaid debts.

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