Oil Market Report - 5th March 2019

The Elephant in the Room: Prices barely changed this week yet again, as Brent has stabilised in the range of $65-66 while the 5, 10 and 20 Day Moving average for WTI is between $55-56. After last week’s IP week events which set out a bullish tone, prices failed to rise materially higher.

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There was a lot of fundamental data updates in the past week. OPEC released their February monthly production numbers. According to Reuters, OPEC is doing their job by being 100% compliant (101% to be exact) mainly led by voluntary cuts by Saudi and involuntary cuts by Venezuela.

However, OPEC has 2 upcoming problems in ensuring this compliance remains at 100%. Firstly, Libya’s largest oilfield Sharara which has a capacity of 315KBD and has been closed since December has resumed . Libya produced 0.9MMBD in February and they can reach 1.2MMBD like they did in October last year.

Secondly, production in Nigeria has started to ramp up due to the new Egina oilfield. Nigeria’s April loading program is at 2.04MMBD which is the highest since November 2016. That is an incremental 200KBD from the February production numbers.

Saudi and Venezuela, in theory, can offset the potential incremental 500KBD coming from these 2 states. However, Saudi’s patience will be tested out in the next few months.

Source: OPEC and Reuters Survey

Source: OPEC and Reuters Survey

Source; Russian Energy of Ministry

Source; Russian Energy of Ministry

Speaking of Saudi’s patience, Russia updated their February production numbers as well. Russian February production dropped 40KBD m-o-m to 11.34MMBD, however its still 160KBD higher than the cut they had promised to OPEC in December. Russia is taking its time to cut their production due to supposedly winter technical constraints. The growth in Russian production has been spectacular despite low prices and often been ignored by the market. Even with the lower February production, the y-o-y increase in production is almost 400KBD.

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Saudi OSP’s were out this week and their pricing wasn’t consistent at all. They increased the prices for their Asian customers, lowered it for European customers and kept it unchanged for US. Arab Light for Asia will now be at Dubai + 1.20 especially when the Dubai benchmark is already so strong due to the sour barrel tightness. Asian refiners will really feel the pinch even though refinery margins have picked up from the lows seen this year.

In US, Exxon and Chevron dramatically lifted their production estimates. The bulk of the growth is going to come from the Permian. Chevron had an analyst day yesterday and Exxon will have theirs today. Chevron’s doubled their Permian portfolio value in a year. Chevron’s Permian resources grew from 9.3BBOE to 16.2BBOE in just a year. On the production front, Chevron sees production hitting 900KBD in 2023 (their previous expectation was 650KBD). Exxon which relies less on shale, also sees production hitting 1MMBD in 2024 (compared to the previous projection of 600KBD). As Permian gets increasingly dominated by oil majors and away from the smaller players, we will see increased efficiency.

Permian is yet again the elephant in the room. US oil growth has surprised to the upside (even with the most optimistic scenarios) for the last 6 years and it looks like the industry will be making this same mistake yet again. Industry expectations are that US oil growth in 2019 will be around 1.4-1.5MMBD which seems conservative given the aggressive outlooks from Exxon and Chevron. According to EIA STEO, even though 2019 growth is expected at 1.45MMBD, 1.16MMBD will come from L48. In 2018, the L48 growth was at 1.56MMBD and we will see the L48 growth revised higher if Exxon and Chevron are to be believed.

Source: Chevron

Source: Chevron

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