US oil production decline much less than feared

As the latest visit to Houston, Texas nears its conclusion, the Oilholic walked wistfully past a petrol station in the Lone Star state. What European motorists wouldn’t give for US$2.49 (£1.61) per US gallon (3.79 litres) to fill up their cars. That was the price was this morning (see left)!

Ditching wistfulness and moving on to price of the crude stuff, the latest energy outlook report from the US Energy Information Administration (EIA) sees Brent averaging $61 per barrel in 2015, with WTI averaging around $55. The EIA also expects a decline in crude oil production stateside from June onwards through to September.

However, there is little anecdotal evidence here on the ground in Houston to suggest the Eagle Ford is slowing down if activity elsewhere is. Furthermore, feedback from selected attendees at two events here – Baker & McKenzie’s 2015 Oil & Gas Institute 2015 and the Mergermarket Energy Forum – alongside most experts this blogger has spoken to since arrival, point to the said production decline being much less than feared.

On average, most opined that we’d be looking at a decline of between 35,000 to 45,000 barrels per day (bpd) this year. It would imply that US production would still stay within a very respectable 9.1 to 9.3 million bpd range with much of the drop coming from North Dakota. As if with eerie timing, American Eagle’s filing for Chapter 11 bankruptcy protection, following its inability to service debt on plays in North Dakota (and Montana), provided a near instant case in point.

Overall picture is less clear for 2016. If the oil price stays where it is, we could see a US production decline in the region of 60,000 to 100,000 bpd. EIA has estimated the decline might well be towards the upper end of the range. 

It comes after analysts at Goldman Sachs labelled the recent oil prices “rally” as being a bit ahead of itself. Or to quote their May 11 email to clients in verbatim: “While low prices precipitated the market rebalancing, we view the recent rally as premature.

“The oil market focus has dramatically shifted over the past month, from fearing a breach of US crude oil storage capacity to reflecting a well under way oil market rebalancing. We view this shift in sentiment and positioning as excessive relative to still weak fundamentals.”

The Oilholic has repeatedly said over the past six weeks that both benchmarks are likely to stay within the $50-75 barrel range, as the decline in the number of operational oil rigs stateside was not high enough (yet) to trigger persistently lower US production. EIA data and feedback here in Houston supports such conjecture.

Meanwhile, the front page of the Financial Times loudly, but bleakly, declared on Tuesday that “more than $100 billion of projects” were on ice with Canada hit the hardest. According to the newspaper’s research, Shell, BP, Statoil and ConocoPhillips have all led moves to curtail capital spending on 26 major projects in 13 countries.

Speaking of ConocoPhillips, its CEO Ryan Lance has joined an ever increasing chorus stateside of oil industry bosses calling on the US government to lift its 40-year plus ban on crude exports. 

At a conference in Asia, Lance told Bloomberg that the Houston-based oil and gas producer had sufficient production capacity stateside to cater the global market and ensure stable domestic supply. Right, so there’s no danger to Houstonians paying $2.49 per gallon to fill up their cars then?

To be fair, the ConocoPhillips boss is not alone in calling for a lifting of the ban. Since last July, the Oilholic has counted at least 27 independents, many mid-tier US-listed oil and gas producers including Hess Corp and Continental Resources, and almost all of the majors voicing a similar opinion.

They can say what they like; there won’t be any movement on this front until there is a new occupant in the White House. That’s all from Houston on this visit folks, its time for the big flying bus home. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo: Price display board at a Shell Petrol Station in Houston, Texas, USA © Gaurav Sharma, May 2015.

OPEC vibes, a Libyan matter & market chatter

As OPEC prepares to meet for the first time this year, oil ministers of the 12 member nations should feel reasonably content. The hawks always like the oil price to be in three figures and doves usually like a support level above the region of US$85 per barrel using Brent as a benchmark. Needless to say, both camps are sitting comfortably at the moment and will continue to do so for a while.

Macroeconomic permutations and risk froth is keeping the oil price where OPEC wants it, so the Oilholic would be mighty surprised if the ministers decide to budge from the present official quota cap of 30 million barrels per day. Those going long on Brent have already bet on OPEC keeping its output right where it is.

