WEEKLY ENERGY RECAP: Pondering Permian pipeline

WEEKLY ENERGY RECAP: Pondering Permian pipeline
A pump jack operates in the Permian Basin oil production area near Wink, Texas U.S. August 22, 2018. (REUTERS)
Updated 11 August 2019

WEEKLY ENERGY RECAP: Pondering Permian pipeline

WEEKLY ENERGY RECAP: Pondering Permian pipeline

Oil prices tumbled last week as Brent crude fell below $60 per barrel for the first time in eight months. Brent finished at $58.53 while WTI fell to $54.50 per barrel.
Some analysts suggest that Brent has dropped on fears that the trade spat will expand into a full currency war, overshadowing the risk of supply disruptions in the Arabian Gulf. There has also been much attention paid to gloomy global economic sentiment dragging the oil price down — yet demand continues to be strong in China, the world’s biggest buyer of crude oil, and that has been reflected by record high imports.
We should instead consider the financial fragility of the US shale industry amid tightening of liquidity that has made it clear that US shale requires longer investment horizons than expected. The US oil rig count is at a 19-month low amid a broad drilling slowdown.
Shale risks being left behind by increasingly skeptical US capital markets. Drilling has slowed in the Permian Basin, and the slowdown has been even more acute outside this region.
The key mathematics of US shale oil growth have become more challenging, partly because of the rapid growth achieved in 2018. Decline rates for existing wells have risen, and production growth means the month-to-month decline is applied across a higher base. Changes in Permian well productivity estimates suggest that shale is much less resilient and hence output growth is set to slow sharply amid lower plans for capex.
Small and mid-sized shale producers have suffered from a financing squeeze since late 2018 when oil prices plummeted to similar prices levels. Shale investors are growing weary of a sector that has struggled to generate cash returns.
US loans to sub-investment energy companies fell by a third in the first half of 2019, compared with the same period last year.
Equity offerings were down by two-thirds and bonds by half. Shareholder pressure on larger explorers has dampened interest in acquisitions. This makes the capital constraints facing smaller producers all the more onerous, with investors shunning the space enough to crush equity values and kill off attempts to build scale.
Last year saw midstream operators deftly circumvent anticipated capacity shortfalls through de-bottlenecking and accelerated construction schedules.
Estimates vary, but the market largely expects a major shortfall in Permian pipeline takeaway capacity to persist late into 2019. At that point, Permian producers are expected to breathe a collective sigh of relief, with no further oil infrastructure bottlenecks on the horizon till 2020.
The Permian Basin continues to dominate US shale oil output growth but the rapid pace is becoming increasingly difficult to sustain in the face of pipeline constraints.
So far, infrastructure expansion has failed to keep pace with Permian output growth. So the future sustainability of oil recovery in the Permian is still questionable as shale producers have different levels of exposure to the bottlenecks.

Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalfaeq


Global shares, oil prices falter as US stimulus buzz fades

Global shares, oil prices falter as US stimulus buzz fades
Updated 5 min 55 sec ago

