Crude prices jump on Libya export blockage, Iraq disruptions

Category : News

By Grant Thornhill on 1/19/2020

SINGAPORE (Bloomberg) – Oil gained in Asian trading Monday following supply disruptions and political instability in key producers Libya and Iraq.

Futures in New York rose as much as 2%, after ending little changed on Friday. A blockage of oil exports at Libya’s ports is expected to cut the country’s output by about 800,000 barrels a day, and forced the national oil company to declare force majeure on delivery contracts. Meanwhile, Iraq temporarily stopped work on an oil field on Sunday and supply from a second production site is at risk as widespread unrest escalates in one of OPEC’s biggest producers.


America is awash with natural gas, and it’s about to get worse

Category : News

By Rachel Adams-Heard, Naureen S. Malik and Sayer Devlin on 1/19/2020

HOUSTON (Bloomberg) – One chilly day in October, President Donald Trump boarded Air Force One and flew to Pennsylvania to hail one of the state’s most important industries — not coal, but natural gas.

Trump spoke an industry event of the “astonishing increase” in shale gas production. The Appalachian region has spearheaded a historic expansion, turning the U.S. into the world’s biggest producer while slashing prices for consumers and sounding the death-knell for domestic coal.

But the dark side of the boom is increasingly difficult to ignore. Shale drillers are extracting so much gas that it’s overwhelming demand.

Prices briefly dipped below $2 /MMbtu on Friday for the first time since 2016. At that level, U.S. producers simply don’t make money. It’s forcing a wave of multibillion-dollar writedowns, layoffs and spending cuts. Still, the industry is powerless to stop a wave of additional gas hitting the market as a byproduct of rising shale oil output in places like the Permian basin of West Texas and New Mexico. Even exports of liquefied natural gas provide little relief, as the international market is also oversupplied.

“The industry is a victim of its own success,” said Devin McDermott, an analyst at Morgan Stanley. “You don’t just have oversupply in the U.S. — you have oversupply in Europe, oversupply in Asia, and really oversupply across the globe.”

Gas prices have been in the doldrums for a while. The Henry Hub benchmark, named after a key Louisiana pipeline facility, has dropped for three years straight. This winter is proving to be unusually warm and inventory levels are above their seasonal average. Futures prices show traders aren’t expecting gas prices to rise above $2.60 even in the coldest months, when demand typically peaks.

According to McDermott, U.S. producers need gas to be at least $2.50 in order to generate free cash flow. “In the near-term, we don’t think it’s realistic to see a $2.50 price,” he said.

Evidence of corporate distress is mounting. Chesapeake Energy Corp., once in the vanguard of U.S. frackers, is unprofitable and struggling with more than $9 billion of debt. It warned in November it may go bust. EQT Corp., the largest domestic gas producer, said last week it will take an impairment of up to $1.8 billion for the fourth quarter, due in part to low prices.

Even the global energy giants aren’t immune. Chevron Corp. said last month it expects a writedown of more than $11 billion, more that half of that attributable to its Appalachian gas assets.

Producers including Cabot Oil & Gas Corp. and Range Resources Corp. are responding by taking an ax to capital expenditure. But that’s not going to put much of a dent in U.S. output. Production of “dry gas,” which excludes hydrocarbon liquids, is forecast to rise by 3% to 95 billion cubic feet a day this year, yet another record, the U.S. Energy Information Administration said last week.

An unfortunate reality for gas producers is that their oil counterparts in crude plays like the Permian keep spewing more gas from their wells — and they don’t even want it. Unlike in the Marcellus Shale in Appalachia, where it’s the main prize, gas is often regarded as an annoying byproduct of Permian oil. A lack of pipelines can force gas prices there to occasionally go negative — that is, producers have to pay others to take the fuel. They’re increasingly resorting to burning it off, a process known as flaring.

The unwelcome attention attracted by flaring isn’t helping gas’s environmental credentials, either. Despite being touted as greener “bridge” fuel that enables utilities to lower their emissions en route to a carbon-free future, gas is coming under attack in some parts of the U.S. from lawmakers seeking to ban all fossil fuels.

One outlet for excess supply has been the nascent U.S. liquefied natural gas export sector. Since the first cargo of the super-chilled fuel — “freedom gas,” as the Trump administration would have it — set sail four years ago, the country has leaped into the front ranks of global suppliers.

