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Oil Prices Crash As Hurricane Hurts Bullish Sentiment

Tom Kool

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Friday, August 30th, 2019

Oil prices looked set for their biggest weekly gain since July, but demand fears caused by Hurricane Dorian hitting Florida sent prices crashing on Friday morning. Oil prices were pushed up this week by cautious language from the U.S. and China, falling oil inventories, and also by a major Hurricane heading for the U.S. southeast. Despite an apparent cooling in the trade war, already-announced tariffs are set to jump on Sunday. “Upside momentum should not be taken for granted. Recession fears are casting a shadow on sentiment and oil prices should keep dancing to the tune of the U.S.-China trade saga,” Stephen Brennock of oil broker PVM told Reuters.

Possible Category 4 hurricane barrels towards Florida and the Gulf. Hurricane Dorian, which could yet strengthen to a powerful Category 4, is heading for Florida. “There’s a storm premium in the WTI price,” Phil Flynn, an analyst at Price Futures Group in Chicago, told Reuters. “The track of the storm is kind of dangerous for Gulf of Mexico production.” The storm could impact fuel supplies in Florida at the retail level. Florida is not an oil producer. The storm is expected to turn up the Atlantic Coast, so Gulf of Mexico production probably won’t be impacted. There could be a significant demand impact though.

Shale bankruptcies increase. There have been 26 bankruptcies in the U.S. shale industry this year, nearly as much as the 28 bankruptcies in all of 2018. The default rate of 5.7 percent is at its highest level since 2017, according to the Wall Street Journal. Investors have lost faith in shale E&Ps, and bankruptcies are on the rise. But this may pale in comparison to the debt wave that comes due over the next few years. Roughly $9 billion in debt is set to mature over the remainder of 2019 – but a massive $137 billion matures between 2020 and 2022.

China stakes out softer tone on tariffs. Tariffs are still set to jump starting in September, but both President Trump and China have dialed down the rhetoric in recent days. China said that it would not immediately respond to last week’s announced tariff increase from Trump.

Related: Natural Gas Prices Poised For Dramatic Price Increase

Aramco eyes split IPO. Saudi Aramco may pursue a public offering in two stages, one on the Saudi stock exchange later this year, followed by an international offering in 2020 or 2021, according to the Wall Street Journal. The WSJ says that Aramco is considering Tokyo, spurning London and Hong Kong because of political uncertainty.

Aramco sells WTL to South Korea. Saudi Aramco Trading Company, an arm of the Saudi oil giant, sold its first-ever cargo of U.S. West Texas Light oil to a refinery in South Korea, according to Reuters. The move is a sign that Aramco is expanding its relationship with the U.S. and boosting trade volumes.

Dutch to end Groningen gas quicker than expected. The Dutch government will stop production at the enormous Groningen natural gas field sooner than previously planned. “I expect the Groningen field to no longer be necessary very soon,” Dutch Economy Minister Eric Wiebes said on Tuesday. “Things are moving very fast, a lot faster than anyone would have predicted some time ago.” The government has curtailed output due to the rising frequency of earthquakes.

Mexico to open up energy sector again. In an about-face, Mexican President Andrés Manuel López Obrador is expected to turn back to the private sector to revive oil production. AMLO had halted new oil auctions and laid out billions of dollars of new investment into state-owned Pemex. But in the face of budgetary pressure and deteriorating credit ratings at Pemex, AMLO could reopen offshore development to the private sector.

Related: Trump Feeds Oil Markets False Hope

U.S. cyber-attack thwarts Iranian tanker attacks. A secret U.S. cyber-attack in June against Iran damaged a critical database Iran’s paramilitary arm needed to plot attacks against oil tankers.

Iran open to talks with U.S. A new report from the New York Times says that the Iranian government sees talks with the U.S. as inevitable. The NYT says that Iran could pursue a dual-track strategy of escalation with the U.S. in order to gain leverage, while exploring the possibility of future talks. Notably, the report says that Iran would be open to a comprehensive deal, covering both nuclear issues and some other issues that the Trump administration has cited, such as Iran’s ballistic missile program. In exchange, Iran would demand lasting economic relief.

BP’s Alaska sale raises questions about future of Arctic. BP (NYSE: BP) agreed to sell its Alaska assets to privately-held Hilcorp Energy for $5.6 billion as the oil giant focuses on U.S. shale. The exit raises questions about the future viability of Alaska’s oil and gas sector, which has been in decline. "Alaska's never been shy on supply ... but is it economically viable?" Kara Moriarty, president and CEO of the Alaska Oil and Gas Association said in an interview with S&P Global Platts. Platts says that breakeven prices for Alaska’s onshore oil stand at about $55 per barrel, with higher offshore breakevens at about $65 per barrel. In contrast, U.S. shale has a breakeven closer to $45 per barrel.

India to ban single-use plastics. India is set to impose a nationwide ban on plastic bags, cups and straws beginning on October 2, according to Reuters. “The ban will be comprehensive and will cover manufacturing, usage and import of such items,” one official said.

S&P Global: Argentina in “default.” Argentina has decided to extend the maturities on outstanding debt, rather than seeking a haircut, but S&P Global said that it still constitutes a selective default. “Following the continued inability to place short-term paper with private-sector market participants, the Argentine government unilaterally extended the maturity of all short-term paper on Aug. 28,” the ratings agency said in a statement. “This constitutes default under our criteria.” The Vaca Muerta could be hit hard by the financial turmoil in Argentina. Fixed oil prices are cutting into profits, while currency volatility could deter investment.

Inventory draw pushes up oil. A more conciliatory tone from the U.S. and China, along with a massive crude inventory drawdown report from the EIA helped push up oil prices this week.

By Tom Kool for Oilprice.com

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