Global shares, oil prices falter as US stimulus buzz fades

Global shares, oil prices falter as US stimulus buzz fades

LONDON: Global shares stumbled on Friday as hopes of a fiscal boost from a $1.9 trillion US stimulus plan were smothered by the prospect of stricter lockdowns in France and Germany and a resurgence of COVID-19 cases in China.
European stocks followed Asian markets lower, with the pan-European STOXX 600 down 0.8 percent and London’s FTSE 100 0.8 percent weaker, with the latter clobbered by data showing Britain’s economy shrank in November for the first time since the initial COVID-19 lockdown last spring.
The MSCI world equity index, which tracks shares in 49 countries, was 0.3 percent lower. S&P 500 e-mini futures shed 0.3 percent to 3,779.
Oil prices, which had risen on a weak dollar and strong Chinese import data, dropped as COVID-19 concerns in China hit sentiment.
Brent was down $1.33, or 2.3 percent, after gaining 0.6 percent on Thursday. US West Texas Intermediate crude was down $1.17, or 2.1 percent at $52.44 a barrel, having risen more than 1 percent the previous session.
Brent and US crude were heading for their first weekly declines in three weeks.
Spot gold rose 0.1 percent to $1,847.00 per ounce.
While oil producers are facing unparalleled challenges balancing supply and demand equations with calculus involving vaccine rollouts versus lockdowns, financial contracts have been boosted by strong equities and a weaker dollar, which makes crude cheaper, along with strong Chinese demand.
“The recent resurgence in coronavirus infections, appearance of new variants, delayed vaccine rollouts and renewed lockdown measures in most major OECD economies has clouded the economic and demand recovery,” said Stephen Brennock of oil broker PVM.
“Simply put, near-term demand expectations aren’t too promising.”
Earlier on Friday, an Asian regional share index had edged near record highs after US President-elect Joe Biden proposed a $1.9 trillion stimulus plan to jump-start the world’s largest economy and accelerate its response to the coronavirus.
In prime time remarks on Thursday, Biden outlined a proposal that includes $415 billion aimed at the COVID-19 response, some $1 trillion in direct relief to households, and roughly $440 billion for small businesses and communities hard hit by the pandemic.
But that initial boost later faded as risk appetite waned, lifting bond prices and the dollar, and hitting equities.
“People are saying it’s a big number but markets are almost acting like its a disappointment,” said James Athey, investment director at Aberdeen Standard Investments.
“I think maybe the market was pricing an additional $2,000 cheque going to the US population, but what’s being proposed is a top-up of $1,400 to take the total to $2,000 because $600 has already been agreed.”
Investors also digested the prospect of rising taxes to pay for the plan.
“The concern is what it’s going to mean from a tax stand point,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.
“Spending is easy to do but the question is how are you going to pay for it? Markets often ignore politics but they don’t often ignore taxes.”
Biden’s comments came after US Federal Reserve Chair Jerome Powell struck a dovish tone in comments at a virtual symposium with Princeton University.
Powell said the US central bank is not raising interest rates anytime soon and rejected suggestions the Fed might start reducing its bond purchases in the near term.
Investor concerns over the prospects for a global economic recovery were raised after France strengthened its border controls and brought forward its night curfew by two hours to 6 p.m. for at least two weeks to try to slow the spread of infections.
German Chancellor Angela Merkel called for “very fast action” to counter the spread of variants of the coronavirus.
Chinese blue chips eased 0.2 percent, snapping a four-week winning streak, after the country on Friday reported the highest number of new COVID-19 cases in more than 10 months.
US earnings season kicked into full swing with results from JPMorgan, Citigroup and Wells Fargo.
JPMorgan Chase reported a much better-than-expected 42 percent jump in fourth-quarter profit on Friday, driven by the release of some of the reserves it had built up against coronavirus-driven loan losses.
Investors will be looking to see if banks are starting to take down credit reserves, resume buybacks, and provide guidance that shows the economy is improving, said Thomas Hayes, chairman of Great Hill Capital in New York.
In the currency market, the US dollar rose.
The dollar index was at 90.407 versus a basket of currencies, up 0.2 percent on the day.
It was on track for a weekly gain of around 0.4 percent, making this its strongest week since November.
Against the stronger dollar, the euro was down 0.2 percent at $1.21325.
US yields stepped back as risk appetite waned. Benchmark 10-year Treasury notes yielded 1.1039 percent, down from a US close of 1.129 percent on Thursday, while the 30-year yield dipped to 1.8451 percent from 1.874 percent.
In Europe, Italy’s bond market was poised to end the week calmer, as 10-year bond yields were down 2 basis points at 0.59 percent.
Italian Prime Minister Giuseppe Conte resisted calls to resign on Thursday after a junior coalition party led by former premier Matteo Renzi pulled out of the government on Wednesday and stripped it of its majority.