Weekly Oil & Energy Insider Report
OIL & ENERGY INSIDER - Investment Opportunities & Strategic Energy Intelligence
18th November 2016

Vienna: The OPEC Countdown Begins

In this issue

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Inside Investor
Why You Should Expect A Substantial OPEC Deal
Inside Opportunities
Playing The Overreaction To The Election Results
Executive Report
OPEC Overproduction To Create Problems In Vienna
Inside Intelligence
Global Energy Advisory - 18th November 2016
Inside Markets
Oil At A Crossroads Ahead Of OPEC’s Vienna Meeting
Inside Investor with Daniel Dicker

Why You Should Expect A Substantial OPEC Deal

OPEC ministers are again meeting, this time in Doha, but haven’t yet showed a sign of a sweeping deal that could come out of Vienna and OPEC later this month. But I believe it’s going to be a lot more substantial that just about any other analyst thinks.  

The markets are saying there won’t be much if any cut from OPEC and non-OPEC states from the meeting that’s going to take place on November 30th. A deal to limit OPEC to 32.5m barrels a day that was first suggested in Algiers in October would send oil prices well over $50 a barrel. Today, the $46 price you’re seeing represents a market that surely expects nothing from this meeting. I think the market is wrong.

The pressure to generating a production deal is being spearheaded by Saudi Arabia, although Nigeria and Venezuela would certainly approve. And the Saudis have certainly changed their tune in lots of substantial ways in 2016:  They’ve begun floating sovereign bonds, a first time for them in beginning to monetizing national oil assets. They’re engaged in a real struggle for power inside the Saudi family, with young Prince Salman gaining public prominence over the older Prince bin Nayyef, still first in line for succession. Their military excursion against the Houti into Yemen isn’t going well. Younger Saudis are calling for a faster progression towards ‘Vision 2030’ and a relaxation of social restrictions inside the kingdom.

But, most importantly, the Saudi and OPEC strategy to fight for market share and allow the oil price to freely float downwards – a move they began in 2014 and they expected would quickly destroy their competition – has not worked out nearly as well as they had hoped. US shale producers have shown a remarkable resilience in weathering low oil and gas prices, and many of the largest producers here in the US that the Saudis had hoped would be out of business by now are still here – perhaps not thriving, but certainly alive.  

And that, more than anything else, has pushed the Saudis to totally abandon their free market strategy. They again want control the global price of oil and to move it higher in order to finance their own strategic and economic goals.  

Since Algiers, the Saudis have been crazily running around, and have a heavy schedule continuing to run around the globe until November 30th. They are frantically trying to get cooperation inside OPEC to reduce production to the newly targeted 32.5m barrels a day.  Instead of cooperation, they’ve been met by a huge new output of oil, not only from OPEC members, but from Russia as well. Iran and Iraq have been particularly unreceptive. Both have been ravaged in the last several years – Iraq through war and Iran through sanctions – and both want to have a free rein to get production back to much higher levels:

But here are a few reasons why I think this meeting will finally find all of the players on the same page and ready to deal:  

The Iranians and Iraqis might want to ramp production forward, but several sources I have seen indicate that all the ‘easy’ barrels have already been recaptured, and it will be near impossible at the moment for Iran to get to the 4m barrel target and Iraq to get to their 5m goal.  Neither of them, as a practical matter, will be much burdened with a freeze, or at least a small commitment to limiting growth for a year or more.  Second, and more importantly: I’ve learned to never discount what the Saudi oil minister says - ever. When he’s said that oil prices will rise, they have risen. When he’s promised an oil output increase, it has come. And now when he believes an OPEC deal will be done, I’ll be betting that it will be done.  

I believe the stubbornness from OPEC members and Russia are little more than posturing – Hardball stances to get as good an individual deal as they can later this month. All of them need global supply to re-balance soon, if not more than the Saudis themselves. And like the Saudis, they all have taken steps to increase their production near to their possible limits in anticipation of a freeze or a moderate cut. At this point, it does not burden any of them much, while benefiting all of them greatly.

Therefore, I think the November meeting in Vienna will deliver a substantial agreement where other meetings have failed. And oil will subsequently rally strongly.  

And we’ll need to re-position ourselves for that rally – which I will talk about in my next column.
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Inside Opportunities with Martin Tillier

Playing The Overreaction To The Election Results 

One of the most basic things that those new to the world of trading have to understand is that markets overreact to news. Traders are essentially herd animals, and once momentum builds in any direction it can be hard to reverse and as a result usually overshoots the logical mark. That is almost certainly the case now with solar stocks in the U.S. market.

