CONCLUSION:. On the positive side, the agreement avoids a price collapse as it reduces the risk of filling up the global storage capacity completely and most importantly it ends the price war between Russia and Saudi Arabia. Our research team expects the price of oil to remain between $20 and $30 through June while the market assesses the compliance and more importantly the potential rebound in demand at some point. As of this morning, the market reaction has been somewhat muted with Brent and WTI relatively unchanged.
1- TOTAL CUTS OF 13.4Mb/d if you had OPEC at 6.1M b/d, OPEC+ members mostly Russia at 3.6Mb/d and G-20 cuts monastery US/Canada/Brazil at 3.7Mb/d. The cuts are focused on the May-June period then they go down to 8M b/d for July-dec.
2- AVOID PRICE COLLAPSE DUE TO LACK OF STORAGE- Demand destruction is estimated at 17Mb/d for 2Q ( compared to a 13.4M b/d cut but an actual cut from the March level of ONLY 7Mb/d for OPEC+ members). So this means inventories will go up by about 984M barrels versus a total storage capacity including floating storage left of 1.2 billion barrels.
3- END OF THE PRICE WAR- probably the most positive is all this is the end of the price war between Russia and Saudi Arabia
4- CUTS BY THE G-20? US/Canada/Brazil but allows Norway are talking about cutting 3.7M b/d of supply but it is not very clear how. It will be mostly through Strategic Petroleum Reserves ( SPR) purchases, shut-ins and natural declines.
5- THE TEXAS RAILROAD COMMISSION ( RRC) meets tomorrow Tuesday to discuss production cuts. Based on recent discussions we are doubtful a serious official cut will come out of the US as most of the large producers like Exxon and Chevron have come against it.
6- IDEAL PRICE- we continue to think that $40 WTI is where the Saudis and the Russians want to oil price which is enough to kill US Shale's economics while helping the local budgets of each closer to balance.
Living on the Edge: Historic Deal With a Lot of Unknowns
Randy Ollenberger • Oil & Gas (403) 515-1502 Phillip Jungwirth, CFA • Oil & Gas (303) 436-1127
Bottom Line:
OPEC+ has reached an agreement to reduce production by 9.7 million b/d in May and June and roughly six million over the balance of the year. The G20 group acknowledged the need to stabilize oil markets and has reportedly agreed to reduce production by 3.7 million b/d. The OPEC+ cut (if adhered to) plus expected shut-in production due to low oil prices could be just enough to keep inventories from breaching capacity. We expect crude oil prices to trade in a $20-30/bbl range through May as the market waits to see if the production cuts materialize and are large enough to stave off disaster.
Key Points
OPEC+ capitulates. OPEC and its non-OPEC partners have agreed to reduce production by 9.7 million b/d in May and June and by roughly six million b/d for the remainder of the year. The baseline for the determination of production levels is October 2018 except for Saudi Arabia and Russia, which have baselines of 11 million b/d. The group will meet again on June 10 to determine if additional action is required.
No commitments but uneconomic shut-ins elsewhere. The broader G20 group did not explicitly commit to any reductions in supply but acknowledged the need to stabilize oil markets and has reportedly agreed to reduce supply by 3.7 million b/d through declines and shut-in of uneconomic production. The OPEC+ cuts are not contingent on commitments from the U.S. and others to reduce supply. We anticipate a drop in non-OPEC production of 1.8 million b/d in the second quarter and growing over the balance of the year due to the drop in activity levels.
Level of demand destruction unknown. We believe that global oil demand could be down more than 17 million b/d year over year in the second quarter to roughly 82 million b/d, which would represent the lowest level of demand since 2004. Taking the OPEC+ cuts into consideration we anticipate a year-over-year decline in production of 7 million to 92.8 million b/d, which implies a build of approximately 984 million barrels. We estimate remaining available global storage capacity (including floating storage) is roughly 1.2 billion barrels. While this means there could be adequate storage room there is not much room for error.
Pricing in uncertainty. We expect crude oil prices to remain relatively weak through April and May as the market assesses the risk that the level of demand destruction could be higher than expected, leading to the possibility that there is not enough storage available. We also expect regional dislocations where storage fills up leading to wider price differentials in some markets.
