October Industry Affairs

IEA: Global oil market likely

To be oversupplied through 2016

By Oil & Gas Journal editors, www.ogj.com, 10/13/2015

A projected marked slowdown in oil demand growth next year and the anticipated arrival of additional Iranian barrels—should international sanctions be eased—are likely to keep the market oversupplied through 2016, the International Energy Agency said in its October Oil Market Report.

According to IEA’s most recent estimates, global demand growth is expected to slow down from its 5-year high of 1.8 million b/d in 2015 to 1.2 million b/d in 2016. These figures compare with 1.7 million b/d in 2015 and 1.4 million b/d in 2016, respectively, from last month’s OMR. Revised global oil demand now stands at 94.5 million b/d in 2015 and 95.7 million b/d in 2016.

The demand outlook for next year is looking softer mainly due to recent downgrades to the macroeconomic outlook and expectations that crude oil prices will not see repeats of the heavy losses of 2015.

The International Monetary Fund (IMF), in its latest World Economic Outlook, cut 0.2 of a percentage point from 2015 and 2016 economic growth, with big markdowns in oil-dependent economics, such as Canada, Brazil, Venezuela, Russia, and Saudi Arabia.

Global oil supplies held steady near 96.6 million b/d in September, as lower production from non-members of the Organization of Petroleum Exporting Countries was offset by a slight increase in OPEC crude output.

The continued strong performance from OPEC’s two biggest producers—Saudi Arabia and Iraq—left the group’s overall output in September running 940,000 b/d higher than the previous year. Since March, OPEC has pumped in excess of 31 million b/d—raising its year-to-date average to 31.2 million b/d vs. 30.2 million b/d in the first 9 months of 2014.

“Iraq and Iran are critical low-cost OPEC producers when it comes to determining how the global oil market balance evolves in 2016,” IEA said.

Iraq is currently the world’s fastest source of supply growth: average output of 4.2 million b/d during this year’s third quarter was 1 million b/d above a year ago. But “oil’s collapse and Iraq’s severe financial crisis have forced the government to curb spending, hence output next year is likely to remain broadly flat versus 3Q 2015 levels,” IEA said. Iran, on the other hand, could see upside potential of some 600,000 b/d—provided international sanctions are eased.

“Non-OPEC supply growth is clearly eroding.” For September, non-OPEC supply fell by 180,000 b/d to 58.3 million b/d on lower North American output.

“From 2.2 million b/d at the start of the year, and as much as 2.7 million b/d in December 2014, [year-over-year] growth had fallen to below 0.7 million b/d in September. The sharpest slowdown is in the US, where onshore crude and condensate production has started to drop,” IEA said.

After a brief recovery in active oil rigs in the US over July and August, producers pulled 70 rigs out of service in September and early October, reducing the total number of rigs to only 605 in the week ended Oct. 9.

“The sector could be tested further in October as banks reevaluate credit lines that are crucial to operators with little or negative free cash flow. For the time being, it looks as though banks are maintaining lines, not cutting them, as they need the heavily indebted sector to maintain production to service their debt,” IEA said.

IEA forecasts that lower oil prices and steep spending curbs will cut nearly 500,000 b/d from non-OPEC output next year, with the US, Russia, and Norway hit hard. For now, however, record supply from Russia and Brazil and a faster-than-expected rebound in Canada have led to a 150,000 b/d upward revision to 2015 and an 110,000 b/d lift for 2016 since last month’s OMR.

Commercial inventories from members of the Organization for Economic Cooperation and Development extended recent gains and rose 28.8 million bbl in August to stand at 2,943 million bbl by the month’s end. Since this was nearly double the 15 million bbl 5-year average build for the month, inventories’ surplus to average levels widened to 204 million bbl.

The onset of seasonal turnarounds is estimated to have curbed global refinery runs by 1.9 million b/d in September to 79.4 million b/d. The OECD and the former Soviet Union accounted for the bulk of the decline, while runs remained remarkably strong in Asia and the Middle East.

The problem with my $70 oil call

By T. Boone Pickens, CNBC.COM, 10/8/2015

After oil prices plummeted, I went on the record saying I thought they'd be back above $70 per barrel by the end of 2015.

The year isn't over yet, but my prediction isn't looking good.

I thought worldwide demand would go up — and it has. The latest from the International Energy Agency shows demand is already up about 1.7 million barrels a day.

I thought supply from the United States would go down — and it has. Companies have been laying down rigs, and U.S. production has dropped by 500,000 barrels a day since June.

So where'd I go wrong? One word: OPEC.

I thought supply from the Organization of the Petroleum Exporting Countries — and specifically Saudi Arabia — would also go down. You can't get rich selling anything for less than it costs to maintain the country. I expected they would at least maintain, if not cut, production to command a better price.

That didn't happen. Rather than cutting back or holding steady, OPEC drove prices even lower as Saudi Arabia has increased production by almost a million barrels a day.

I erred in underestimating OPEC's determination to keep the flow of oil under their control. The OPEC cartel is controlled by leaders whose top priority isn't to make money for stockholders, it's keeping themselves in power.