But even that success story appears to have stalled. China has imposed tariffs on U.S. LNG, effectively cutting off a major market. Despite last week’s phase one trade deal, in which China agreed to buy an additional $52.4 billion of U.S. energy products including LNG, it remains unclear if the tariffs will be scrapped. Meanwhile, international LNG prices have tanked, and there are questions whether the global market can take all the supply that’s available.

“We just don’t believe we can sustain reduced LNG exports later this summer,” said Clifton White, a commodity strategist for Bank of America Corp. in Houston. “That would force the market to price low enough to find incremental domestic power sector demand.”

All that pain will almost certainly be reflected in production numbers at some point. The EIA forecasts U.S. dry gas production will drop by 600 million cubic feet next year, the first annual decline since 2016, as low prices finally rein in drilling in the Appalachia. That, combined with the potential removal of tariffs, could finally provide the kind of positive catalyst U.S. producers are desperately seeking.

“Many U.S. LNG exporters likely are hoping, if not praying, that China will import more U.S. gas in the wake of the first phase trade agreement,” said Rich Redash, a gas analyst at S&P Global Platts.

In the meantime, some investors are willing to look past the current challenges. Dallas Cowboys owner Jerry Jones has been on the hunt for more U.S. gas assets. Two of the largest deals in the industry in the last year have seen foreign buyers — Japan’s Osaka Gas Co. and Thailand’s Banpu Pcl — swoop in to make acquisitions.

Those deals offer a bull case: Strong global gas demand, in large part from Asia, means the U.S. remains a good long-term bet. Still, Banpu doesn’t plan on drilling its new reserves in the Barnett Shale of North Texas until gas prices rise to about $3.50.

“I’m pretty confident that within five years, that will happen,” Chris Kalnin, CEO of BKV Oil & Gas Capital Partners, the investment vehicle for Banpu, said in an interview last month. “Anything before that is anyone’s guess.”


Libyan oil production halts in advance of talks to end civil war

Category : News

By Salma El Wardany on 1/19/2020

CAIRO (Bloomberg) – Libya’s biggest oil field began to halt production after armed forces shut down a pipeline, compounding supply disruptions ahead of a conference that aims to broker an end to the OPEC nation’s civil war.

The Sharara field, which can pump 300,000 barrels a day, will stop producing once its storage tanks are full, a person familiar with the situation said. Libya’s oil production has already plummeted to the lowest level since September 2016, data compiled by Bloomberg show.

Libya’s output has plunged by about 800,000 barrels a day from 1.174 million since an eastern military commander, Khalifa Haftar, blocked exports at ports under his control, according to a statement on Saturday from the state-run National Oil Corp. The NOC declared force majeure, which can allow Libya — home to Africa’s largest-proven oil reserves — to legally suspend delivery contracts.

Members of the Petroleum Facilities Guard under the command of Haftar’s Libyan National Army shut down the Hamada-Zawiya oil pipeline, forcing the NOC to limit oil production at the Sharara and El Feel fields, according to an NOC statement. The Hamada station hosts pipelines for Mellitah Oil Co. and Akakus, the operators at El Feel and Sharara respectively, it said.

“This is a policy-related disruption,” said Edward Bell, director of commodity research at Dubai-based bank Emirates NBD PJSC. “There could be a pretty quick turnaround if there’s a political solution.”

Crude prices will probably jump in trading on Monday but not by as much as they did after the Sept. 14 attacks on Saudi Arabian oil facilities, Bell said. Libya has less production at stake than Saudi Arabia, and its difficulties are more contained than the Saudi crisis, which threatened to escalate into a regional war, he said. Brent crude rose 23 cents on Friday to end the week at $64.85 a barrel.

Haftar’s show of force comes as he prepares to attend an international conference in Berlin on Sunday hosted by German Chancellor Angela Merkel where the general will face pressure to agree to a cease-fire. Haftar, whose troops have been bogged down in the southern suburbs of the capital of Tripoli, has so far refused efforts to end his offensive and agree to a compromise.

By shutting down oil fields, Haftar is denying a key source of revenue to the internationally recognized government of Prime Minister Fayez al-Sarraj. Funds from oil production go to the country’s central bank, and the Tripoli government has them money to buy weapons for its defense.

Russian mercenaries have supported Haftar’s forces, according to officials who told Bloomberg. Egypt and the United Arab Emirates are also backing Haftar. Turkish soldiers are training forces loyal to Sarraj, and Turkish-backed Syrian rebels have also joined the fray.