Don’t get me wrong, I don’t think that the election of Trump is a good thing for alternative energy. The candidate Trump made it clear in his campaign that his administration would be focused on conventional, fossil fuel energy. Policies such as opening up Federal lands for drilling and expanding energy infrastructure will help oil companies, and the logical assumption is that there will be no extension of subsidies and tax credits designed to encourage a shift to renewable energy. That was why I wrote in my immediate take on post election investing that solar stocks would suffer. A week and a half, however, is a long time in investing.

In that week and a half the broad market has surprised many people by soaring following the election, but the response in the energy sector was, initially at least, exactly what one would expect. Big oil companies and energy infrastructure companies such as CVX and KMI soared in the few days immediately after the results, while the big solar names such as FSLR took a dive. Over the last few days, though, the rally in the oil sector has stalled, while the rout of solar stocks and in FSLR in particular, has continued.

With that stock now at multi year lows it is worth taking some time to step back and see if that exaggerated move is really justified or if this is a case of the market overshooting logic. 

The facts in this case point to the latter conclusion. First and foremost, FSLR is not some speculative stock that has value based on the hope that someday, with enough help from subsidies, they will make a profit. They have been making money for around five years now. Admittedly the tax breaks that are offered for solar power have helped, but they were extended through 2023 by a Republican Congress in 2015, and Trump has not specifically said that he will end them. It is fair to believe that there is a chance of that given his overall view of energy policy, but FSLR is being sold off as if it was a done deal, and the stock should at some point reflect the uncertainty.

Once again, I should make it clear that I am talking from a short term, trading perspective, not in terms of a long term investment. Even if the existing tax incentives are left in place the solar industry faces some tough times in many ways if we assume that Trump will govern based on his campaign promises. There could be some positives though. FSLR’s main competition is in China, and a less friendly trade environment with the Chinese could actually help. All in all it just looks like this move is overdone. At some point soon other considerations will cause a correction, and that could be extremely profitable for those that saw it coming.
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Executive Report with ISA Intel

OPEC Overproduction To Create Problems In Vienna

Friday, November 18th 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers. 

Let’s take a look.

1.    OPEC’s job getting harder

-    In Algiers at the end of September OPEC members pledged to cut their collective output to a range between 32.5 million barrels per day and 33.0 mb/d.
-    At the time, it appeared to be a heavy lift although it would be doable, requiring cuts between 200,000 and 700,000 barrels per day.
-    But since then, several members continued to boost output ahead of the Nov. 30 meeting. 
-    Production is now up to 33.6 mb/d, which means OPEC will need to cut between 600,000 and 1.1 mb/d to fall within that range. 
-    Members are now in the middle of a final diplomatic push to overcome hurdles, and Russia has signaled its tentative support. But convincing Iran and Iraq to cut, the two biggest obstacles to a deal, will prove difficult. 

2.    Saudi Arabia set to unveil oil reserves

-    Saudi Arabia is preparing to publish data on its oil reserves, a closely guarded state secret that it has not updated since the 1980s.
-    It is unlikely that Saudi Arabia’s oil reserves have stayed constant at 260 billion barrels for three decades, as the government insists. But the data has been kept under wraps and the world has been left to speculate. 
-    Saudi Arabia is planning a partial IPO of Saudi Aramco in 2018 in order to bring in about $100 billion. But in order to do so, it has to publish data for investors. 
-    That could at last provide the world with a look at Saudi Arabia’s oil reserves. 

3.    Oil demand set to grow

-    In its annual World Energy Outlook, the IEA threw cold water on a lot of recent projections regarding peak oil demand. The IEA does not see peak oil demand before 2040.
-    Renewables take a larger share in the electricity market, and EVs and efficiency edge out some oil in the transportation sector, but the changes are gradual. 
-    In particular, transportation will be a tough nut to crack. In its central scenario, the IEA expects EVs to displace just 1.3 mb/d of oil demand by 2040. But those declines in demand are offset by gains in demand from the petrochemical, aviation and freight transit sectors. 
-    A more aggressive climate-friendly scenario has EVs eating into 6 mb/d. But that is predicated on a lot of policy that is not guaranteed to be forthcoming. 
-    In its central scenario, the IEA sees total liquids demand rising by about 13.6 mb/d through 2040.

