The Single Biggest Factor In Oil This Week - OIR 170120


Saturday, January 18,  2020   /07:20AM  / By Tom Kool of / Header Image Credit:  Oilprice


China has been the key oil price driver this week, with phase one of the trade deal driving prices higher before worrying economic data from the country dragged prices lower.

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Friday, January 17th, 2020

Oil prices regained a bit of ground at the end of the week on optimism surrounding the Phase 1 U.S.-China trade deal. At the same time, China reported some downbeat economic data that points to a slowdown.

IEA: Oil market well-supplied. The global oil market dodged a bullet after the U.S. and Iran backed away from war, although geopolitical risk has not gone away. Nevertheless, non-OPEC supply is expected to continue to grow faster than demand this year, leaving the market with a persistent supply surplus, according to the IEA. That puts tremendous pressure on OPEC+, which may need to cut further.

China GDP slowest in 30 years. China's GDP expanded by 6.1 percent in 2019, the weakest rate since 1990. The bigger question is whether the economy will continue to decelerate, or if it will bounce back due to reduced trade tensions. "Despite the recent uptick in activity, we think it is premature to call the bottom of the current economic cycle," Julian Evans-Pritchard, senior China economist at Capital Economics, told the FT. "This year could be the opposite of last year, where the external environment improves but domestic stimulus efforts aren't enough to support higher growth...We're particularly concerned about the property sector."

Will the Permian peak this year? The Permian basin is suffering through bankruptcies, slower growth and investor scrutiny. While many analysts still see production growing this year, some investors are starting to see a peak in supply in the near-term. 

West Africa loses if China buys more U.S. oil and gas. The Phase 1 trade deal calls for China to buy huge volumes of U.S. oil and gas, although analysts question whether such increases are possible. China has pledged to buy more than $52 billion in energy products from the U.S. over the next two years. Such an increase would have ripple effects throughout the global market, with West African exporters losing out as China scoops up more cargoes from the U.S. 

Schlumberger beats estimates. Fourth quarter earnings for Schlumberger (NYSE: SLB) rose by 9.4 percent compared to a year earlier, due to positive international conditions, offsetting weak drilling activity in U.S. shale. Meanwhile, Reuters reports that Schlumberger, along with Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BKR), are planning to put a combined $800 million in assets up for sale. Together, the three oilfield services giants control 26 percent of the global services market. 

Germany announces coal phase out. Germany announced a plan to phase out coal entirely by 2038, and estimated the cost at $44.5 billion. The cost is due to compensation for companies and workers affected by the transition. Environmental groups say the timeline is too slow.

LNG prices continue to erode. JKM spot prices - an important market for LNG in East Asia - fell below $5/MMBtu, a four-month low. Those prices are also unusually low for this time of year, when demand tends to be at a seasonal high. The downturn is a reflection of global oversupply - weak demand and a large increase in export capacity last year. Some analysts see JKM prices dipping below $3/MMBtu in the coming months, which would put exporters exposed to the spot market under financial pressure. 

Five clean energy trends to watch. Clean energy experts laid out several trends to watch for 2020, which include the death of coal, the loss of acceptance for gas, and the ongoing momentum for clean energy, among others.

Iraqi oil production in spotlight. Iraq has become the battleground as the U.S. and Iran launch tit-for-tat attacks, and while a full-blown war may be off the table for now, more attacks could continue in the shadows. Iraq has become a major source of supply for the global oil market in recent years, the second largest OPEC member. But that supply is increasingly at risk

Oil majors in disarray. A new report found that the five largest oil majors - ExxonMobil (NYSE: XOM)Chevron (NYSE: CVX)Royal Dutch Shell (NYSE: RDS.A)BP (NYSE: BP) and Total SA (NYSE: TOT) spent $536 billion on shareholder dividends and stock buybacks since 2010 while generating only $329 billion in free cash flow. "The oil majors are consistently under-performing the market and may believe that shareholders won't notice, as long as they receive generous dividends," the authors of the report said. 

Tullow to take $1.5 billion write down. Tullow Oil (LON: TLW) said it would write down $1.5 billion for the fourth quarter, reflecting a lower oil price forecast and a downward revision to its reserve estimates in Ghana. Tullow's share price is down 75 percent in the last three months. 

Saudi Aramco "underweight." Morgan Stanley rated Saudi Aramco "underweight," while others gave a "neutral" outlook. Morgan Stanley put a price target of SR28.10 per share ($7.49 per share), roughly 20 percent below current levels.  

High-yield energy issues bonds. Seven energy companies with speculative credit ratings issued a combined $6 billion in new debt, according to the Wall Street Journal. A sudden rally in corporate bonds late last year allowed them to take advantage of the improved market conditions. It could be a temporary window of opportunity to refinance debt. The WSJ says that the North American oil and gas sector has $40 billion in debt maturing this year and more than $200 billion over the next four years. 

Canadian oil frozen under extreme temperatures. A wave of Arctic weather pushing temperatures to -30 degrees Celsius (-22 Fahrenheit) has reportedly frozen some of Alberta's heavy oil into a solid. That forces producers to blend in lighter oils in order to allow the oil to flow through pipelines, but that increases costs. 

UK oil and gas sector losing "social license to operate." The UK's oil and gas regulator warned that the industry is losing its "social license to operate" due to climate change. "I have been through a number of oil price cycles but I cannot remember anything like the industry rethink of the last few months. Clearly, climate change is happening right now. That debate is over. The framework, the license to operate for the industry, has changed fundamentally and - unlike the oil price - forever," Tim Eggar said. "If the industry wants to survive and contribute to the energy transition it has to adapt."


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