It looks like it is game on for a historic OPEC/non-Opec meeting giving the crude oil market a reason to bounce back after yesterday’s selloff. Word on the street is saying the meeting is going to take place March 20 in Moscow. The meeting is important because an agreement to freeze production might be the first step on the road to getting the market in balance as shale producers and private oil companies are already making drastic cuts. While today the market is cheering the meeting, yesterday comments from Kuwait seemed to raise questions that this deal to freeze production was a forgone conclusion. The Kuwaiti oil minister said he would agree to an output freeze only if all major producers, including Iran, are on board. If not, they will continue to pump full out.
By being on board, what does that mean? We know that the Iranians won’t agree to freeze output at January levels, so if that is what Kuwait is saying, then it seems like a freeze won’t happen. Yet all of the other players seem to think they are going to Moscow to seal the deal.
Of course there are question just how much more oil even OPEC can produce. It takes money to keep up this frantic pace of production and let's face it, the dough is not running in as quickly as it used to. Not only in the short term but in the longer term as well.
RT news is reporting that oil production in Russia will inevitably decline by 2035 according to an Energy Ministry report by the Vedomosti Business Daily. The different scenarios predict an output drop from 1.2 percent up to 46 percent two decades from now. The document, obtained by the newspaper and confirmed by a source in the ministry, says by 2035 existing oil fields will be able to provide Russia with less than half of today’s production of about 10.1 million barrels per day. They say the Russians are looking to the arctic to replace those barrels yet it will take billions of dollars in investment to replace those declining barrels.
Oil also seemed to get a bounce from the American Petroleum Institute supply report. While we did see a 4.4 million barrel crude supply increase, the rest of the report was rather supportive. We saw a 2.1-million-barrel drop in gasoline supply and oil supply in Cushing, Oklahoma rose by 700,000 barrels. Today the market will take direction from the Energy Information Administration report for more signs of falling U.S. oil output. Chevron (NYSE:CVX) was the latest company to announce more cap x cuts yesterday.
The Energy Information Administration reported in their latest “Short Term Energy Outlook” that U.S. crude oil production averaged an estimated 9.4 million barrels per day (b/d) in 2015 and it is forecast to average 8.7 million b/d in 2016 and 8.2 million b/d in 2017. EIA estimates that crude oil production in February averaged 9.1 million b/d, which was 80,000 b/d below the January level.
The EIA also reports that natural gas working inventories were 2,536 billion cubic feet (Bcf) on February 26, 46% higher than during the same week last year and 36% higher than the previous five-year average (2011-15) for that week. EIA forecasts that inventories will end the winter heating season (March 31) at 2,288 Bcf, which would be 54% above the level at the same time last year. Henry Hub spot prices are forecast to average $2.25/million British thermal units (MMBtu) in 2016 and $3.02/MMBtu in 2017, compared with an average of $2.63/MMBtu in 2015.
Natural gas is expected to fuel the largest share of electricity generation in 2016 at 33%, compared with 32% for coal. This would be the first time that natural gas provides more electricity generation than coal on an annual average basis. In 2017, natural gas and coal are both forecast to fuel 32% of electricity generation. For renewables, the forecast share of total electricity generation supplied by hydropower rises from 6% in 2016 to 7% in 2017, and the forecast share for other renewables increases from 8% in 2016 to 9% in 2017.