The World's Most Powerful Oil Alliance Is Falling Apart - OIR 060320

Oil & Gas
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Saturday, March 07,  2020   /06:42 AM  / By Tom Kool of / Header Image Credit: Oilprice


It appears that the OPEC+ alliance may soon be over as Russia refuses to cut and its oil minister hints at increasing production.

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Friday, March 6th, 2020

Oil prices plunged by more than 8 percent after the OPEC+ meeting broke up with no deal. Saudi Arabia and Russia negotiated behind closed doors in Vienna, but Moscow refused to sign on to deeper production cuts. Now there is uncertainty about whether the OPEC+ alliance will survive. A day earlier, OPEC essentially issued an ultimatum, calling for 1.5 mb/d of production cuts, but suggested that no deal would occur without Russia. At the time of this writing, oil prices were in freefall. WTI was below $43 and Brent near $46. 

OPEC+ facing demand "trap". Moscow has balked at deeper production cuts not only because it has a stronger stomach for lower prices than Riyadh, but also because the oil market is suffering from a demand trap. That is, restraining supply may not rescue prices when global oil demand has fallen so sharply. 

What next? At the time of this writing, there is some speculation that not only has OPEC+ failed to agree on additional production cuts, but also that the current OPEC+ agreement - the one from December - is set to expire in March, after which producers can raise output. The entire OPEC/non-OPEC alliance is now on the rocks, although the group pledged to continue to talk going forward. 

Exxon maintains aggressive spending. Despite pressure from investors to focus on cash flow and only modest growth, ExxonMobil (NYSE: XOM) laid out its medium-term corporate strategy in an investor presentation this week, one that continues to rely heavily on production growth. Exxon trimmed its spending somewhat, but remains largely unbowed in its view that heavy spending will pay off. The company's share price fell sharply on the news. Meanwhile, Chevron (NYSE: CVX) promised to earmark more money for shareholders, pledging $80 billion in payouts over five years. 

European and American oil majors diverge. European oil majors have adopted climate targets and have made initial investments in renewable energy, promising to gradually make a transition to a lower-carbon portfolio. The American oil majors are largely digging in and rejecting such strategies. 

IHS: Oil demand to fall by most in history. Global oil demand could fall by as much as 3.8 mb/d in the first quarter, the largest contraction in history, according to IHS Markit. A growing number of analysts now see negative oil demand for the full year in 2020. 

Airlines could lose $113 billion. Airlines could lose as much as $63 to $113 billion this year due to the coronavirus, according to the International Air Transport Association. 

CNPC declares force majeure on LNG. CNPC declared force majeure on prompt natural gas imports, the second Chinese buyer to do so. 

Gas industry seeks to block gas bans. A growing number of U.S. cities are exploring bans on natural gas hookups in new commercial and residential construction. In response, gas lobbyists are pressing state legislatures to preempt municipal bans. Arizona recently passed a law blocking cities from banning gas hookups.

Gas falling out of favor with investors. Bloomberg notes that investors are souring on natural gas, with local gas distributors now trading for less than electric utilities in relation to projected earnings. "Right now, anyway you look at it, natural gas is not seen as something that is very friendly," Shahriar Pourreza, an analyst at Guggenheim Securities LLC, told Bloomberg. The poor performance reflects dim long-term prospects. 

Cargo at U.S. ports down 20 percent. Cargo volumes at U.S. ports could be down by as much as 20 percent in the first quarter.

Coal use falls fastest in 65 years. U.S. coal consumption fell by 13 percent in 2019, the fastest decline rate since the 1950s. The EIA expects coal co decline at a similar rate this year. 

BNSF loses bid to ship shale oil across tribal land. BNSF Railway shipments of oil across tribal land in Washington state violated a right-of-way and easement agreement, according to a ruling from a federal court. 

ConocoPhillips exits DJ Basin. ConocoPhillips (NYSE: COP) agreed to sell its Niobrara assets for an estimated $380 million, exiting the basin.

Warren Buffet bails on Canadian LNG. Warren Buffet's Berkshire Hathaway decided against investing $4 billion in an LNG and pipeline project in Quebec.

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