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Oil Markets Uncertain As Trade War Counters Supply Shortages

Tom Kool

Oil prices were flat in early trading on Friday, sandwiched between supply outages and the escalating U.S.-China trade war.

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Friday, May 10th, 2019

Trump doubles tariffs on China, markets wait. The U.S. hiked tariffs on $200 billion of Chinese goods from 10 to 25 percent on Friday, while leaving open the possibility that trade talks could continue. Trump also began the process of new tariffs on another $325 billion in Chinese imports. China vowed to implement retaliatory measures. “The opportunity window for avoiding a trade war is closing fast,” Citigroup wrote in a note to clients. Global financial markets were largely stable on Friday, suggesting that major investors still think that a resolution can be reached. “Our base case remains that the U.S. and China will eventually reach some kind of accord,” said Mark Haefele, global chief investment officer for the Swiss bank UBS, in a note.

U.S. shale running into trouble. As the sweet spots in the U.S. shale patch become crowded, it may be more costly and difficult to keep production elevated, according to a new report. While drilling techniques have succeeded in growing output, the industry may simply be front-loading production.

Oil prices firm up on bullish EIA report. Crude inventories fell and oil production also dipped in the most recent report from the EIA. That ended a string of inventory increases and offers some evidence that the market is not oversupplied.

Related: There’s Tremendous Room For Growth In Offshore Oil & Gas

Oil fundamentals diverge from prices. Brent crude futures have opened up a steep backwardation, evidence that the physical market for crude is tightening. Yet, spot prices have fallen in the last two weeks, and analysts are puzzled at the discrepancy. “There is no true sign of weakness in the physical market,” Olivier Jakob, managing director of consultant Petromatrix GmbH, told Bloomberg. “You have lower exports from Venezuela, you’ve got sanctions for Iran, Libya which is still a risk.”

Iran oil exports falling amid escalating tension. The U.S.-Iran conflict escalated this week, with rhetoric on both sides growing more heated. Iran said it would withdraw from parts of the nuclear deal, and top U.S. officials hinted at a military response. Washington also imposed sanctions on metals exports from Iran. Iran warned the EU to step up incentives or else it will fully withdraw from the 2015 accord. Meanwhile, Iran’s oil exports are plunging.

Saudi Arabia to keep oil exports below 7 mb/d in June. Saudi Arabia is holding firm on oil exports despite the tightening market. Saudi oil exports are expected to remain below 7 mb/d in June, with production also below the OPEC+ ceiling.

Venezuelan opposition VP detained. The Vice President of Venezuela’s opposition, Edgar Zambrano, was detained by the government this week, a sign that the failed coup attempt is now leading to a crackdown.

Turkey to drill near Cyprus. Turkey said that it was going to drill in disputed waters off the coast of Cyprus, raising tensions between the two sides. The series of gas discoveries in the Eastern Mediterranean appear to be exacerbating tensions, not resolving them, as many analysts had once hoped.

Texas air quality deteriorates. Air quality in and around Odessa, Texas – in the heart of the Permian Basin – continues to deteriorate as oil production grows. “Controlling air pollution in West Texas has not been a priority for the state, as evidenced by the scarcity of air pollution monitoring stations in the Permian Basin,” a report from the Environmental Integrity Project said. “And yet, the type of air pollution in the Permian Basin — dominated by excessive emissions of sulfur dioxide and hydrogen sulfide — is known to have serious environmental and public health consequences.”

New Colorado oil and gas law deters investment. The overhaul to oil and gas regulation in Colorado, which was recently signed into law, could slow investment into the sector. The new law gives local communities greater authority over zoning and regulation. According to Reuters, there were only five land transactions of negligible value in the Denver-Julesburg Basin in the nine-month period through March, down sharply from the nine deals worth $2 billion in the same period between 2016 and 2017. ConocoPhillips (NYSE: COP) tried to sell its acreage for more than $1 billion last year but found no willing buyer. Reuters reports that more recently some companies have begun to scale back operations.

U.S. solar panels surpass 2 million. The U.S. now has 2 million solar installations, only three years after hitting 1 million. It will only take until 2023 to hit 4 million.

Related: Nigeria Shuts In More Oil After Protests In Niger Delta

Iraq close to $53 billion oil deal. Iraq is close to signing a long-term, $53 billion oil deal with ExxonMobil (NYSE: XOM) and PetroChina. Iraq said the deal could bring in $400 billion in revenue over its 30-year lifetime.

Chevron threw in the towel on Anadarko deal. After Occidental (NYSE: OXY) raised its offer for Anadarko Petroleum (NYSE: APC), Chevron (NYSE: CVX) said it would not up the ante. “Winning in any environment doesn’t mean winning at any cost. Cost and capital discipline always matter, and we will not dilute our returns or erode value for our shareholders for the sake of doing a deal,” said Chevron’s Chairman and CEO Michael Wirth. Anadarko has to pay Chevron a $1 billion termination fee.

Saudi Aramco weighs U.S. shale investment. Saudi Aramco is considering a potential investment in Equinor’s (NYSE: EQNR) U.S. shale operations. Equinor has operations in the Marcellus shale.

Pioneer slashes jobs. Pioneer Natural Resources (NYSE: PXD) said on Tuesday that it would ask nearly a third of its executives to leave their jobs, a cost-saving measure on the order of $100 million per year. “The big change is to treat capital just as important as production,” CEO Scott Sheffield said.

UK coal-free for a week. For the first time since the 1880s, the UK went an entire week with zero electricity generation from coal. The UK plans to entirely phase out coal by 2025.

By Tom Kool for Oilprice.com 

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