Even knowing that, I didn't expect to see Saudi Arabia, Qatar, Kuwait and the United Arab Emirates all working to increase their market share by bringing new production online over the next few years.

They won't be alone going forward. Iran will become an even bigger factor in the next few years now that the removal of sanctions allows them access to more of the world market. And Iraq has some of the world's largest reserves. If the country ever settles down, the Iraqis will have a major say in world prices.

When it comes to the price of oil, which remains in the mid-forties, all of that gets taken into account. What doesn't get taken into account is that the nations of OPEC have a long-term strategy, America doesn't. And, on top of all that, we have Russia moving into Syria. That will invariably add a new dimension to the Middle East energy equation.

Even as OPEC loses money, they are growing their market share. When prices rise, they'll rake in profits while the competition scrambles to catch up. It's also a geopolitical move. The world depends on oil, and they've got their hands on the spigot.

The United States, however, is taking a short-term view. Our economy is powered by cheap energy, and $2 gasoline makes a lot of folks happy. We know it'll hurt when prices go back up — which they will — but the American public has pretty much made energy a back-burner issue. Things are good today, so we'd prefer to wait until tomorrow to worry about the future.

We should be using this opportunity to debate, map out and plan for the future, and start putting a comprehensive, cohesive strategy for America to meet its energy needs without depending on OPEC's influence over oil or natural gas prices.

The lack of momentum for a long-term energy plan isn't surprising. There has been a gaping hole in American thinking about energy since the 1970's. The Nixon, Ford, Carter, Reagan, H.W. Bush, Clinton, W. Bush, and Obama Administrations have all talked about the importance of energy, then failed to produce a plan.

The United States has the largest total energy reserves in the world. If we want to keep electricity, oil and natural gas prices permanently low, we have to begin working now.

Even a casual student of World War II understands the Normandy invasion began years in advance. The United States didn't just need to recruit and train troops. They needed to be clothed and equipped. Planners began building mining capacity for iron needed to make enough ships and tanks, and coal to run the smelters. They trained welders and line workers — men and women — to build the planes and trucks.

D-Day was only possible because we started planning for it before we were at war with Germany or Japan — when we were at peace.

The future of energy is the modern equivalent. We should be using this time to plan our strategy for producing, importing and exporting energy. We should develop our rail, pipeline and electrical networks to expand and strengthen our ability to transport energy. And form a long-term agreement with our neighbors to the north and south to take advantage of energy know-how and resources.

This administration has run out the clock for a long-term energy plan. The ball is now in the courts of the candidates for president in both parties. They need to stop bickering about how they look, and stop bragging about what they did in their past careers. The candidates should take a good hard look at energy as a centerpiece of their economic policy and tell us what their plan is.


Oil Slide Means `Almost Everything' for Sale as Deals Accelerate

By Aaron Clark & Stephen Stapczynski, BloombergBusiness.com, 10/13/2015

More than $200 billion of hydrocarbon assets available: IHS
Oil and natural gas deals to increase this year and next

More than $200 billion worth of oil and natural gas assets are for sale globally as companies come under renewed financial pressure from the prolonged commodity price rout, according to IHS Inc.

There are about 400 buying opportunities as of September, IHS Chief Upstream Strategist Bob Fryklund said in an interview. Deals will accelerate later this year and into 2016 as companies sell assets to meet debt requirements, he said. West Texas Intermediate crude has averaged about $51 a barrel this year, more than 40 percent below the five-year mean.

Low prices have slashed profits and as of the second quarter about one-sixth of North American major independent crude and gas producers faced debt payments that are more than 20 percent of their revenue. Companies have announced $181.1 billion of oil and gas acquisitions this year, the most in more than a decade, compared with $167.1 billion the same period in 2014, data compiled by Bloomberg show.

 “Basically almost everything is for sale,” Fryklund said Oct. 8 in Tokyo. “Low cycles are when a lot of these companies can rebalance their portfolios. In theory, this is when you upgrade your existing portfolio.”

Companies with strong balance sheets are seeking buying opportunities, said Fryklund, citing Perth, Australia-based Woodside Petroleum Ltd.’s $8 billion offer for explorer Oil Search Ltd. and Suncor Energy Ltd.’s $3.3 billion bid for Canadian Oil Sands Ltd. Both targets rejected initial offers.

As of August, one out of every eight junk-rated oil companies was in danger of defaulting, according to Moody’s Corp. WTI plunged below $40 a barrel in August, to the lowest price in six years. The grade added 0.3 percent to $46.81 a barrel on the New York Mercantile Exchange at 11:36 a.m. in Tokyo.

Next year the U.S. benchmark may trade around $55, said Fryklund. It will take several years for supply and demand to rebalance and prices may rise to about $70 a barrel by 2018, he said.

These down cycles are really great for defining the winners for the next cycles,” said Fryklund. “The ones that have cash right now, the ones that have good financials are seeing lots of opportunities.”