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Oil Producer Report

Oil & Money – Takeaways & hedging implications

By October 21, 2017No Comments

It was great to attend the annual Oil & Money conference in London this past week.

Interestingly, natural gas was allocated a full day, highlighting its importance in Big Oil’s energy transition. Geopolitical risks, US shale and the Saudi/Russia alliance in steadying OPEC and establishing a floor in oil prices were some of the key focus points.

Our trading/ hedging takeaways: Saudi/Russia put makes for derivative dislocation opportunity, completion and startup of a number of natural gas projects suggest hedging strategies need to be adapted and geopolitical risk premium to return with vengeance and not priced in.

These are some of the key themes we will be incorporating into our risk-management & hedging discussions in the coming weeks.

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– OIL & MONEY –

We spent the better part of this week with our friends and colleagues at the annual Oil & Money conference. It is regarded as one of the premier industry gatherings and includes some of the most influential and key players of the oil and gas industry. These are a couple of our key takeaways:

NATURAL GAS KEY FOR OIL INDUSTRY’S ENERGY TRANSITION STRATEGY:

For the first time in the 38-year history of the Oil & Money Conference, natural gas was allocated a stand-alone day. That in itself speaks volumes of how important the role of natural gas is expected to play in the oil industry’s energy transition strategy. The picture was by no means viewed through rose tinted glasses, as a number of challenges remain.

Primarily these include: lowering costs to ensure better competition against coal and renewables, demand penetration outside of the power industry, availability of more spot cargoes in order to attract more opportunistic traders and finally a more liquid paper market where traders, producers and consumers can risk manage positions and exposures.

The derivatives market in Asian LNG has started to gain momentum as Japanese and Korean buyers have signed short term contracts linked to LNG price indices. Despite the increase in liquidity, the LNG derivatives market is still a small portion of the overall physical market.

In other words, it has a long way to go compared to the oil market, where paper volumes are multiples those of the physical market. We expect liquidity in the LNG paper market to increase over the next 3-years due to the substantial rise in the number of new projects ready to hit the market with new supplies.

Concern remains over the sustainability of this liquidity given the long lead time for new LNG projects and the lack of newly approved FIDs due to low prices and cost challenges.

SAUDI/RUSSIA ALLIANCE BUILDS CONSENSUS FOR OPEC/NOPEC DEAL EXTENSION TO THE END OF 2018:

HE Mohammad Sanusi Barkindo, OPEC Secretary General, in his speech, highlighted the ‘Declaration of Cooperation’ between OPEC and Non-OPEC producers, which has been unparalleled in the history of the oil market both in size and duration.

The agreement has been key to stabilizing and bringing the oil market into balance. Mr. Barkindo also highlighted that Russia’s readiness to back an extension of the supply cuts has prompted oil ministers to seek widespread support for the extension of the production cuts to the end of 2018.

Finally, the speech highlighted OPEC’s return to the role of oil price stabilizer, as opposed to late 2014 maximizing volumes. Consensus from the conference was that a $50/bbl Brent put was firmly established.

AVERAGE OF LATEST S/D DATA FROM IEA, EIA, OPEC & CTC

AVERAGE OF LATEST S/D DATA FROM IEA, EIA, OPEC & CTC

US SHALE BAND BETWEEN $50-60/BBL WTI POTENTIAL LIMIT TO OIL PRICE UPSIDE:

Outside of the over-extended long positioning of hedge funds (which was not a focus of the conference), US shale was highlighted as potentially the biggest overhang and cause for concern in the oil market.

Even the most bullish saw shale as a potential near-term limit to the upper band of oil prices.
Pioneer, President & CEO, Tim Dove suggested that the $50-60/bbl shale band offered significant growth opportunities within the Permian basin for many years to come.

Current production in the Permian is around 2.6m b/d, would end 2017 at 2.7m b/d and increase to 3.3m b/d by the end of 2018.

The verdict is still out on US shale production but the build-up in drilling uncompleted wells (DUCs) to record highs in the Permian over the past 6-months suggests that growth comes with a higher cost due to a backlog in equipment and a labour shortage.

We would highlight comments from Schlumberger’s recent 3Q 2018 conference call ”…investment appetite in North America land now seems to be moderating, driven by a growing focus from E&P companies on financial return and the need to operate within cash flow rather than the pursuit of production growth.”

Third quarter results from the US shale industry remain a key focus area and important to near-term sentiment, especially as growth estimates have been ratcheted down.

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Commodities Trading Corporation is a London-based private advisory company specialized in commodity risk-management and hedging. We service a growing need in the natural resources sector for unbiased and strong expertise and provide our services to an array of corporate clients and financial institutions. We are experts in derivatives and monetizing volatility and develop corporate strategies for hedging energy portfolios, using bespoke derivatives solutions for price risk mitigation.

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