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The oil market is gradually returning to balance as the Organisation of Petroleum Exporting Countries (Opec) reins in output and the US shale boom slows, according to executives gathered at Davos.
Yet the risk of stalling growth in China continues to cloud the outlook.
“The supply and demand looks balanced for 2019,” BP chief executive Bob Dudley said in an interview in the Swiss resort.
“Opec has started to cut production in the first quarter, but they cannot balance overnight,” he said. Crude has got off to its best start to a year since 2001 on hopes that Opec and its allies will cut enough output to eliminate a glut.
However, forecasts for slower economic growth, particularly in China, are threatening that rally, with demand concerns overshadowing tighter supply.
“There’s still so much uncertainty about what’s going to happen with the world economy,” Occidental Petroleum CEO Vicki Hollub said at Davos. “The volatility is going to be worse over the next couple of months before Brent crude settles in a $60 to $70-a-barrel range,” she said.
Benchmark Brent has rallied 15% this year as the Opec cuts kick in, but remains almost 30% below the four-year peak reached in October. Crude’s volatility has unnerved the investment community, which is “much more cautious now” than it was previously, according to Hollub.
“Not as much money is going to be pouring into the Permian basin”, she said, adding that “there’s going to be more discipline around how the Permian reacts to pricing”. That’s a sentiment shared by Hess CEO John Hess, who said that investors want shale producers to “grow at a more moderate rate so that you’re free-cash-flow-generative in a low-price environment”.
Burgeoning shale output has pushed US oil production to a record 11.9 million barrels a day. Yet the number of rigs drilling for crude has recently dropped, and the Energy Information Administration predicts shale growth is set to slow. That outlook is one of the main drivers of the oil market, according to IHS Markit vice chairman Daniel Yergin, who said the other is China. They are “the two biggest kind of factors now that are interacting and shaping the price,” Yergin said in Davos.
The IMF has cut its world growth forecast while China said its economy last year expanded at the weakest annual rate since 1990.
Faltering manufacturing and slumping exports have stirred doubts over the country’s expansion, while a trade battle with the US continues to weigh on markets.
- Bloomberg
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The price of crude oil tumbled on world markets on a report that US production surged and fuel inventories climbed, but signs that Opec’s plan to drain a global glut is taking hold eased the losses.
Prices fell as much as 1.6% in New York after the Energy Information Administration (EIA) said American oil drillers pumped 11.9 million barrels a day last week and gasoline stockpiles soared.
Yet the same report showed Saudi Arabia slashing crude shipments to American refiners and prices recouped much of the loss later in the session. Fluctuating equity markets added to the volatility.
“Gasoline continues to build at a staggering rate and that’s weighing on prices,” Nick Holmes, a director at Kansas money manager Tortoise, said in an interview.
Whether Opec can offset the US surge “is absolutely critical to where we go in the next few weeks”, he said.
West Texas Intermediate for February delivery was down 32 cents to $51.79 a barrel in New York, after earlier slipping to $51.26 following the EIA’s weekly report.
The global benchmark, Brent for March settlement advanced 2 cents to $60.66 a barrel on the London-based ICE Futures Europe exchange, after falling 1%.
The price of crude in the US has stayed above $50 a barrel for a week, holding on to a gain earlier this year.
The recent momentum has been spurred by improving trade relations between the US and China, as well as the start of 1.2 million barrels a day of pledged output curbs by Saudi Arabia, Russia, and other major producers.
Still, prices remain more than 30% below their early October high point.
Saudi Arabia’s energy minister said he was sure the plan will return global supplies to “normal averages” and “increase confidence” in the market.
Bloomberg
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Tullow Oil has said its total net production levels could break the 100,000 barrels of oil per day (bopd) mark this year.
However, Tullow's shares took an initial knock as 2018 debt reduction and cash flow levels missed expectations.
In a trading update ahead of the publication of full-year results next month, the Irish-founded exploration company forecast its 2019 oil production to be between 93,000 and 101,000 bopd.
That would be up from 90,000 bopd last year.
Significant production increases from Tullow's big two Ghana fields - Jubilee and TEN - are expected this year and the company plans to drill seven new wells in the country.
Tullow also said 2018 revenue will amount to approximately $1.8bn (€1.6bn), almost 6% up on the previous year.
However, the delayed conclusion of the farm-down of its Ugandan assets meant Tullow missed its 2018 free cash flow targets.
The company said it closed 2018 with net debt of $3.1bn - down from $3.5bn - and free cash flow of around $410m.
It had expected the latter figure to be closer to $700m, but the Ugandan deal which will boost this is now not set for completion until later this quarter.
Tullow's shares were down by around 2% before paring losses and closing just 0.3% down. The stock has fallen by over 13% in the past 12 months.
However, the lower-than-expected cash flow figure hasn't changed the company's mind on dividends.
In November, the company confirmed its intention to resume paying dividends - after a five-year break - this year.
Payment will be no less than a combined $100m.
"Despite a volatile oil price, Tullow’s improved balance sheet, low cost production and strong cash flow generation, even at lower oil prices, will allow us to both invest for growth and pay a sustainable dividend," said Tullow's chief executive Paul McDade.
Mr McDade said Tullow remains "well-placed to deliver on its growth ambitions".
"In 2019, we will increase oil production in west Africa, target final investment decisions in east Africa and drill the first wells in an exciting exploration campaign in Guyana," he said.
Tullow also said it will seek further exploration acreage this year.
"The update underlines the fact that better oil prices and a growing production profile builds significant cash flows," said Davy's Job Langbroek.
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Oil prices extended gains, supported by hopes that talks in Beijing between US and Chinese officials might defuse a trade dispute between the world’s two biggest economies, while Opec-led supply cuts also tightened markets.
The price of Brent crude — the global benchmark — rose by over $1, or 1.75%, to $58.35 a barrel. US benchmark, the West Texas Intermediate crude oil, climbed 95 cents, or almost 2%, to $49.47 a barrel.
US Commerce Secretary Wilbur Ross said earlier this week there was a “very good chance” of reaching a settlement, while China’s foreign ministry said Beijing had the “good faith” to resolve trade friction with the United States.
Some analysts warned, however, that the relationship between the superpowers remained shaky and tensions could flare anew.
“Surely there will be more twists and turns in the saga and increasing US tariffs on Chinese goods after March from 10% to 25% cannot be excluded,” Tamas Varga of PVM Oil Associates said.
“For now, however, optimism prevails,” the analyst said.
There is also concern that a worldwide economic slowdown will dent fuel consumption, leading the hedge fund industry to cut significantly its bullish positions in crude futures.
S&P Global Ratings said it had lowered its average oil price forecasts for 2019 by $10 per barrel to $55 and $50 a barrel for Brent and WTI, respectively.
“Our lower oil price assumptions reflect slowing demand and rising supply globally,” said S&P Global Ratings analyst Danny Huang.
Crude prices so far in 2019 have been buoyed by supply cuts from Opec, including top exporter Saudi Arabia, as well as non-member Russia.
Saudi-based Arab Petroleum Investments, a firm specialising in funding petroleum projects, estimated in a report that oil prices are likely to trade at $60 to $70 a barrel by mid-2019.
But looming over the Opec-led cuts is a surge in US oil supply — now the world’s top producer — driven by a steep rise in onshore shale drilling. As a result, US crude oil production rose by two million barrels per day (bpd) last year to a world record 11.7 million of barrels a day. With drilling activity still high, most analysts expect US oil production to rise further this year.
Consultancy JBC Energy said it was likely that US crude production was “significantly above 12 million bpd” by early January.
Reuters
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