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Without Deeper Output Cut, Crude Projected to Fall Below $40/bbl in Q1 2018

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  • Without Deeper Output Cut, Crude Projected to Fall Below $40/bbl in Q1 2018

Crude Oil, Brent Crude in particular, is projected to fall to $40 per barrel or below in the first quarter of 2018, except the Organisation for Petroleum Exporting Countries (OPEC) implements a deeper cut in oil production. This is according to the prediction of an oil analyst at JBC Energy GmBH as reported by Bloomberg.

JBC Energy GmBH provides consulting, research, and training services for businesses, governments, and organisations operating in the energy sector in Austria and internationally. The company offers analytical and unbiased information, commentary, and advice on current and future developments in oil, gas, and alternative fuel markets; market analysis in a range of regular reports.

This is coming on the heels of rise in the cartel’s output by 340,000 barrels per day in June to 32.6 mbd, which has been described as the highest level in 2017, after Saudi flows increased and Libya and Nigeria, spared from supply cuts, pumped at stronger rates. According to Oil Market Report (OMR) for July, released by International Energy Agency (IEA) higher output from members bound by the production pact knocked compliance to 78 per cent in June, the lowest rate during the first six months of the agreement.

According to the analyst, Richard Gorry, who is the Managing Director at JBC Energy Asia, with the momentum of supply flows globally and weak demands months later, additional cut in output may be required to consolidate the earlier ones that had been implemented to avoid the price of Brent crude dropping to $40/bbl or below in the first quarter of 2018. OPEC was reported earlier by Bloomberg to have quietly opened the tap. According to the report, OPEC’s resolve to stick to promised supply cuts stumbled in June, the sixth month in its long-haul gambit to erode a world oil glut and boost prices. Total compliance within OPEC slipped below 100 percent, back to levels seen in February, dragged down by rising production in Angola, Iraq and Saudi Arabia.

The 21 nations participating in supply cuts are collectively trying to reduce output by almost 1.8 mbd, in most cases using October levels as the starting point. Iran was given a target that allowed a modest increase while two other OPEC nations, Libya and Nigeria, are exempt and have steadily ramped up production this year. However, just few days ago, Nigeria agreed to cap its oil production at 1.8m barrels per day after an extensive meeting of OPEC and Non-OPEC members. By so doing, Nigeria cutting off 400,000 barrels per day from its budget benchmark of 2.2 mbd.

In his analysis, Gorry estimated that,the benchmark for more than half the world’s oil might end 2017 between $45 and $47/bbl, after which the market might turn “very tricky,” He posited that, while prices were being supported by recent U.S. inventory draws amid the summer driving season when fuel demand typically peaks, that trend will reverse from early-September as consumption weakens.

Brent crude extended gains on Wednesday, trading up 0.4 per cent at $50.39/bbl at 6:32 a.m. in New York, riding a rally as industry data showed U.S. stockpiles plunged last week, Bloomberg reported.

“Brent could go to $40 and even below,” Bloomberg quoted Gorry to have said in an interview in Singapore recently. “That’s not necessarily what we’re forecasting, but we don’t know where exactly the market is going to trade and how bearish it’s going to be.”

JBC is flagging the risk of a drop in prices as the OPEC and some partner nations grapple with the implementation of output curbs aimed at easing a global glut. At a meeting earlier this week in St. Petersburg, Saudi Arabia promised deep cuts to crude exports next month, emphasising its commitment to eliminating the oversupply even as fellow OPEC members Libya and Nigeria were told they are free to keep increasing production.

“If OPEC stays the same and we have the same output restrictions even in the first quarter, we’re looking at a lot of surplus in the market,” Gorry was quoted to have said. “To really tighten the market, OPEC will have to cut more, and I don’t know if they want to do that.”

Oil slumped into a bear market last month, after giving up most of the gains it made following OPEC’s agreement late last year to begin cuts from January. Beyond the renewed focus on exports, the St. Petersburg meeting made no changes to the supply deal to correct that underwhelming performance.

Still, crude has climbed about 10 per cent over the past month as U.S. inventories have shown signs of declining. Demand may slow after September, while oil output from producers in Brazil, Kazakhstan, West Africa and central Europe is set to rise in the first half of next year, Gorry said.

