John Kemp Tweets On Crude Oil Supply - Demand Mismatch -- June 27, 2017

John Kemp via Twitter, three tweets:

1) Pioneer Natural Resources sees Saudi Arabia cutting oil production to lift prices -- but [Pioneer NatRes ] won't cut its own ... 2) oil industry's history and problem in a nutshell: someone must cut but not me ... 3) oil market doesn't care who cuts production but prices will continue to drop until someone does cut and supply growth is brought back into line with demand.

John fails to mention:

• US shale oil is a different kind of oil than Mideast oil 
• US shale oil is a different kind of oil than Venezuelan oil and western Canadian sands oil
• US refineries are optimized for Venezuelan, Mideast, and Canadian sands oil

Isn't this what free market capitalism all about: prices will continue to drop as long as supply outpaces demand? Would one prefer the alternative, a cartel?

Oil industry's history and problem in a nutshell: someone must cut but not me. Really? I am not aware of many times in history when there was a glut of oil coming to the market.

A couple other points: why would Pioneer Natural Resources cut production if the company is making money or meeting contractual requirements? The current price of oil - supply - demand dilemma may be an existential problem for some/many/all US oil companies, but the current price of oil - supply - demand is not an existential problem for the United States. In fact, in many ways, cheap oil is great for much of the US.

Saudi Arabia has a different kind of problem. For Saudi Arabia, the price of oil translates to an existential problem for the kingdom. Not so long ago the Kingdom based its budget on $100 oil. The kingdom was able to accept $80 oil but $60 oil is of great concern. Beyond the pale: $40 oil. Saudi cannot survive at $40 oil; it appears many US oil companies will do just fine on $40 oil. Not great, but fine.

Idle chatter.

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Meanwhile, Back To The Real World

From Bloomberg via Rigzone: Canada M&A hits decade-high as foreign owners flee oil sands (Mr Kemp may have not gotten the memo (see his tweets above). From the linked article:

Mergers and acquisitions in Canada are set for the strongest start in a decade as foreigners sell their oil sands investments.

There have been about $132 billion of transactions recorded this year, the highest since $156.5 billion in the first half of 2007.

Local companies snapped up these energy assets, boosting domestic M&A to a record. ConocoPhillips and Royal Dutch Shell Plc are leading the exodus amid a bear market for crude.

However, Canadian producers are responding by pumping money into oil deposits in the remote boreal forests, which trail only Saudi Arabia and Venezuela in proved reserves but are more expensive to extract.

Much, much more at the link.

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Octane, RFS, CAFE And All That Jazz

Link here.

US gasoline markets are robust as the summer driving season continues, but several forces could lead to an octane shortage, speakers warned during a June 26 breakout session at the US Energy Information Administration’s 2017 Annual Conference.

Automakers could rely on engine designs with higher compression ratios to comply with more-stringent fuel economy standards, speakers said. In turn, this would require gasoline with higher octane ratings. “Ironically, we’re not going to be using more fuel in the US in the next 5 years, but we’ll need more octane, at least until more cars run on electricity,” said Tom Kloza, global head of energy analysis at Oil Price Information Service, a division of IHS.

Kloza characterized current US gasoline markets as sloppy, with product exports coming to many refiners’ rescue. “But nearly all the growth in this country’s oil production is light crude which has a lot of condensate with naphtha that requires the addition of expensive octane enhances,” Kloza said. “If super turbocharged engines represent 25% of the US fleet in 2025, there will be some big changes coming.”

Both the Corporate Average Fuel Economy (CAFE) and the Renewable Fuel Standards (RFS) will influence gasoline quality, said Blake Eskew, vice-president, global consulting, at IHS Markit. They also could enable more-efficient engines and provide an incentive for higher ethanol blends.

Much more at the link.