Oil prices fell back to $50 on Friday afternoon, after the U.S. rig count hit eight year highs.
Friday, October 14, 2016
Crude oil is set to close out the week not much different from where it started, seesawing a bit along the way. Oil prices sank on EIA data showing rising crude inventories – the first increase in six week – but that was offset by a large drawdown in refined product stocks. “It could simply be the fact that selling couldn’t sustain itself below $50,” Mark Anderle, director of supply and trading at TAC Energy, told the WSJ in an interview. “Clearly to me this says the bulls are still in charge.” Oil prices are looking for some direction with conflicting data emerging this week.
North Dakota’s oil production drops below 1 mb/d. The Bakken continues to feel the effects of low oil prices. New data shows that North Dakota’s oil production dipped below 1 million barrels per day for the first time in more than two years. Output fell to 981,000 bpd in August, down from a peak of over 1.2 mb/d in December 2014. The Bakken has seen drilling vanish and companies decamp to more profitable plays such as the Permian in West Texas. “It does send a signal to the world markets that U.S. producers are serious about reducing activity, reducing costs, reducing production and I think that should help support the recent price increase we saw,” Lynn Helms, director of state’s Department of Mineral Resources, told reporters.
Permian gas on the rise. The flurry of drilling in the Permian basin is leading to an increase in the volume of associated natural gas produced. Gas production has topped 7 billion cubic feet per day, according to Bloomberg Intelligence, equivalent to about 8 percent of U.S. supply. Natural gas markets are growing tighter in the U.S. as demand rises and drilling slows (in most places), but the Permian remains as one region where gas output is expected to climb in the near-term. As such, it could be one of the few downside risks to natural gas prices. Nevertheless, Henry Hub is up to $3.30 per MMBtu as overall supply in the U.S. falls.
U.S. energy emissions at 25-year low. The EIA says that energy-related emissions in the U.S. in the first half of 2016 have declined to their lowest levels since 1991, due to mild weather and a cleaner energy mix. A warm winter led to weak demand for electricity, and renewable energy and energy efficiency continue to eat into the market share for fossil fuels, particularly for coal. But the upcoming winter is expected to be colder, which could lead to higher emissions, and as the EIA noted in a separate report, higher natural gas prices and more expensive electricity.
Kashagan exports first oil. One of the most expensive oil fields in history finally began operations. The Kashagan project in Kazakhstan sent its first shipment of oil, after 16 years of development and more than $50 billion spent. Kashagan has suffered from repeated delays, equipment failures, and massive cost overruns – the project had a price tag of $38 billion in 2008 but that mushroomed to at least $53 billion by 2015. Nevertheless, the project is expected to be significant, potentially adding 370,000 barrels per day by the end of next year, something oil analysts and investors need to keep an eye on in the context of global supplies. Eni (NYSE: E) is the lead operator, working with ExxonMobil (NYSE: XOM), Total (NYSE:TOT) and Royal Dutch Shell (NYSE: RDS.A).
First energy IPO in two years. Extraction Oil & Gas succeeded in going public this week, the first public offering since 2014. The Denver-based company sold more than 33 million shares at $19 per share, valuing the company at $2.4 billion. The successful IPO suggests that investors are still hungry for energy exposure, and could once again be warming up to the sector as oil prices rise.
Russia’s Rosneft to acquire India’s Essar Oil. Rosneft is leading a group that willpurchase Essar Oil in a deal valued at about $7.5 billion. Rosenft will take a 49 percent stake, and Trafigura Group and a Russian investment fund will split the remainder. Essar has a large 450,000 barrel-per-day refinery in western India. The deal will also offer Russia’s Rosneft access to over 2,700 retail gas stations in India, giving it a greater ability to market its fuels.
Gazprom nears deal with EU antitrust regulators. The Russian gas giant and EU regulators are expected to reach a deal within the next few weeks that would settle antitrust concerns. The multi-year saga could come to a close, forcing changes in how Gazprom operates. The EU has accused Gazprom of charging unfair prices to certain Eastern European countries. The WSJ reports that Gazprom might avoid paying billions of dollars in fines but will agree to change its pricing practices. The deal could be a boon to Eastern Europe.
Williams Partners and Cabot see share prices fall on pipeline delay. Williams Partners LP and Cabot Oil & Gas (NYSE: COG) have seen their share prices slip as a major shale gas pipeline in Pennsylvania faced a setback. The federal pipeline regulator, FERC, extended a public comment period for the $3 billion Sunrise project, which would carry Marcellus shale gas to market.
The Two Conflicting Influences that Will Keep WTI Rangebound
Looking back at the last couple of weeks’ price action in WTI one thing stands out. OPEC or no OPEC, the benchmark U.S. oil futures contract attracts plenty of sellers above $51. I remain skeptical of the chances of any meaningful action from the oil cartel as a result of their “agreement to agree” on action on production to support the price of oil, and it seems that others are coming into that camp, but if some reports I have heard from traders are to be believed that is not what put such a firm top on WTI above that level. Those reports indicate that the selling came from producers hedging at prices over $51, and if that is the case the path to further gains looks like a seriously uphill battle.
If we look back even further to when WTI was declining rapidly last year, though, that should not come as any major surprise. Many, including, I will freely admit, me, said at that time that the price declines would quickly lead to a reduction in the rig count and reduced supply, which would in turn cause a fairly rapid rally. However, that didn’t happen until oil was trading substantially below $50, which gave an indication that at around that level even relatively expensive projects were still profitable. Given that history the fact that the low $50s are providing such determined resistance points is only logical. It is just the market working exactly how it should do in theory…higher prices encourage production, which in turn drags the price back down again.
If those stories are true, though, and the selling for hedging purposes is enough to stop what was a strong news driven rally, then that clearly has implications for the future. The $60 or $70 per barrel WTI that some saw as the logical result of a revitalized OPEC is clearly not on the cards any time soon. Even if the Saudis and Iranians do reach an agreement, and even if the Russians tag along, there are still some serious barriers to further significant gains.
What the hedging reinforces is that there is still a huge untapped reserve of oil in the U.S. and that much of that production is viable at around $50, which in turn means that any action by OPEC will have a limited effect. Such action would make another complete collapse in price highly unlikely, but it would probably not cause a spike much above what we have already seen in anticipation.
The futures curve as it stands also supports that view. Futures are still in contango (meaning that longer dated contracts are higher), but the curve is not abnormally steep. If we look at the January 2017 contract that expires well after OPEC’s scheduled meeting at the end of November, it is trading as I write at $51.32, and we have to go all the way out to December of 2018 to see prices above $55. That does not suggest any confidence in OPEC’s ability to push oil, or at least WTI, much higher.
It seems the that we are entering into a period when two conflicting influences, the possibility of an OPEC agreement to at least freeze production and U.S. producers’ readiness to increase production at prices above $50, are effectively cancelling each other out. That suggests that if the cartel does reach an agreement that members actually stick to we could be in a range of around $40-$55, or quite probably even narrower, say $43-$53 for quite some time to come.