Friday, August 31st, 2018
Crude oil fell slightly in early trading on Friday, but are still set to close out another week of gains, the second week in a row. The string of gains put an end to two months of losses and a significant dip in sentiment. The oil market is now two months away from seeing substantial supply losses from Iran due to sanctions. Indeed, the declines are already underway, raising concerns about market tightness.
Deadline on NAFTA. At the time of this writing, the U.S., Mexico and Canada were nearing a trilateral deal on NAFTA ahead of Friday’s self-imposed deadline. The three countries are rushing to hammer out a deal in order to have enough time to pass the treaty before the change of administrations in Mexico as well as the potential loss of a Republican majority in the U.S. Congress after November’s midterm elections. The negotiations come after the U.S. and Mexico announced a preliminary bilateral deal earlier this week. While details have not been disclosed, reports suggest that the revisions to NAFTA preserve the protections offered to the investments of oil and gas companies under the current treaty. There is a watering down of the investor-state dispute mechanism, but an exemption was made for oil and gas. The main focus of the overhaul is on agriculture and automobiles, so as long as a deal is reached, there likely won’t be major changes for the energy industry.
Argentina’s peso crashes. Argentina’s peso fell 7.5 percent mid-week, with year-to-date losses topping 50 percent. The peso is now performing worse than Turkey’s lira. Argentina’s central bank hiked interest rates from 45 to 60 percent, an aggressive move made to defend the currency but will likely deepen the economic downturn. While this may seem like an isolated problem, the deeper and wider the currency turmoil spreads around the world, the more emerging market oil demand will have to be revised down.
Trans Mountain expansion put on ice. A Canadian court ruled that the federal government failed to consult with First Nations when it approved the Trans Mountain expansion pipeline, which would nearly triple the current system’s throughput capacity to 890,000 bpd if completed. The pipeline has been critical to relieving midstream bottlenecks in Canada, but the latest ruling has halted construction indefinitely. The Canadian government can appeal to the Supreme Court or redo the consultation process with First Nations, but both avenues are lengthy and fraught with uncertainty. The pipeline likely won’t be completed for years, if ever.
Iran complies with nuclear deal, but oil exports falling. The International Atomic Energy Agency said this week that Iran has continued to comply with the terms of the 2015 nuclear deal, despite the withdrawal of the U.S. from the accord. The IAEA said Iran was honoring its commitments to the deal – specifically, to limit stockpiles of nuclear materials and to grant access to IAEA inspectors. There were no areas in which Iran breached the deal. Nevertheless, the U.S. has stepped up confrontation, having added new demands earlier this year that few expect Iran would ever accept. As such, there is almost no chance of a de-escalation, which means Iran’s oil exports are going to continue to fall. The WSJ reports that Iran’s exports could fall by as much as 700,000 bpd in August, down to just 1.66 mb/d. By November, exports could dip below 0.8 mb/d.
Texas oil production fell in June. For the first time in 16 months, Texas’ oil production fell year-on-year in June. State data finds that Texas’ oil production fell to 98.9 million barrels in June, down 2 percent from the same month in 2017 and down 7 percent from the previous month. The sudden drop suggests that pipeline constraints are starting to impact production rates.
OPEC and non-OPEC look to formalize coordination. OPEC and non-OPEC countries are considering ways to formalize their cooperation later this year, eyeing a charter that would extend their coordination on stabilizing the oil market. Under the charter, ministers would meet once a year and technical experts would meet twice a year. The coalition would meet in Vienna and would be hosted by OPEC, but would remain a separate entity.
OPEC production rises despite Iran declines. OPEC production rose to its highest point this year in August, pushed up by a surge in output from Iraq and a restoration of production in Libya. OPEC production increased by 220,000 bpd in August, rising to 32.79 mb/d. Saudi Arabia added a modest 80,000 bpd, taking output up to 10.48 mb/d, after reducing its output in July.
Venezuela’s exports could drop by a third because of tanker crash. Venezuela’s oil exports could fall by a third in September due to a tanker collision at a terminal run by PDVSA. A Greek-flagged ship carrying naptha collided with the terminals south dock, according to Argus Media, which could reduce capacity of the terminal by up to 425,000 bpd in September. “But this assumes that PdV manages to repair and restart the dock operations by 30 September at the latest,” a PDVSA terminal official told Argus.
California votes for 100 percent clean energy by 2045. California passed a bill this week that would require the state to reach carbon-free electricity by 2045. Notably, the legislation is technology neutral, meaning that as long as power generation does not emit greenhouse gas emission, it would qualify, allowing nuclear power to have a future (despite the poor long-term trends facing the nuclear industry). The bill could have ramifications far beyond the state. California is exploring the possibility of linking up its electricity grid with a collection of western states. More than that, as the fifth largest economy in the world, the legislation could drive faster technology change that may ultimately be felt around the world.
Mexico may halt oil auctions. Reuters reported this week that incoming Mexican president Andres Manuel Lopez Obrador (AMLO) may cancel oil auctions indefinitely, rather than the previously reported two-year suspension. His policy team is also considering withdrawing from the IEA and moving closer to OPEC, although no decisions have been made.
Wyoming attracting oil industry interest. Oil companies are increasingly moving into the Powder River Basin as the Permian has become too crowded. Deal-making in Wyoming has been on the rise, Reuters reports. “There are a lot of similarities between where the Powder River is today and where the Permian Basin was just a few years ago,” Edward Geiser, managing partner at Juniper Capital Advisors, told Reuters.
$8 billion in Brazil would boost production by 230,000 bpd by 2025. A new report from Wood Mackenzie estimates that if the oil industry put $8 billion into the aging and declining Campos Basin in Brazil, production would not only stop falling but would rise by 230,000 bpd by 2025.
Thanks for reading and we’ll see you next week.