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Crude Drawdowns Can’t Save Oil Prices

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Oil prices fell below $50 this week as rising U.S. oil output and increasing Libyan exports led to a more bearish sentiment in oil markets.


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Friday, April 28, 2017

Oil prices got walloped this week on growing concerns that U.S. shale is coming back too quickly, offsetting the progress made by OPEC. Meanwhile, disrupted Libyan production could come back online, taking one of the few reasons to be bullish away. WTI briefly sank below $49 per barrel on Thursday, but regained a bit of ground at the start of trading on Friday.

Lower inventories, higher refining runs…doesn’t matter. U.S. refiners processed a record volume of crude oil last week, according to the EIA. With maintenance season over and refiners ramping up to meet summer demand, they are pulling crude oil out of storage. U.S. inventories dropped by 3.6 million barrels, the largest drawdown in quite a while. But that did very little for oil prices, which dropped sharply this week. One reason the data could be a little misleading: gasoline stocks actually jumped much higher, so all that refining is resulting in gasoline heading into storage.

Goldman: high probability of OPEC extension. Goldman Sachs’ head of commodities, Jeff Currie, said that OPEC is likely to extend its deal for another six months. That could result in WTI trading between $55 and $60 for the rest of this year, which is a "substantial upside, given we are trading at roughly $49.50" Currie said on Bloomberg TV.

IEA: global oil discoveries hit record low. The IEA said on Thursday that the oil industry discovered a record low amount of oil in 2016, logging just 2.4 billion barrels in new discoveries. Also, the volume of oil given final investment decisions in 2016 amounted to 4.7 billion barrels, the lowest level in 70 years. The result could be a supply shortage towards the end of the decade, the IEA warned. In fact, the IEA has repeatedly warned about the pending shortfall, which would lead to higher prices and much more volatility by 2020.

Libyan production restarts. Although there is conflicting news about what is going on in Libya, Reuters reports that several key oil fields in Libya are restarting operations, including the Sharara field that has a capacity of 300,000 bpd. That news could have been a big reason for the 1.6 percent sell off of WTI and Brent on Thursday. To be sure, there were separate reports that the Sharara field remained shut and Libyan production was still at a 7-month low at 490,000 bpd. Needless to say, Libyan production will likely seesaw for the foreseeable future, and conflicting reports will be likely. Related: U.S. Oil Rig Count Increases For 15th Straight Week

Bakken oil exported to Asia. The first shipment of oil from the Bakken was exported to Asia last month, a cargo carrying 600,000 barrels. The exports could climb significantly with the startup of the Dakota Access pipeline, which will tie North Dakota crude into an existing pipeline system that extends to the U.S. Gulf Coast. The pipeline will also allow Bakken crude to fetch a higher price, providing a lift to producers.

1st quarter earnings look better so far. This week, Total (NYSE: TOT) reported a 56 percent increase in first quarter earnings from a year earlier. Oil prices were sharply up in 1Q2017 compared to 1Q2016, and production costs were also down. Net income for Total rose to $2.56 billion in the quarter. Cash flow excluding acquisitions and assets sales surged to $1.7 billion, the highest in four years and a level that the company last hit when oil prices were trading at $100 per barrel. The improved performance has led the French oil giant to begin investing in new projects, including one in Argentina’s Vaca Muerta. It will be the first major project sanctions for Total since 2014. “The costs are low, so it’s the right time to invest,” Pouyanne said Thursday. “Our strategy is to take advantage of this market, where you have a lot of weak players.” Pouyanne sees oil prices rising towards the end of the decade, which makes today a smart time to make investments.

Anadarko Petroleum sees shares dive after explosion kills 2 in Colorado. Anadarko Petroleum saw its share price plunge by more than 5 percent on Thursday after it said it would shut down 3,000 wells in Colorado following an explosion that killed two people. The cause of the explosion, which occurred on April 17, was unknown, but Anadarko said it would shut down the wells for several weeks to assess the situation. The wells account for 2 percent of Anadarko’s oil and gas production, according to Reuters.

Gas shortage in Australia could bring pain to LNG exporters. The Australian government is considering restricting natural gas exports because of a domestic supply shortage. Natural gas prices have surged by 80 percent in the first quarter of this year and the Australian government wants to protect domestic consumers and manufacturers. The Prime Minister met with Royal Dutch Shell (NYSE: RDS.A) and Santos (ASX: STO), and is threatening to limit their exports if they do not provide sufficient gas to the Australian market. Santos’ stock price fell by more than 5 percent on the news. Australia has emerged as one of the world’s top LNG exporters in recent years due to a handful of massive projects constructed in the Northeast and Western Australia.

Related: Why Is China Buying Up These Unprofitable Natural Gas Assets?

Norway warns about falling safety standards in the North Sea. Norwegian regulators warned that the rush to cut costs in the expensive North Sea has led to a lowering of safety standards across the industry. The number of leaks occurring at oil and gas wells in Norway hit a five-year high last year.

Trump to sign executive order on offshore drilling on Friday. President Trump is scheduled to sign an executive order aimed at opening up new drilling areas in the Gulf of Mexico, as well as the Atlantic and Arctic Oceans. The order is just the beginning of what will surely be a long drawn-out legal process, so there will be no immediate effect on the oil industry.

By Tom Kool for Oilprice.com 

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  • Bud on April 28 2017 said:
    Shale production up 20 thousand bpd this week while imports up 1.1 million bpd. The Saudis can manage around shale, the imports from Canada, Venezuela, Mexico, Brent and west Africa are the competitive target.

    The focus should be inventories sitting in storage on tankers at sea and on land controlled by OPEC.
  • Bob Saget on May 05 2017 said:
    "President Trump is scheduled to sign an executive order aimed at opening up new drilling areas in the Gulf of Mexico, as well as the Atlantic and Arctic Oceans." Seriously? This is exactly what the world needs.

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