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OPEC Extension Sends Oil Prices Soaring; The Oil Market Look Out For The Week

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Monday, December 04, 2017   07.52AM / Tom Kool, Editor, Oilprice.com 

As expected, OPEC agreed to extend its production cut deal through to the end of 2018. The initial reaction from oil prices was muted, but once fears of a selloff had passed, both WTI and Brent moved dramatically upwards on Friday morning.

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OPEC followed through on its promise, extending the production cuts through the end of 2018, bringing relief to an oil market that had grown jittery in recent days. Oil prices traded in a relatively narrow range after the meeting and appeared muted. But once concerns over a selloff calmed, oil prices rallied once again on Friday morning.

OPEC deal extended through 2018. The deal will run from January through to December, and the exact volumes of the production cuts will be the same as this year. The OPEC/non-OPEC coalition said that they would monitor market conditions and would remain “agile,” ready to respond if the fundamentals deviate significantly from expectations. They will revisit the agreement at the next official meeting in June 2018, but they assume the cuts will last through the end of the year. Russian officials pressed for details on an exit strategy heading into the meeting, but the group offered no information – Saudi oil minister Khalid al-Falih said it would be “premature” to do so. One notable change is that Libya and Nigeria agreed to cap their production levels at their 2017 average, which doesn’t necessarily curtail supply but will prevent any “surprise,” as witnessed this year. The Russian and Saudi oil ministers played up their unity and boasted about their strong relationship. All smiles from Vienna.

Goldman: Oil market volatility doesn’t make sense. Long-dated oil futures are more volatile than is justified, according to a research note from Goldman Sachs. The investment bank said that assurances from OPEC that the group will respond to market conditions should assuage concerns in the market about an unexpected rush of supply or, conversely, excessive tightening. The responsiveness of OPEC “leads us to reiterate our view that long-dated implied volatility remains too rich,” Goldman analysts wrote in the note published on Thursday. 

EIA: U.S. oil production surged in September. While OPEC was meeting behind closed doors, the EIA published data for September, showing a dramatic jump in output. The U.S. produced 9.48 million barrels per day in September, an increase of 290,000 bpd from a month earlier. Aside from the size of the increase, the data was significant because it seemed to put to rest the notion that the agency was overestimating supply. For several months, the weekly data diverged from the monthly data, raising questions about how accurate the EIA’s estimates were. Yesterday’s data suggests that U.S. shale production is indeed growing robustly. 

Shale hedging soared in 3rd quarter. New hedging contracts in the third quarter encompassed 897,000 bpd of annualized production, according to Wood Mackenzie survey of 33 companies. That is 147 percent increase from the second quarter, and a sign that shale drillers rushed to lock in hedges after WTI rose above $50 per barrel. “Producers that are able to lock in prices above previous expectations may feel more comfortable with increasing activity," Andy McConn, a Wood Mackenzie research analyst, told Bloomberg. “Others may leave budgets unchanged and promote higher cash-flow guidance to an investment community anxious about profits."

China gas consumption surges, leads to shortages. China has tried to replace dirty coal-fired power plants with natural gas to cut down on pollution, and by all accounts, it has succeeded. But now, the country faces natural gas shortages because of the spike in consumption. That has led officials in Hebei province to call on cities to cut their gas use

Venezuela arrests former oil minister. The purge in Caracas continued to expand this week. After replacing the head of PDVSA and the oil minister with a military general, the Venezuelan government detained Eulogio del Pino, the former oil minister. The reason, like the other arrests, was because of corruption allegations. But the government also risks purging the country of its top oil talent, and PDVSA could struggle as production declines accelerate.

EV recharging along highways is key to adoption. Building out EV recharging networks along highways is crucial to accelerating the adoption of electric vehicles, ChargePoint CEO Pasquale Romano told Bloomberg in an interview, noting that recharging infrastructure is less urgent at homes and workplaces. “Getting a highway infrastructure up and ready is critical,” he said. “It’s a red-herring that there is no charging network in cities.” He went on to add: “The infrastructure is segueing naturally, except for highway charging, where Tesla has already proven this can be done without much trouble.”