4.    Libya output rising

-    OPEC’s task to stabilize oil prices will be made a lot harder by rising output from within.
-    The cartel saw its collective output rise by about 236,000 barrels per day in October compared to a month earlier.
-    Libya is one reason for that. After suffering war and political instability, which has kept output at about 300,000 barrels per day for the last several years, the country is finally returning disrupted output to market. 
-    Several major oil export terminals are coming back online. Production is now up to 600,000 barrels per day. 
-    Libya is targeting 900,000 barrels per day by the end of the year. Libyan gains essentially offset the promised cuts from the yet-to-be-signed OPEC deal. From there, Libya is promising more, aiming for 1.1 mb/d next year. 

5.    Natural gas storage rises to record high 

-    Natural gas storage levels hit a record high last year as mild weather cut into demand, and drillers continued to add supply.
-    The glut pushed natural gas prices down below $2/MMBtu. 
-    But analysts thought that prices would rise towards the end of 2016 and into 2017 because natural gas supply is finally falling. 
-    However, in the first week of November, storage levels jumped to a record high 4,017 billion cubic feet.
-    Prices are not as low as they were last year, despite the record storage injection. The EIA expects gas demand to be 8 percent higher this winter, although the cold season has gotten off to a mild start. 

6.    U.S. exports record high LNG

-    The U.S. is flush with natural gas supplies, but one reason to be bullish on prices is that the U.S. is exporting a growing volume of gas abroad. 
-    November will mark the highest amount of gas exported on record, with 9 LNG tankers set to depart Cheniere Energy’s (NYSE: LNG) Sabine Pass export facility. 
-    So far, LNG shipments this year have set sail for a variety of destinations, including the Caribbean and Western Europe. 
-    The demand pull from LNG exports could soak up some of the excess supply in the U.S., although LNG makes up a small share of overall demand. 

7.    Decline rates cut into supply

-    Oil fields suffer from depletion over time as oil is produced and reservoir pressure declines. 
-    Estimates vary widely from field to field, but the IEA believes that on average, oilfields around the world decline by about 6.2 percent per year after they have passed their peak. 
-    Constant investment is required to prevent steeper decline rates. Without ongoing investment to boost reservoir pressure, the decline rate would be closer to 9 percent, the IEA says.  
-    The drop off in investment over the past two years will lead to higher decline rates. By 2020, depletion could cut into global supplies by about 450,000 barrels per day. 

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.

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Inside Intelligence with Southern Pulse

Global Energy Advisory - 18th November 2016

Politics, Geopolitics & Conflict

•   The U.S. seems to be close to exhausting its options in Syria and Iraq. While the battle for Mosul, IS’ stronghold in Iraq, goes on with Iraqi troops on the group and U.S. remote support, Washington is planning to take on Raqqa, the HQ of the terrorist group in Syria. The problem is that as the so-called moderate opposition forces in the war-torn country are showing themselves to be not all that moderate, the Kurdish-dominated Syrian Democratic Forces seem to be the only option to lead the attack on the ground. It’s fairly certain the U.S. won’t send in its own troops to liberate Raqqa from IS and besides the Kurdish forces, its allies in Syria have been revealed as uncomfortably radical. The problem with the SDF is geopolitical: the Kurds have been treated as a pain in the neck by Turkey for decades because of their push for independence. Allying with them more closely won’t do any favors for Turkish-U.S. relations. On the other hand, with what seems like a complete transformation of U.S. politics in the making after the November 8 elections, nothing can be taken for granted or certain.

•    Meanwhile, the battle for Mosul continues, with the prospects of an Iraqi success in driving IS out growing. However, according to observers, this will not result in peace returning to Iraq. Quite the contrary: the geopolitical divides in the country and the power play in the Middle East will only become more obvious with direct implications for the country’s oil industry. The Kurds are stronger in Iraq than they are in Syria, and are likely to push for more influence. The U.S. is taking a damage control approach, keeping away from direct intervention, and Saudi Arabia, Iran, Turkey, and Russia are – quietly for now – wrestling for more influence. Chances are that Iraq will remain a focal point for regional geopolitical tension in the near future.

•    OPEC has entered the final phase of its production cut negotiations. Here is a brief timeline of events so far.

September: Saudi Arabia initiates talks about a production freeze as prices stay around $50 a barrel. There is general agreement both inside and outside OPEC that such a move is necessary.

October: A Technical Committee in charge of hammering out the details of the agreement is set up, chaired by Algeria.

Venezuela turns into the most vocal defender of a freeze or a cut as it is perhaps the hardest hit by the low prices. Government officials talk with Gulf, Russian and Iranian counterparts, and even call on the U.S. to join the freeze talks.

Russia, having declared general support for a freeze, refrains from any more specific remarks, repeatedly noting only that if it is to join the drive, OPEC members should be unanimous about it.