Over the week to May 27, bets on a rising price rose to their highest level since September 2013. ICE's Commitment of Traders report for the week saw all concerned, including hedge funds, increase their net long position in Brent crude by 6% (or 4,692) to 213,364 positions, marking a third successive week of increases. Going the other way, the number of short positions fell by 7,796 to 42,096.

Wires might be saying that "all eyes" are on OPEC, but not many eyes would roll at Helferstorferstrasse 17 once the announcement is made. Futures actually slipped by around 0.5% as dullness and a minor bout of profit taking set in last week at one point. While the quota level is a done deal, what ministers would most likely discuss, when those pesky scribes (and er...bloggers) have been ejected out for the closed door meeting, is how much China would be importing or not.

Several independent forecasters, including the US EIA have predicted that China is likely to become the largest net importer of oil in 2014. By some measures it already is, and OPEC ministers would like to ponder over how much of that Chinese demand would be met by them as US imports continue to decline.

Other matters of course pertain to the appointment of a successor to Secretary General Abdalla Salem El-Badri, and where OPEC stands on the issue of production in his home country of Libya, which is nowhere near the level recorded prior to the civil war.

In order to pick-up the Libyan pulse a little better ahead of the OPEC meet, yours truly headed to IRN/Oliver Kinross 3rd New Libya Conference late last month. The great and good concerned with Libya were all there – IOCs, Libyan NOC, politicians, diplomats and civil servants from UK and Libya alike.

A diverse range of stakeholders agreed that the race to reversing Libyan production back to health would be a long slow marathon rather than a short sprint. Anyone who says otherwise is being naively optimistic.

Forget geopolitics, several commentators were quick to point out that Libya has had no private sector presence in the oil & gas sector. Instead, until recently, it has had 40 years of a controlling Gaddafi fiefdom. Legislative challenges also persist, as one commentator noted: "The road map to a petroleum regime starts first with a constitution."

That's something newly-elected Prime Minister Ahmed Maiteg must ponder over as he tries to bring a fractured country together. Then there is the investment case scenario. Foreign stake-holding in Libyan concerns is only permitted up to 49% despite a risky climate; the Libyan partner must be the majority owner. The oil & gas business has always operated under risk versus reward considerations. But a heightened sense of risk is something not all investors can cope with as noted by Sir Dominic Asquith, former UK ambassador to Iraq, Egypt and Libya, who was among the delegates.

"There is a long term potential with a bright Libyan horizon on the cards. However, getting to it would be a difficult journey, and particularly so for small and medium companies with a lesser propensity to take risk on their balance sheets than major companies," he added.

Meanwhile, a UK Foreign & Commonwealth office spokesperson said the British Government was not changing travel advice to Libya for its citizens any time soon. "We advise against all but essential travel to the country and Benghazi remains off limits. In case of companies wishing to do business in Libya, we strongly urge them to professionally review their own security arrangements."

Combine all of these latent challenges with the ongoing shenanigans and its not hard to figure out why the nation has become one of the smallest producers among its 12 OPEC counterparts and it may be a while yet before investors warm up to it. However, amid the pessimism, there is some optimism too.

Ahmed Ben Halim, CEO of Libya Holdings Group noted that sooner rather than later, the Libyans will sort their affairs out, even though the journey would be pretty volatile. Fares Law Group's Yannil Belbachir pointed out that despite everything all financial institutions were functions normally. That's always a good starting point.

Some uber-optimists also expressed hope of making Libya a "solar power" by tapping sunlight to produce electricity, introduce it back into the grid and send it via subsea cable from Tripoli to Sicily. Noble cause indeed! Being more realistic and looking at the medium term, with onshore prospection and production getting disrupted, offshore Sirte exploration, first realised by Hess Corporation, could provide a minor boost. Everyone from BP to the Libyan NOC is giving it a jolly good try!

Just one footnote, before the Oilholic takes your leave and that's to let you all know that one has also decided to provide insight to Forbes as a contributor on 'crude' matters which can be accessed here; look forward to your continued support on both avenues. That's all from London for the moment folks; more shortly from sunny Vienna at the 165th meeting of OPEC ministers . Keep reading, keep it 'crude'!

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To email: gaurav.sharma@oilholicssynonymous.com 

© Gaurav Sharma, 2014. Photo 1: OPEC HQ, Vienna, Austria. © Gaurav Sharma, 2014.