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Saudi Supply Outage Juices Crude Prices

02/15/2019 11:37 am EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

The potential impact of the outage on oil prices depends on how long output at the oilfield is down, said Phil Flynn, senior market analyst at Price Futures Group.

While the globe and oil prices are on pins and needles over the outcome of U.S.-China trade talks, an outage at Saudi Arabia’s biggest oil field may further squeeze global heavy oil supply. Saudi Aramco’s Safaniya Oil Field is the largest offshore oilfield in the world, with a capacity of more than 1 million barrels per day. It is possible, according to some reports that it could be running at significantly reduced rates.

MarketWatch reported that “Saudi Aramco halted oil output this week at Safaniyah, the world's largest offshore oilfield, Energy Intelligence reported Thursday, citing sources familiar with the matter, according to a tweet from Amena Bakr, senior correspondent at the news and research service provider. Further information was only available through subscription-based Energy Intelligence. The thinking is that the field produces heavy crude, and the world is short of that [type of] oil.

“The unplanned shutdown takes out another 1 million barrels a day of heavy oil from the market, Alex Schindelar, executive editor of content & strategy at Energy Intelligence Group tweeted Thursday, adding that the heavy crude oil market was already tight because of the OPEC output cuts and U.S. sanctions on both Iran and Venezuela.”

Reuters is reporting the offshore oilfield down after a main power cable was cut by a vessel’s anchor, a source familiar with the matter said on Friday. The shutdown occurred about two weeks ago, the source said, and it was not immediately clear when the field would be back at full capacity. Still the fact that this oil may be lost for weeks is juicing prices. Oil products like heating oil and RBOB are in breakout mode as the tighter supply realities start to sink in. U.S. and China demand numbers continue to be strong during the trade war. It should soar if there is a deal. The charts look like we are in a breakout mode and the only thing that might stop the rally is a breakdown of U.S.-China talks. I have very happy hedgers.

On top of that, there are still signs that U.S. shale procurers are taking a cautious approach to raising oil production in part because refiners are buying less shale oil and need more heavy crude. Reuters reports that “Drilling curbs by oil producers in the largest U.S. shale field will continue until transport bottlenecks ease and investors stop punishing companies for increasing capital spending, executives at an energy conference said on Thursday.”

Pioneer Natural Resources Co, one of the Permian’s largest producers, said this week it plans to reduce 2019 capital expenditures by 11%, or about $350 million, slowing its production growth from prior years. “There aren’t nearly as many drilling dollars available,” said Bobby Whiteside, president of Midland, Texas-based oil producer Regions Permian LLC. “If Wall Street wants you to drill within cash flow; you’re going to have slower growth.”

The Permian is the nation’s largest and fastest growing oil field. Its output has driven U.S. crude production to near 12 million barrels per day (bpd), forcing OPEC and allies to cut their output. Oil and gas officials interviewed at the Houston conference say the recent shale cutbacks will remain until three proposed pipelines from West Texas to the U.S. Gulf Coast come online over the next 18 months. Executives said the recent strengthening of regional crude prices suggest that producers can expect oil sold at Midland, Texas, to slip from the current premium to a $1 to $3 per barrel discount to U.S. benchmark crude in the second quarter. “I don’t think you’ll see a big differential again unless they grow production over capacity,” said Jacob Daniels, an employee of Texas oil producer Chisholm Energy, which drills in the Permian. “We’re about at breakeven now, and that has really helped us,” added Brett Bracken, an exploration manager at Permian oil producer Ares Energy Ltd.

Reuter goes on to write ”The U.S. oil industry could easily meet the U.S. Energy Information Administration’s oil-production forecasts over the next two years if Wall Street still rewarded production growth over returns,” said Allen Gilmer, founder of market intelligence provider Drilling Info. “But with investors insisting on free cash flow and dividends, maybe we won’t,” Gilmer said. “These guys have amazing assets, but their stock prices haven’t benefited at all from growing reserves or production.”

Yet U.S. natural gas production is still soaring. The Energy Information Administration reported that this week dry gas production hit 98.6. Natural Gas Inventory fell by 78 bcf vs 85 bcf expected. Working gas in storage was 1,882 Bcf. Stocks were 30 Bcf less than last year at this time and 333 Bcf below the five-year average of 2,215 Bcf. At 1,882 Bcf, total working gas is within the five-year historical range. 

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