Iran, Nigeria, and Libya are exempted from the freeze because of market share loss for reasons other than the oil price crash.

Iraq insists it is exempted too as it is fighting IS and needs the oil revenues. Saudi Arabia refuses.

Production freeze talks turn into production cut talks as it becomes clear the Exempted Club is fast building its output, and so are other OPEC members, plus Russia, Brazil, and Kazakhstan.

November: Saudi Arabia threatens to turn its own taps up if its co-members, namely Iraq, don’t play along with the cut.

Venezuela’s Nicolas Maduro says, after a meeting with OPEC gensec Mohammed Barkindo, that the cartel is ready and willing to use force to make members comply with the agreement, although the means by which this force would be exerted remain unclear.

Russia says it’s optimistic about a final agreement, and so are many analysts. Some argue that if the agreement falls through, OPEC will lose all relevance on international markets. Opexit is also an option for some members.

Iran, Iraq oil ministers say they will not attend talks on the cut between Saudi Arabia and Russia in Qatar.

Tenders, Auctions & Contracts

•    Pakistan has invited Chinese energy companies to invest in its oil and gas industry as part of the bilateral China-Pakistan Economic Corridor, which is focused on infrastructure projects in Pakistan. LNG is a separate area of interest, according to Pakistan’s Petroleum and Natural Resources Minister Shahid Khaqan Abbasi.

•    Israel is accepting bids for the development of offshore oil and gas deposits in its Mediterranean shelf. A total 24 blocks have been tendered, all in the country’s exclusive economic zone. The deadline for bid submission is April 2017 and the winners will be made public three months later.

•    Mexico is tendering 14 onshore oil exploration licenses. The licenses are for 25 fields in the Burgs basin, the Tampico-Misantla area, the Southeast basins, and the state of Veracruz. Winners will be announced in July 2017.

•    The UK and Norway will see a higher rate of oil and gas field going out of commission over the next decade, according to Oil and Gas UK. More than 100 platforms are seen to be either completely or partially removed from the two countries’ shelves until 2025 and more than 1,800 wells will be plugged and abandoned.

Discovery & Development

•    The U.S. Geological Survey has announced that the Wolfcamp shale in the Permian contains technically recoverable reserves of 20 billion barrels of crude, which makes it the largest onshore unconventional oil discovery in history. The size of the reserves is three times that of North Dakota’s Bakken formation.

•    Libya’s Es Sider terminal, the largest of the four export terminals in the Oil Crescent could start shipping cargoes starting next week. The port is currently undergoing some maintenance work. Es Sider has been closed for two years on force majeure grounds.

•    Turkish Petroleum plans to spend $1.7 billion on exploration next year, both at home and abroad. Of this, the state-owned energy company will allocate $1.45 billion on overseas exploration for oil and gas. Currently, Turkish Petroleum has presence in Russia, Iraq, Azerbaijan, Libya, and Afghanistan.

•    Ghana will soon get its third floating production, storage and offloading vessel (FPSO), to be located in the Sankofa OCTP block of fields, operated by Italian Eni. Gas from the block will be used for power generation. Oil is planned to start flowing at a daily rate of 80,000 barrels in 2017.

•    Russia’ Yamal LNG project is at 68 percent of completion, with first production set to start in late 2017, when the completion rate reaches 85 percent. The $27-billion project is operated by Novatek and, according to CEP Leonid Mikhelson, will stay within budget.  

•    Ithaca Energy expects first commercial oil from its project in the Greater Stella Area in the North Sea to start flowing before the end of November. The UK company said production costs at the field at $23. Output is seen at 20,000-25,000 barrels of oil equivalent.

•    Africa Oil, Tullow Oil, and Maersk Oil plan to drill up to eight exploration and appraisal wells in Kenya, beginning next month. The companies have partnered on oil exploration and production in Kenya’s newly discovered reserves. The wells should increase proven reserves and improve the chances of development projects and pipeline construction getting the necessary funding.

•    Shell, French Total, and South Korea’s Kogas are discussing a gas pipeline from Iran to Oman with officials from the two countries. The construction of the pipeline, to supply some 1 billion cubic feet of gas from Iran to Oman, has been estimated to cost $1.5 billion. The initial agreement on the project was signed three years ago.

Regulatory Updates

•    Nigeria will unify its oil regulation agencies into one body in a bid to improve efficiency. According to the draft National Oil Policy, the different bodies currently responsible for various aspects of oil industry regulation are prone to dysfunction. The new Petroleum Regulatory Commission will take on powers from the Nigerian National Petroleum Corporation, the Department of Petroleum Resources, and the Petroleum Products Pricing Agency, as well as others.

