Politics, Geopolitics & Conflict
Last month, the EU heralded a deal with Azerbaijan that would net it extra Azeri gas to reduce dependence on Russia. That deal is now being threatened by renewed fighting between Azerbaijan and Armenia over Nagorno Karabakh. Both sides are now accusing each other of violating the ceasefire that ended the 2020 conflict after which Armenia ceded some territory it had controlled in the enclave, with some 2,000 Russian peacekeepers stepping in to maintain the ceasefire. Russia has accused Azerbaijan of breaking the ceasefire, leading to this week’s renewed violence that saw at least three people killed as of the time of writing.
Putin and Ergodan are set to meet on Friday in Sochi, at a time when the Turkish leader has scored serious global points for facilitating the shipment of grain out of Ukraine’s ports and essentially removing the threat of global starvation. The two are on opposite sides of a number of geopolitical situations, including the conflict in Syria and the frozen conflict between Armenia and Azerbaijan over Nagorno Karabakh. On the top of Erdogan’s wishlist now that he has scored some more leverage points is a green light from Russia (and by default, from Iran) to launch another operation against the Kurds in northern Syria - a military operation that is largely intended for the Turkish public as Erdogan faces new elections in less than a year, and he’s not going to win on the economy.
China’s…
Politics, Geopolitics & Conflict
Last month, the EU heralded a deal with Azerbaijan that would net it extra Azeri gas to reduce dependence on Russia. That deal is now being threatened by renewed fighting between Azerbaijan and Armenia over Nagorno Karabakh. Both sides are now accusing each other of violating the ceasefire that ended the 2020 conflict after which Armenia ceded some territory it had controlled in the enclave, with some 2,000 Russian peacekeepers stepping in to maintain the ceasefire. Russia has accused Azerbaijan of breaking the ceasefire, leading to this week’s renewed violence that saw at least three people killed as of the time of writing.
Putin and Ergodan are set to meet on Friday in Sochi, at a time when the Turkish leader has scored serious global points for facilitating the shipment of grain out of Ukraine’s ports and essentially removing the threat of global starvation. The two are on opposite sides of a number of geopolitical situations, including the conflict in Syria and the frozen conflict between Armenia and Azerbaijan over Nagorno Karabakh. On the top of Erdogan’s wishlist now that he has scored some more leverage points is a green light from Russia (and by default, from Iran) to launch another operation against the Kurds in northern Syria - a military operation that is largely intended for the Turkish public as Erdogan faces new elections in less than a year, and he’s not going to win on the economy.
China’s provocative air and sea military exercises around Taiwan have Asia in a panic, particularly Japan, where some of China’s ballistic missiles landed in Japanese waters. These military exercises diverted from the norm, raising tensions significantly because they forced ships and planes to divert their routes to Taiwan. The military exercises, which began on Thursday and will continue until Sunday, were timed around Nancy Pelosi’s visit to Taiwan, which has angered Beijing.
Oil & Gas Markets
The talk of the week, other than OPEC, has been about gasoline demand, which EIA data suggests is waning and below 2020 Covid era levels on a 4-week average basis. But not everyone agrees with this data. EIA data is published weekly, but like production data, actual figures are provided monthly - the rest are estimates. EIA monthly data for gasoline demand has been higher than its weekly figures this year. The EIA uses implied product supplied. Others in the industry use retail gallons data, such as GasBuddy, which claims to see a different picture of gasoline demand that is actually rising. Several oil refiners on earnings calls this quarter are also indicating that they are not seeing any slackening in demand.
OPEC+ agreed this week to add 100,000 bpd to its production targets. The production cut quotas were completely rolled back as of August, but the group, which includes Russia, has agreed to continue to meet and discuss the state of the oil markets and coordinate production. The 100k bpd increase is largely insignificant, not just because of its size but because OPEC+ is producing millions of barrels under its current production quotas. Spread across all members, Saudi Arabia’s share of the increase - one of the only OPEC members that could possibly have any spare capacity left - is 26,000 bpd. 7,000 bpd of it is allocated to the UAE - the only other OPEC+ member that could ramp up production by September. Neither the UAE nor Saudi Arabia will be interested in tapping 100% of their spare capacity - and Saudi Arabia proved this by raising the OSP of most of its crude grades to most locations on Thursday - a clear signal to the market that it wants to sell less oil - not more. Expect slight production increases from OPEC+ overall in August and September, but still millions of barrels per day below the quota. OPEC+ cautioned in its meeting notes “the severely limited availability of excess capacity necessitates utilizing it with great caution in response to severe supply disruptions,” so we’re not expecting any significant OPEC increases unless something really jars the supply side of the market. This message is the largest takeaway from the meeting and combined with Saudi Arabia’s OSP hike and rumors that Saudi Arabia is reserving some capacity for a possible severe winter supply crisis.