Eni receives approval to drill offshore Alaska. Eni (NYSE: E) won approval to drill an exploration well in the Beaufort Sea off of Alaska’s northern coast. The shallow water wells will be drilled in winter months through early 2019. 

ExxonMobil begins production at Hebron field. ExxonMobil (NYSE: XOM) said production at the Hebron field in eastern Canada began this week, which will see peak production at 150,000 bpd. The field was first discovered in 1980 and is thought to hold 700 million barrels. Its partners in the project include Chevron (NYSE: CVX), Suncor Energy (NYSE: SU), Statoil (NYSE: STO) and Nalcor Energy-Oil and Gas Inc.

ExxonMobil close to exploration deal in Mauritania. ExxonMobil (NYSE: XOM) said it is nearing a deal with Mauritania to explore for oil and gas offshore, which would mark its first deal in the West African country. Interest in Mauritania has climbed because of the sizable discoveries in neighboring Senegal.

Elon Musk’s claim for world’s largest battery to be temporary. Elon Musk made news over the past week when Tesla (NYSE: TSLA) successfully installed the world’s largest energy storage facility in Australia, a 100-megawatt project that came online in less than 100 days. But he will only hold that mantle for a short period of time – Bloomberg reports that a 150 MW project should reach completion in South Korea in three months. Developers are expected to install 1,650 MW of energy storage capacity this year, quadruple the total from 2016.

In our Numbers Report, we take a look at some of the most important metrics and indicators in the world of energy from the past week. Find out more by clicking here. 

Global Energy Advisory - 1st December 2017 
OPEC and its partners in the Vienna Club agreed to extend their oil production cuts to the end of 2018 – a widely expected move despite doubt about Russia’s willingness to support the extension. This doubt has now been cast aside and the only thing that suggests the cuts may not last until the very end of the year is the stipulation that the partners will meet to discuss progress in June. In other words, they’ve got an exit plan. 

Since the extension had been factored in by traders, oil prices remained stable, so the announcement was met with a lackluster market response. One change this time around is that Libya and Nigeria, which were exempted from the initial deal, have now agreed to cap their production at current levels to support their OPEC co-members efforts to boost prices. This doesn’t really mean much. Libya would have had a hard time producing more than it’s producing right now regardless. So, for all intents and purposes, it’s still an exemption. 

Prices saw a significant rally on Friday morning as bullish sentiment returned, but a new issue is now emerging: how will the Vienna Club wind down the cuts? This question seemed to be of particular concern for Russia at the meeting, according to sources close to the talks. It should be of concern to all participants, in fact: the wind-down needs to be gradual to avoid prices tanking again on oversupply worries. 

Deals, Mergers & Acquisitions 
•    Total will sell two stakes in Norwegian North Sea oil fields to Statoil for a total consideration of $1.45 billion. The sale is part of the French company’s review of its North Sea assets, prompted by the acquisition of Maersk Oil earlier this year: most of the Danish company’s assets are also located in the area. The assets agreed for sale to Statoil include a 51% interest in the Martin Linge field, with reserves estimated at 300 million barrels of oil equivalent, and a 40% one in the Garantiana discovery, whose resources are estimated at 50-70 million barrels of oil equivalent. 

•    Abu Dhabi’s ADNOC plans to spend $109 billion over the next five years on acquiring stakes in refining and petrochemical companies abroad as well as building its own capacity in the downstream segment. These will be the first international investments of the Emirati company as it follows in the footsteps of Saudi Arabia in trying to secure long-term demand for the crude oil it produces. 

•    Sinopec will sell its Argentine oil assets to Mexican Vista Oil & Gas for between $500 and 600 million. The Mexican company competed for the assets with Argentine state oil major YPF and private oil player Pluspetrol, along with several other companies. Initially, the assets were valued at up to $1 billion. The Chinese company—the country’s largest refiner—decided to quit Argentina as the business was loss-making and Sinopec had labor trouble. The Chinese company paid $2.45 billion for the business back in 2010. 