U.S. output is continuing to ramp up, with the nation pumping 9.4 million barrels daily, close to the record 9.6 million barrels’ levels seen in 2015. American production may again rise to 9.6 mbpd by the end of 2017, according to Gorry. Asia-Pacific is the only region that will see output declines as China shuts wells, he said.

According to the July OMR, global oil supply rose by 720,000 bd in June to 97.46 mbd as producers opened the taps. Output stood 1.2 mbd above a year ago with non-OPEC firmly back in growth mode. The report noted that the substantial recovery in Libya and Nigeria diluted OPEC’s actual supply cut of 920,000 bd in June to just 470,000 bd. “If Libya can sustain still higher flows during July and Nigeria posts even a slight improvement, OPEC’s cut could be eroded to less than 300,000bd.”

The OMR also pointed that, “The call on OPEC crude is forecast to rise steadily through 2017 and reach 33.6 mbd during the final quarter of this year, up 1 mbd on June output. Provided there is strong compliance with OPEC’s cuts, that would imply a hefty stock draw, even if Libya and Nigeria recover further.

For the Non-OPEC, their supply rose by 380,000 bd in June on seasonally higher biofuels output and as Canadian oil production recovered after outages, the OMR revealed. “At 58 mbd, non-OPEC supply was 1.3 mbd above a year earlier, with gains stemming primarily from the US and Canada, but with significant contributions also from Brazil and Kazakhstan.”

According to the report, “Compliance with agreed non-OPEC output curbs improved to 82 per cent in June, overtaking compliance from OPEC for the first time since the cut took effect in January. Over the first six months of output cuts, compliance for the group of ten, now excluding Equatorial Guinea who joined OPEC from 1 June, has averaged 61 per cent.”

Nevertheless, non-OPEC supply is seen expanding by 0.7 mbd in 2017 and 1.4 mbd next year, largely unchanged from last month’s report. “Growth will primarily come from the US, which is forecast to expand by 610,000 bd and 1. 045 mbd over 2017 and 2018, respectively. Other notable gains come from Brazil, Canada and Kazakhstan, while Mexico and China are expected to see the largest declines,” OMR noted.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Crude Oil

Sirius Petroleum and Baker Hughes Collaborate on OML 65 Drilling in Nigeria

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Sirius Petroleum, the Africa-focused oil and gas production and development company, has signed a memorandum of understanding with Baker Hughes. The MoU names Baker Hughes as the approved service provider for Phase 1 of the Approved Work Program (AWP) of the OML 65 permit, a large onshore block in the western Niger Delta, Nigeria. Baker Hughes will provide a range of drilling and related services at a mutually agreed upon pricing structure to deliver the initial nine-well program.

Sirius has signed various legal agreements with COPDC, a Nigerian joint venture, to implement this program. COPDC has signed a Financial and Technical Services Agreement (FTSA) with the Nigerian Petroleum Development Company (NPDC) for the development and production of petroleum reserves and resources on OML 65. The FTSA includes an AWP which provides for development in three phases of the block. and Sirius has entered into an agreement with the joint venture to provide financing and technical services for the execution of the PTA.

The joint venture will initially focus on the redevelopment of the Abura field, involving the drilling and completion of up to nine development wells, intended to produce the remaining 2P reserves of 16.2 Mbbl, as certified by Gaffney Cline and Associates (GCA) in a CPR dated June 2021.

Commenting, Toks Azeez, Sales & Commercial Executive of Baker Hughes, said: “We are extremely happy to have been selected for this project with Sirius and their JV partners. This project represents an important step towards providing our world-class integrated well-service solutions in one of the most prolific fields in the Niger Delta. Baker Hughes’ technological efficiency and execution excellence will help Sirius improve its profitability and competitiveness in the energy market.”

Bobo Kuti, CEO of Sirius, commented: “We are delighted to have secured the services of one of the world’s leading energy technology companies to work with our joint venture team to deliver the approved work program on the block. OML 65. We look forward to building a long and mutually beneficial partnership with Baker Hughes.”

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Egbin Decries N388B NBET Debt, Idle Capacity

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Egbin Power Plc, the biggest power station in Nigeria, has said it is owed N388bn by the Nigerian Bulk Electricity Trading Plc for electricity generated and fed into the national grid.

