It's On. Russia Blows Past Previously Agreed Oil Production Limits.

/ Note - I don't usually comment directly this much on oil prices, but I had 4 cups of coffee this fine Sunday morning, and feel like shooting my mouth off.  You are crazy if you use my opinions for oil trading advice.  Below is just my opinion; as always, you are free to disagree...

Seems to me that with Russia apparently torching its previous agreements with OPEC regarding oil production limits in order to increase oil prices, pretty much everyone else may jump on the oil production bandwagon and jack up their own oil production, making hay while the oil price shines.

Which seems to me will rein in the oil price bulls a bit.

Russia has budgeted for $40 oil for 3 years (2017 - 2020) and has repeatedly indicated it would be happy with $60 oil.

MbS might get a bit pissed with Russia, as he seems to want closer to $100 oil for his pet project of Aramco IPO.  And it is estimated that the Saudi Arabia government needs $88 oil to balance its budget this year, now that MbS Vision 2030 goals have kicked in and need financing (i.e. government subsidies from oil revenue).

U.S. Shale Oil has shot itself in the foot once again by producing more than it can ship, furiously producing in order to pay the debts from drilling new wells.  The WTI / Brent price differential may get wider as the U.S. Shale Oil transportation bottleneck doesn't look likely to get resolved any time soon.  Low WTI prices may drag down Brent prices.

So the whisper campaign push by the (Saudi) oil bulls toward $80 seems to be pulled down by the (Russian) oil bears toward $60.

Venezuela's oil production crash seems to have already been factored in by OPEC and by the markets.  Maduro's begging to OPEC to rescue him have amusingly fallen on deaf ears.  Maduro dug his own grave, and OPEC seems to view PDVSA's incompetence as a justification to increase other OPEC nation's production.

And Iran's soon to be curtailed oil production seems to have been taken into account as well by OPEC and oil traders.

So the current upper and lower bands for this summer seem to be roughly $80 to $60.  Gentlemen, start your engines.

I'm not an oil trader.  This is just my opinion; how I see things at the moment.  You are crazy if you use my opinions for oil trading advice.  Please feel free to grab a few cups of coffee and fire back a few dissenting comments.

Anyway, on to the news:

Russia's oil output at 11.1 million bpd in early June, above quota: Ifax

MOSCOW (Reuters) - Russia’s oil production increased to 11.1 million barrels per day (bpd) in the first week of June, far exceeding production limits outlined in a global oil deal, Interfax news agency cited a source as saying on Saturday.

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I predict the problems with shale oil transport from wellhead to refinery or transship point (to tankers heading abroad) will be resolved by rail.  It is not being resolved just yet due to the aftermath of the Lac Megantic (Quebec) runaway train disaster, which killed 47 sitting inside a soft-rock bistro past midnight on a Friday night, then burning down 3/4 of the town in an inferno of epic proportions.  Out of that huge mess came new Rules banning the Type 111 petroleum railcars from Canadian trackage, thus requiring the car builders to ramp up production to replace these now-obsolete cars.  The new design incorporates features to prevent shell puncturing, by the installation of deflector plates and heavier steel in the end caps of the tanks, and better shielding of the unloader valves, and improvements to the top loading dome.  Incidentally I agree with this approach on a technical basis. But the economics are that the old cars either need to be rebuilt or scrapped. The industry seems to be going towards scrappage.  So there is a supply shortage right now as the new production seems to be headed for Canadian service. 

Right behind that is the problem with  locomotive supply.  The environmentalists are demanding, and have succeeded through the Federal Railway Administration, on strict pollution controls on new builds of rail locomotives.  The operational limit is that now the railroads have to use what is known as "Diesel emission fluid," or "DEF" for short, inside these catalytic converters to remove particulates and oxides of nitrogen. DEF will freeze unless kept in a heated compartment; the logistics of placing and storing and handling vast quantities of DEF across the frozen lands of Northern US and all of Canada have resulted in an absolute refusal of these large railroads to purchase these new locomotives.  What is happening is that the railroads are furiously buying up old stuff and hauling those to their own internal rebuild shops, and spending big bucks on doing rebuilds of older, less efficient, definitely more polluting, engines, instead of buying new engines. SO the paradoxical result is that the total pollution output is much higher than it would be if there were no new Regs and the industry had bought new, improved locomotives with lowered emissions but not at the impossible targets the EPA types were demanding.  Just brilliant.