•    Russia’s Economy Minister Alexei Ulyukayev has been charged with bribery and detained by the Investigative Committee. According to the authority, Ulyukayev has received $5 million for the Economy Ministry’s green-light of Rosneft’s acquisition of smaller rival Bashneft. The deal itself, however, is legal, the Committee said.

•    Fitch has revised to Stable from Negative its outlook for the Russian oil and gas industry for 2017. The ratings agency said that tax rates in 2017 for Russian oil and gas firms would remain largely the same as this year’s, although mover the medium term they could be increased.

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Inside Markets with James Hyerczyk

Oil At A Crossroads Ahead Of OPEC’s Vienna Meeting

Crude oil futures traders experienced high intraday volatility and a two-sided trade most of the week as expectations of an OPEC deal to limit production helped underpin the market and oversupply concerns and a strong U.S. Dollar limited the rallies. 

To recap the week, January crude oil futures closed lower on November 14 after falling to their lowest levels in three months. Prices were pushed lower early in the week due to oversupply concerns. Additionally, data from the InterContinental Exchange showed investors cut their long positions by the largest weekly amount on record. This information alone made the market ripe for a turnaround. 

Trading conditions changed quickly with oil prices jumping nearly 6 percent on November 15 on expectations that OPEC will agree later this month to cut production to reduce the supply glut. 

Triggering the massive short-covering rally was a report from Reuters that said Saudi Energy Minister Khalid al-Falih was expected to travel to the Qatari capital, Doha, this week for meetings with oil-producing countries on the sidelines of an energy forum. 

This meant that OPEC could start its official meeting on November 30 in Vienna with a structured deal to limit output in place, increasing the chances the meeting will end with a signed, sealed and delivered agreement. 

More volatility and two-sided trading hit the oil market on November 16 as supporters of the OPEC deal, which represents the “future”, clashed with traders following the traditional supply and demand fundamentals, or those traders reacting to the “now”. 

Oil prices firmed early after Russia said it was ready to support OPEC’s decision on an oil output freeze. The idea was supported by comments from Russian Energy Minister Alexander Novak who said he sees big chances that the oil producers’ group can agree on the terms of the freeze by November 30. 

However, the rally failed and the market plunged after the U.S. Energy Information Administration said crude inventories rose for a third straight week and increased by a larger-than-expected 5.3 million barrels last week, exceeding analyst forecasts calling for a 1.5 million-barrel build. 

Volatility was still the theme on November 17, when an attempt to breakout to the upside on rising expectations of an OPEC deal to limit production was thwarted by oversupply concerns and huge surge in the U.S. Dollar. 

Technical Analysis

January Crude Oil futures are in a position to finish the week higher despite this week’s series of volatile sessions. 

The main trend is down, but momentum may be shifting to the upside. Not only has the market crossed to the strong side of a major retracement zone, but it is also in a position to post a potentially bullish closing price reversal bottom. 

The main range is $34.55 to $53.72. Its retracement zone is $44.14 to $41.87. This zone provided support on November 14 when the market reached its low for the week at $42.95 and rallied back to $47.12. 

If the futures contract closes over $44.15 on Friday then this will form a closing price reversal bottom. This chart pattern doesn’t mean the trend is changing to up, but that the buying is greater than the selling at current price levels. This could trigger the start of a 2 to 3 week rally equal to at least 50% to 61.8% of the current break. 

The new short-term range is $52.74 to $42.95. If there is a confirmation of the reversal chart pattern then its retracement zone at $47.85 to $49.00 will become the primary upside target. 


Based on this week’s price action, the direction of the January Crude Oil market next week will be determined by trader reaction to a downtrending angle at $46.74 and an uptrending angle at $45.55. 

Taking out $46.74 with conviction will signal the presence of buyers with the next major target coming in at $47.85. This followed by a Fibonacci level at $49.00 and a downtrending angle at $49.74. 

If $45.55 fails as support then look for a possible break into the major 50% level at $44.14. Taking out this level could trigger a further break into $42.95 and a Fibonacci level at $41.87. 

Looking at the bigger picture, this week’s sustained move over the major 50% level at $44.14 is helping to give crude oil an upside bias. This means that investors are betting that OPEC will reach a deal to curb production. 

If investors weren’t sure then the market would be trading at $44.14. 

If investors feel that a deal is not likely then crude oil will break below $44.14. 

In conclusion, trader reaction to $45.55 and $46.74 will determine the short-term direction of the market. However, longer-term investors should watch the price action and read the order flow at $44.14.
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