Tenders, Auctions & Contracts 
•    Iraq has launched tenders for untapped oil and gas fields in nine blocks. Five of these are located near the border with Iran, three are near the border with Kuwait and one is an offshore block. All these locations have been neglected until now because of conflicts between Iraq and its neighbors that have now been settled. The tender aims to increase Iraq’s production capacity though not its actual production as the country is still bound by the OPEC production cut agreement to produce at an assigned quota of 4.35 million bpd. 

•    Aramco and Sabic inked an agreement for the construction of a $20-billion petrochemicals complex in Saudi Arabia that is supposed to be the largest in the world. The final investment decision, however, will only be made in two years, Aramco’s chief executive Amin Nasser said. The deal is the latest indication of Riyadh’s determination to relieve the Kingdom of its almost exclusive reliance on crude oil sales for government revenues and its diversification into other segments of the energy industry, including renewable power projects. 

Discovery & Development 
•    Anadarko will leave New Zealand as the current level of oil prices cannot justify investments in exploration there, the company said. The U.S. company was the operator of an exploration project in the Canterbury Basin, where it partnered with Australian Lattice Energy Resources and UK-based Discover Exploration. 

•    Exxon announced the start of production at the Hebron offshore field in Canada, ahead of schedule. At peak levels, production should reach 150,000 bpd, with the field’s recoverable resources estimated at over 700 million barrels of oil. Exxon partners on the Hebron project with Chevron, Suncor, Statoil, and Nalcor Energy. 

•    Eni has won drilling rights for a block offshore Alaska. This is the first granting of drilling rights in the region in the last two years and was immediately slammed by conservationists. Drilling will be conducted from an artificial island in the Beaufort Sea and will start next month. The Italian company’s decision is seen as risky due to the high cost of Arctic exploration and also due to the vehement opposition of environmentalists to drilling operations in the region. 

•    Statoil will return to the Arctic next year despite a disappointing drilling season this summer, the Norwegian company said. This year’s drilling failed to hit any meaningful oil deposit but Statoil is determined to continue: in 2018, it will drill five to six new wells in the Barents Sea and another 20-25 split between the North Sea and the Norwegian Sea. Most of Norway’s undiscovered oil resources are located in the Arctic and as mature fields near depletion, it urgently needs new discoveries to keep its energy industry healthy. 

Politics, Geopolitics & Conflict 
•    North Korea launched yet another missile, claiming it can now reach any location in the United States. U.S. Ambassador to the UN Nikki Haley threatened taking the whole thing into U.S. hands if China did not cut off its crude oil supply for the pariah state. 

•    Terrorists bombed a mosque in Egypt killing 305 and wounding at least 128. Egypt’s public prosecutor said the bombers and shooters were from a local branch of Islamic State, although the group is unlikely to claim the attack since it was on a Muslim place of worship. 

•    Libyan PM Fayez al-Sarraj will visit the White House this Friday for talks with Donald Trump on bilateral cooperation and counterterrorism partnership. 

•    Venezuela’s government ordered the removal of its representative in the United Nations Rafael Ramirez – an official that has grown critical of Maduro’s government in recent months. Ramirez used to be oil minister and head of state oil company PDVSA. He was seen by some as angling to be a presidential candidate as Maduro’s government grows increasingly unpopular. In other news, Former Oil Minister Eulogio del Pino and Nestor Martinez, ex-president of PDVSA, were arrested just four days after being removed by Maduro in a surprise cabinet shake-up. 

P.S. – In this week’s Oil and Energy Insider, Martin Tillier addresses a unique problem that technical traders are currently facing following the rapid rise of oil prices over the last six months, he explains that this rare occurrence has provided a real opportunity for those who are in the know. Find out how to trade this long-term oil rally by claiming your 30-day risk free trial on Oil & Energy Insider.  

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