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Energy companies feel the pain of Saudi Arabia's price war 'This is the financial crisis for oil — except the producers are not too big to fail'
From the shale fields of Texas to deepwater projects in the North Sea, the price war launched by Russia and Saudi Arabia sent shockwaves across the entire energy industry and triggered the biggest sell-off since the global financial crisis.
It has left some companies searching for strategies to protect profits and keep paying dividends. Others are fighting for survival.
"The price collapse could be the trigger for a new phase of deep industry restructuring — one that rivals the changes seen in the late-1990s," said Tom Ellacott of the consultancy Wood Mackenzie. "Sustained prices below $40 a barrel would trigger a new wave of brutal cost-cutting. More highly-leveraged players will be forced to make the deepest cuts to stave off bankruptcy."
Nowhere is that more true than in the shale industry, which helped end US dependence on Middle Eastern oil.
Since 1965, over ⅓ of the world's cumulative carbon emissions can be traced back to just 20 fossil fuel companies.
Source: Visual Capitalist
Aramco's operations, Number 1 on the list, have resulted in 59,262 MtCO₂ein carbon emissions since 1965. To put that into perspective, this total is more than six timesChina's emissions in 2017 alone (9,838 MtCO₂e).
Read More Here on Visual Capitalist: https://www.visualcapitalist.com/companies-carbon-emissions/
The Biggest Saudi Oil Field Is Fading Faster Than Anyone Guessed
By Javier Blas
7-8 minutes
It was a state secret and the source of a kingdom's riches. It was so important that U.S. military planners once debated how to seize it by force. For oil traders, it was a source of endless speculation.
Now the market finally knows: Ghawar in Saudi Arabia, the world's largest conventional oil field, can produce a lot less than almost anyone believed.
When Saudi Aramco on Monday published its first ever profit figures since its nationalization nearly 40 years ago, it also lifted the veil of secrecy around its mega oil fields. The company's bond prospectus revealed that Ghawar is able to pump a maximum of 3.8 million barrels a day -- well below the more than 5 million that had become conventional wisdom in the market.
"As Saudi's largest field, a surprisingly low production capacity figure from Ghawar is the stand-out of the report," said Virendra Chauhan, head of upstream at consultant Energy Aspects Ltd. in Singapore.
King of Oil
The Energy Information Administration, a U.S. government body that provides statistical information and often is used as a benchmark by the oil market, listed Ghawar's production capacity at 5.8 million barrels a day in 2017. Aramco, in a presentation in Washington in 2004 when it tried to debunk the "peak oil" supply theories of the late U.S. oil banker Matt Simmons, also said the field was pumping more than 5 million barrels a day, and had been doing so since at least the previous decade.
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The prospectus offered no information about why Ghawar can produce today a quarter less than 15 years ago -- a significant reduction for any oil field. The report also didn't say whether capacity would continue to decline at a similar rate in the future.
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The 470-page bond prospectus confirms that Saudi Aramco is able to pump a maximum of 12 million barrels a day -- as Riyadh has said for several years. The kingdom has access to another 500,000 barrels a day of output capacity in the so-called neutral zone shared with Kuwait. That area isn't producing anything now due a political dispute with its neighbor.
While the prospectus confirmed the overall maximum production capacity, the split among fields is different to what the market had assumed. As a policy, Saudi Arabia keeps about 1 million to 2 million barrels a day of its capacity in reserve, using it only during wars, disruptions elsewhere or unusually strong demand. Saudi Arabia briefly pumped a record of more than 11 million barrels a day in late 2018.
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Costly Strategy
For Aramco, that's a significant cost, as it has invested billions of dollars into facilities that aren't regularly used. However, the company said the ability to tap its spare capacity also allows it to profit handsomely at times of market tightness, providing an extra $35.5 billion in revenue from 2013 to 2018. Last year, Saudi Energy Minister Khalid Al-Falih said maintaining this supply buffer costs about $2 billion a year.
Aramco also disclosed reserves at its top-five fields, revealing that some of them have shorter lifespans than previously thought. Ghawar, for example, has 48.2 billion barrels of oil left, which would last another 34 years at the maximum rate of production. Nonetheless, companies are often able to boost the reserves over time by deploying new techniques or technology.
In total, the kingdom has 226 billion barrels of reserves, enough for another 52 years of production at the maximum capacity of 12 million barrels a day.
The Saudis also told the world that their fields are aging better than expected, with "low depletion rates of 1 percent to 2 percent per year," slower than the 5 percent decline some analysts suspected.