The company disclosed this on Tuesday during an oversight visit by the Senate Committee on Privatisation, led by its Chairman, Senator Theodore Orji, to the power station, located in Ikorodu, Lagos.

The government-owned NBET buys electricity in bulk from generation companies through Power Purchase Agreements and sells it to the distribution companies, which then supply it to the consumers.

The Group Managing Director, Sahara Power Group, Mr. Kola Adesina, told the lawmakers that the total amount owed to Egbin by NBET included money for actual energy wheeled out, interest for late payments and available capacity payments.

Egbin is one of the operating entities of Sahara Power Group, which is an affiliate of Sahara Group. The plant has an installed capacity of 1,320MW consisting of six turbines of 220 megawatts each.

The company said from 2020 till date, the plant had been unable to utilize 175MW of its available capacity due to gas and transmission constraints.

Adesina said, “At the time when we took over this asset, we were generating averagely 400MW of electricity; today, we are averaging about 800MW. At a point in time, we went as high as 1,100MW. Invariably, this is an asset of strategic importance to Nigeria.

“The plant needs to be nurtured and maintained. If you don’t give this plant gas, there won’t be electricity. Gas is not within our control.

“Our availability is limited to the regularity of gas that we receive. The more irregular the gas supply, the less likely there will be electricity.”

He noted that if the power generated at the station was not evacuated by the Transmission Company of Nigeria, it would be useless.

Adesina said, “Unfortunately, as of today, technology has not allowed the power of this size to be stored; so, we can’t keep it anywhere.

“So, invariably, we will have to switch off the plant, and when we switch off the plant, we have to pay our workers irrespective of whether there is gas or transmission.

“Sadly, the plant is aging. So, this plant requires more nurturing and maintenance for it to remain readily available for Nigerians.

“Now, where you have exchange rate move from N157/$1 during acquisition in 2013 to N502-N505/$1 in 2021, and the revenue profile is not in any way commensurate to that significant change, then we have a very serious problem.”

He said at the meeting of the Association of Power Generation Companies on Monday, members raised concern about the debts owed to them.

He added, “All the owners were there, and the concern that was expressed was that this money that is being owed, when are we going to get paid?

“The longer it takes us to be paid, the more detrimental to the health and wellbeing our machines and more importantly, to our staff.”

Adesina lamented that the country’s power generation had been hovering around 4,000MW in recent years.

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Oil Rises on U.S. Fuel Drawdowns Despite Surging Coronavirus Cases

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Oil prices climbed on Wednesday after industry data showed U.S. crude and product inventories fell more sharply than expected last week, reinforcing expectations that demand will outstrip supply growth even amid a surge in Covid-19 cases.

U.S. West Texas Intermediate (WTI) crude futures rose 48 cents, or 0.7%, to $72.13 a barrel, reversing Tuesday’s 0.4% decline.

Brent crude futures rose 34 cents, or 0.5%, to $74.82 a barrel, after shedding 2 cents on Tuesday in the first decline in six days.

Data from the American Petroleum Institute industry group showed U.S. crude stocks fell by 4.7 million barrels for the week ended July 23, gasoline inventories dropped by 6.2 million barrels and distillate stocks were down 1.9 million barrels, according to two market sources, who spoke on condition of anonymity.

That compared with analysts’ expectations for a 2.9 million fall in crude stocks, following a surprise rise in crude inventories the previous week in what was the first increase since May.

Traders are awaiting data from the U.S. Energy Information Administration (EIA) on Wednesday to confirm the drop in stocks.

“Most energy traders were unfazed by last week’s build, so expectations should be high for the EIA crude oil inventory data to confirm inventories resumed their declining trend,” OANDA analyst Edward Moya said in a research note.

On gasoline stocks, analysts had expected a 900,000 barrel decline drop in the week to July 23.

“The U.S. is still in peak driving season and everyone is trying to make the most of this summer,” Moya said.

Fuel demand expectations are undented by soaring cases of the highly infectious delta variant of the coronavirus in the United States, where the seven-day average for new cases has risen to 57,126. That is about a quarter of the pandemic peak.

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