Where Has The Risk Premium Gone For Oil? - OIR 240919

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Wednesday, September 25, 2019   /08:47AM  / By Tom Kool of Oilprice.com / Header Image Credit: 24/7 Wall St.


Today, we will take a quick look at some of the critical figures and data in the energy markets this week. 

We will then look at some of the key market movers early this week before providing you with the latest analysis of the top news events taking place in the global energy complex over the past few days. We hope you enjoy.

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Chart of the Week

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  • The EIA forecasts world energy consumption rising by 50 percent between 2018 and 2050. Most of the growth comes from non-OECD, particularly Asia.
  • By sector, industry will account for the bulk of the growth, a term that includes mining, refining, manufacturing, agriculture and construction. Energy use in industry will rise by 30 percent through 2050.
  • Transportation energy use rises by 40 percent over that timeframe, again led by Asia.
  • The source of the energy matters. Renewables are the fastest growing source through 2050, and will surpass petroleum and other liquids on an absolute basis. Renewables grow at an annual rate of 3.1 percent between 2018 and 2050. 

Market Movers

  • NRG Energy (NYSE: NRG) unveiled a plan to achieve zero carbon emissions from its power generation assets by 2050. By 2025, the company plans to cut emissions in half. 
  • BP (NYSE: BP) and Korea Gas signed a 15-year agreement for U.S. LNG. KOGAS will buy 1.58 million metric tons from the Freeport LNG terminal or Calcasieu Pass beginning in 2025.
  • Continental Resources (NYSE: CLR) and Concho Resources (NYSE: CXO) were both downgraded by Citigroup. Citi analysts see long term value but want to wait for "clarity" on well performance and free cash flow potential. 

Tuesday September 24, 2019

Oil prices sank on Tuesday on news that Saudi Aramco was on track to bring production capacity back online by the end of the month. That allowed oil traders to shift their sights back to concerns about the slowing global economy. Still analysts argue that the lack of a risk premium on the price of oil is remarkable given the scale of the attack on Abqaiq.

Aramco to restart full output next week. A Saudi source confirmed to Reuters that the Abqaiq facility will return to pre-attack production levels by next week. Oil prices fell on the news. But that comes after the Wall Street Journal reported on Monday that repairs could take months longer than expected. Saudi sources told the WSJ that some repairs could take as long as eight months. Aramco is reportedly reshuffling the types of oil it is sending Asian customers, informing buyers in India and China that it will ship heavy oil rather than light oil. 

Aramco IPO unlikely this year. Reuters reports that Saudi Aramco is unlikely to move forward with its public offering this year. Sources said that in the wake of the Abqaiq attacks, the IPO may be pushed off until 2020 or 2021. 

UK, Germany and France blame Iran for attacks. In a sign of rising pressure on Iran following the Abqaiq attacks, several European powers sided with the U.S. in blaming Iran. The U.S. has vowed to maintain and even step up the maximum pressure campaign, but has so far declined to push for military retaliation. Iran released the British tanker that it had detained since July, a move that could ease tensions. 

UN-backed report says investors unprepared for climate disruption. A UN-backed report concludes that investors are making long-term decisions based on flawed forecasts. Technology innovation and forthcoming regulations on carbon will render business-as-usual forecasts obsolete, the report says. In concrete terms, coal will peak globally by 2022, oil by 2028 and natural gas by 2040. Renewables will meet roughly half of all electricity globally by 2030 and nearly all of it by 2050. 

Pensions and insurers promise climate action. Insurers and pension funds managing a combined $2.3 trillion in assets pledged on Monday to shift their portfolios to align with the Paris Agreement. These funds represent some of the largest pools of capital, so a significant shift would reverberate across multiple markets. Notably, some of the largest banks did not go along with the climate announcement.

Oil and gas under fire at UN meeting. Protestors, as well as the UN and global leaders, pressured oil executives to do more on climate change. The UN estimates that oil and gas production needs to contract by 20 percent by 2030 and by 55 percent by 2050 in order to meet climate goals. For its part, industry executives promoted carbon capture and solutions for methane emissions, proposals that are intended to keep production aloft. 

Millennials could doom oil and gas. The fossil fuel industry has a generation problem. Younger cohorts are opposed to oil and gas because of climate change, which threatens the industry in several ways. Drillers are having trouble recruiting talent; investment funds are under pressure to divest; lifestyle changes are undercutting demand; and policy changes could threaten even greater systemic change.

Permian slowdown, but not for majors. Rig counts and drilling activity continues to fall in the Permian basin, but there is a two-track dynamic unfolding. The oil majors are still drilling with gusto, while independent E&Ps are coming under intense shareholder pressure to cut back. The Houston Chronicle reports that ExxonMobil (NYSE: XOM) has filed for 470 drilling permits this year.

ConocoPhillips plans to drill wells in Alaska. ConocoPhillips (NYSE: COP) plans to drill seven exploratory wells in Alaska's National Petroleum Reserve (NPR-A). "We want to get more confidence around the geology and reservoir characteristics of the field, so that's one of the reasons we pushed back our startup date to around 2025-26 now for the Willow development," Conoco's Alaska Vice President Scott Jepsen said last week, referring to an oil discovery the company made in 2017.

German economy flashing warning signs. Manufacturing activity in Germany contracted sharply in August, offering further evidence that the German economy is on the verge of recession. "Manufacturing seems to be in a deep and deepening slump, and there's now some evidence that the services sector is also starting to slow. That broader weakness suggests 4Q will be another poor quarter for economic growth," Jamie Rush of Bloomberg said. 

Abandoned oil and gas wells cost millions. A report from the Government Accountability Office found that abandoned oil and gas wells from bankrupt drillers could cost the government $46 million to $333 million in reclamation liabilities. 

Pipeline companies under stress from buckling shale gas drillers. Several Appalachian pipeline companies could come under financial pressure as the region's shale gas drillers demand pricing renegotiations, according to S&P.

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