Thus the rail industry faces two problems: lack of locomotives, until the old stuff getting rebuilt makes its way through those shops, and lack of tanker cars, until that industry replaces the Type 111 now forcibly retired in Canada  (and in the USA, additional to Regs but because nobody will insure them).  That industry typically builds and sells to railcar leasing companies, the most prominent of which is GATX.  As that is good business, the push is on to build a modern fleet,but it takes time. 

At some point enough new equipment will be available and the RR companies will be back to running long unit trains on their trackage (and the larger RRs with the capital will construct long passing sidings so that trains can continue to run in both directions on single-track rail, keeping the iron and the product moving).  Eventually the costs of shipping by rail will drop, and the shale oil will get to its markets without the hefty discounts you see today.  

And that will put more bucks into the pockets of the shale oil operators, and encourage even more production!

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Russia's Gazprom Neft readies for oil output hike as global deal seen easing

... The OPEC and non-OPEC ministers will meet in Vienna on June 22-23 to discuss the future of the deal, which is valid until the end of the year. Russia and OPEC leader Saudi Arabia have signaled there could be a need to gradually boost production to prevent any supply shortages.

"It is obvious now that the (production) quotas should be revised, the quotas should be increased, this will be beneficial both for producers and consumers," Dyukov said after an annual general meeting.

He added that the company would be able to hike its oil production by 5,000 tonnes per day (36,650 barrels per day) if the restrictions are scrapped.

"We believe that the time has come that it makes sense to keep the deal in place but be more flexible on quotas," Dyukov said.

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13 hours ago, Jan van Eck said:

Eventually the costs of shipping by rail will drop, and the shale oil will get to its markets without the hefty discounts you see today.  

And that will put more bucks into the pockets of the shale oil operators, and encourage even more production!

Jan, well written explanation.

I'd like to point out that by the time the U.S. Shale Oil industry and the associated railroad and pipeline industries finally get around to resolving the bottleneck in transporting the hydrocarbons to market, the current O&G "boom" may already be over.

Oil price boom spikes don't seem to last more than a few years, before overproduction kills off the boom.

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(edited)

15 minutes ago, Tom Kirkman said:

Jan, well written explanation.

I'd like to point out that by the time the U.S. Shale Oil industry and the associated railroad and pipeline industries finally get around to resolving the bottleneck in transporting the hydrocarbons to market, the current O&G "boom" may already be over.

Oil price boom spikes don't seem to last more than a few years, before overproduction kills off the boom.

Then again, maybe not!  If, big "if," the bottleneck is slowing delivery of the pumped oil to the customer, then for "overproduction" purposes the stuff might as well still be sitting in the ground.  Oil that is not at the terminal ready for shipment to the refiner does not exist. 

IN that case, the bottleneck has the perverse function of preventing overproduction, just as if the production were being controlled by some Royal Edict ordering the drillers not to turn on the pumps!    (Then again, if there already is current production being pushed into the market that cannot absorb it, you are already in "overproduction," and prices should already be collapsing.  And since that does not quite seem to be the case, the bottleneck is just at the cusp of that equilibrium.    Your comment?

Edited by Jan van Eck
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Good rebuttal, Jan ... you got me thinking ...

If the bottleneck is slowing down the accelerated rate of the U.S. Shale industry going further into debt by borrowing money to drill even more wells, then the bottleneck is probably a blessing in disguise.

Alternately, the depressed WTI price vs. Brent doesn't seem to be helping all that much in the paying down of existing debt - I had questioned this before.

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