Oil is now flowing into the EU from Venezuela - albeit in small amounts - after the U.S. eased sanctions on the country to allow Europe, struggling amid an energy crisis, access to more crude oil. Repsol has resumed imports of Venezuelan crude, and cargoes have made it to Italy as well.
South Sudan’s oil production fell this week from 169,000 bpd to 156,000 bpd as heavy floods hit the country for the third year in a row.
Discovery & Development
Hess has made an oil discovery in the U.S. Gulf, offshore, in the Green Canyon area-the area that is also home to its Stampede offshore platform. Hess has completed its drilling operations on its Huron prospect, in Block 69, hitting “high quality, oil-bearing Micro-aged reservoirs” that “established the existence of a working petroleum system,” Drilling and appraisal wells will follow. Hess is the operator of the project holding a 40% stake. Chevron and Shell each hold a 30% stake. At the same time, Hess said it experienced a positive drilling result in the Shell-operated Llano field, in Llano-6, with 123 feet of high-quality Miocene pay. It will be brought online in August.
Earnings
This week saw another batch of impressive earnings among oil companies, with fat dividend hikes and more buybacks.
BP (NYSE:BP) reported what it calls an underlying replacement cost profit of $8.45 billion for Q2 - up from $6.2 billion in Q1 and easily beating analyst estimates for $6.8 billion. The results came on the back of strong refining margins, its trading segment, and higher liquids realizations. BP increased its quarterly dividend by 10% and extended share buybacks.
Marathon Petroleum's (NYSE: MPC) adjusted net income rose to $5.7 billion, compared to $437 million from Q2 2021, again beating analyst estimates. EBITDA rose to $9.1 billion for Q2, more than quadrupling from Q2 last year as its refinery utilization hit 100%. R&M margin rose to $37.54 per barrel, up from $12.45 per barrel in Q2 last year. Marathon has approved a $5 billion share repurchase authorization, with unspecified timing.
Occidental Petroleum reported a net income of $3.76 billion, or $3.47 per share, beating analyst expectations like most of its peers. Total revenues were $10.7 billion for the quarter, with oil and gas revenues up 71% year over year. The midstream & marketing segment was up 197% year over year. OXY’s total production came in at 1.147 million boepd, within guidance. Realized crude price was $107.72 per barrel for the quarter, up 68% from Q2 2021.
Transocean reported a loss of $68 million for Q2, or -10 cents per share. While it was a loss, it exceeded analyst expectations for a loss of 11 cents per share. Revenues came in at $692 million, with adjusted revenue of $722 million. Transocean has a $7 billion backlog worth of projects, but it stressed in its Q2 results that the recovery in offshore drilling is underway.
ConocoPhillips recorded adjusted earnings of $5.1 billion, or $3.91 per share for Q2. That’s up from $1.7 billion in Q2 2021 - tripling from a year ago and beating the analyst consensus. The higher earnings came on higher prices, with a total average realized price of $88.57 per barrel - 77% higher than this time last year. Conoco raised its 2022 shareholder returns by $5 billion, to $15 billion.
Devon Energy earned $1.9 billion for the quarter, against revenues of $5.6 billion on higher production, most in the Delaware basin. Production for the quarter averaged 616,000 boepd, up 7% from Q2 2021, with production costs averaging $13.01. Capex was $513 million for the quarter and below forecast. Devon has returned more than $6 billion through dividends and share buybacks over the last year and a half and stressed that it would continue to prioritize capital returns while keeping top-line growth steady.
Deals, Mergers & Acquisitions
Transocean has secured two major drillship contracts worth $1.24 billion. The first, a 68-month ultra-deepwater contract with Petrobras, is a $915 million contract that will commence in 2023 and last for 6 years with its Petrobras 10000 drillship. The second contract is with an undisclosed major for its Deepwater Conqueror drillship. This second contract is for two years in the U.S. Gulf of Mexico at a rate of $440,000 per day without additional products and services. The total contract is valued at around $321 million and will commence in December. Transocean’s product backlog has now reached $7 billion.