IS IRAQ RENEWED EXPECTATIONS COMING TO THE RESCUE OF NIGERIA INTERNAL CHALLENGES

We still believe in a price hovering around $45 for the foreseeable future primarily due to the combination of several factors including Nigeria challenges, a drop in the Chinese demand, a USA propelled by Private equity and a renewal in Iraq.

Nigeria Challenges

ExxonMobil is trying to figure out how to export Qua Iboe, Nigeria’s largest export stream, by using an alternate pipeline. Qua Iboe is under force majeure, and is expected to be so for the next few months. Reuters reported ExxonMobil is working on a plan to export Qua Iboe crude oil via an alternate pipeline while it works to repair damage to the main export line sustained in July. The crude oil grade, Nigeria's largest export stream, has been under force majeure since mid-July, when the company said it detected a "system anomaly" on the line. Reuters said that “sources said the company later found substantial damage to the subsea line that would take at least one to two months to repair”.

Sabotage and supply issues have collectively hit certain key Nigerian grades, dropping export loadings from above 1 million barrels per day in January by 60 percent last month to just over 400,000 bpd. That said, total loadings have held up rather well, as alternate grades such as Agbami and Akpo have risen to the challenge to offset losses primarily in Qua Iboe and Forcados. Through the first third of August, there have been no loadings whatsoever of Qua Iboe.

Drop in Chinese demand

IEA’s monthly oil market report the IEA report, highlighted a swift drop-off in Chinese oil demand over the last three quarters. This is affirmed elsewhere, with Chinese oil demand seen little changed compared to year-ago levels. Official data show refinery runs up only 1.9 percent this year, although Platts suggests independent refiners, could be producing an additional 400,000 bpd.

USA well positioned

Oil companies slash their capital expenditures; investors have been targeting the oil patch in the search for return. The relative high yield on energy debt has attracted an influx of investment in the last two years; private equity funds focused on energy have managed to raise $113 billion in the last nine quarters, looking to buy up the assets that no-one else wants.

The result is the U.S. is one of the best-positioned producers to weather the storm of low oil prices. Not only is shale production dynamic enough to be able to respond swiftly to price moves, but there is no lack of investors willing to buy up cheap assets or own distressed debt after over 60% of the small producers went into distressed status.

Private equity has seized the opportunity to buy up cheap assets from troubled companies, while also targeting loans and bonds – with an eye to gaining ownership in bankruptcy or restructuring. While banks have been cutting back on their exposure to riskier assets in the oil patch, private equity funds are increasingly providing liquidity and boosting their profits.

IRAQ renewal

Iraq is set to resume a number of projects developing domestic oil fields. Iraq has reached agreement with BP, Shell and Lukoil to restart stalled investment in oil fields the firms are developing, allowing projects that were halted this year to resume and crude production to increase in 2017, reported Reuters. The agreements, reached in July and August, effectively delay to the second half of the year projects that the three companies had planned to carry out in the first half, which had been suspended because of low oil prices. As a result of the investment, Iraq's crude output should increase by 250,000-350,000 barrels per day next year, the Iraqi officials said. The country now produces about 4.6 million bpd, most of it from the southern region.

Iraq is OPEC's second biggest producer after Saudi Arabia, and the increase in its output, alongside that of Iran, could aggravate the global oil glut and complicate discussions between OPEC and non-OPEC producers on output limits to prop up prices.

BP agreed to spend $1.8 billion this year at the Rumaila field it operates. It had initially agreed to spend $3.5 billion last year, which it later revised down to $2.5 billion. Shell agreed to spend $742 million after proposing $1.5 billion last year. Lukoil would spend $1.08 billion, compared to $2.1 billion it had proposed last year.

The result is that Iraq current production is at ~4.6mn bpd, and is set to rise to 5mn bpd. Although the real results will be reported in the months to come the Iraqi development could ease the decrease in Nigeria and continue to keep a Brent sill around $45 in spite of the declarations of Mr. Khalid al-Falih who said “Saudi would take any action to help the market rebalance” resulting in sending the price over $45 today from $40 last week.

Today Iraq appointed a new Oil Minister Mr. Jabbar al-Luaibi, the former head of Iraq’s biggest crude producer. He will have to preside over resolving the disputes with the Kurds and make sure that production and investment grow smoothly in his country.

So we keep believing in a price around $45 with a lot of volatility….