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Can Supply Outages Drive Oil To $50?

Oil Rig

Looking at the critical figures and data in the energy markets this week, we see oil prices nearing $50 dollars as supply outages continue and U.S. production declines.

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Chart of the Week

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• The two charts above should be read together. In 2015 U.S. CO2 emissions from the electric power sector fell to their lowest levels since 1993, plummeting to 21 percent below 2005 levels. 

• Electricity demand has been flat over the past decade, so the change in CO2 emissions is directly related to the ongoing shift in the electricity mix. Coal’s market share is collapsing, falling from 51 percent in 2005 to just 34 percent last year. Natural gas and renewables are filling the void. Related: Oil Markets Balancing Much Faster Than Thought

• Natural gas emits about 40 percent of the CO2 emitted from coal-fired electricity. Renewables are also surging, and combined with low-carbon nuclear power (20 percent), the U.S. saw low-carbon electricity sources capture 33 percent of total U.S. electricity generation, the highest total on record.

Market Movers

• Drilling companies have been hurt the worst from the oil price downturn, and will be the last to recover from a rebound, says Moody’s Investors Service. Rock bottom drilling activity and low rig counts mean that the drilling service companies will stressed through the end of 2017 at least.

• Australian regulators told BP (NYSE: BP) that it must revise its drilling plan for the Great Australian Bight. The region on Australia’s southern coast has been described by BP as “pretty much the last big unexplored basin in the whole world.” This is the second time BP has not satisfied the Australian government with its $730 million drilling program.

Range Resources (NYSE: RRC) has agreed to takeover Memorial Resources Development (NASDAQ: MRD) for $3.3 billion, plus taking on $1.1 billion of MRD’s debt. The purchase will be an all-stock deal valued at $15.75 per share, or a 17 percent premium of MRD’s closing price on May 14.

Tuesday May 17, 2016

Oil prices rose this week due to the ongoing outages from Canada and Nigeria, events which Goldman Sachs says has tipped the markets from oil glut into deficit. The investment bank is typically one of the more bearish voices on oil, so its uncharacteristically bullish call on May 16 caught the markets by surprise. Canada still has more than 1 mb/d of supply offline because of the fires, although some companies are trying to restart operations. More importantly, attacks in the Niger Delta have not let up, which have forced ever more output from Nigeria offline. "The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected," Goldman Sachs said on Monday. WTI and Brent traded up near $48 per barrel. Related: Oil Climbs Higher As Goldman Sachs Sees Glut Shift To Deficit 

Bearish signs still abound. There are some caveats to keep in mind. Genscape reported oil storage levels rising at Cushing, Oklahoma for the week. ExxonMobil (NYSE: XOM) said that it would restore some oil supply in Nigeria. Venezuela secured some help from China and a political breakthrough in Libya could mean the return of some supply from the war-torn North African nation (more on that below).

Suncor Energy (NYSE: SU) and Syncrude Canada were forced to undertake fresh evacuations from oil sands facilities in Alberta because of encroaching wildfires, pulling out around 8,000 people. The fires have yet to be brought under control, and they could delay the restart of more than 1 million barrels per day of production, more than a third of Canada’s entire output. Suncor had said last week that it planned on restarting operations, but the spread of the wildfire has prevented that up until now. The company has shut in at least 300,000 barrels per day of supply.

Bankruptcies continue to rise. SandRidge Energy (OTCPK: SDOC) filed for bankruptcy on May 16, and so did Breitburn Energy Partners (NASDAQ: BBEP). SandRidge was the fifth company to file for Chapter 11 bankruptcy protection in five days – Linn Energy LLC, Berry Petroleum Co., and Penn Energy also went under. The industry has defaulted on more than $26 billion in debt in 2016, according to Fitch, which already greatly exceeds the $17.5 billion in defaults from last year. Deloitte says that there are 175 oil and gas firms around the world that are at risk of falling into bankruptcy, plus another 160 companies that are only slightly better off. “Keep an eye out, there’ll be more,” Charles Beckham Jr., a law partner at Haynes & Boone, told the WSJ, referring to the number of bankruptcies. “For the industry it’s kind of a dreadful watch.”

Nigeria outages grow. The attacks from the Niger Delta Avengers continue to knock oil supplies offline in Nigeria. The latest estimates put the outages at more than 1 mb/d in Nigeria. The original outage of 250,000 barrels per day from the Forcados export terminal in February went largely unnoticed by the oil markets. But global supplies have contracted in the ensuing months, and the disruptions in Nigeria have increased sharply since April. Now several major analysts are calling Nigeria one of the most concerning factors for global oil markets. "I think Nigeria really should be at the top of the agenda, because this is not necessarily about low oil prices," Amrita Sen, chief oil analyst at Energy Aspects, told CNBC Monday. "It is about the geopolitical backdrop, the Niger Delta Avengers and how the government is dealing with them and clearly this is a huge risk to the market.” Related: Saudi Arabia Loses Top Credit Rating from Moody’s

Libya supply coming back. The U.S. and the international community are considering a plan to send weapons to the Libyan government to fight ISIS. The militant group has control of the city of Sirte and is steadily gaining territory. The international community has agreed to support solely the government in Tripoli, and cease contact with the rival faction in the eastern city of Tobruk. That comes as the two rival governments have agreed on one legitimate oil company for the country. The deal is only in principle right now, but it could resolve the conflict over oil exports, which reduced Libya’s oil exports in recent weeks. If there aren’t any hiccups, Libya could return some supply to the market.

Venezuela’s economic meltdown. Venezuela’s economy continues to meltdown, and shortages are piling up. The only bright spot for the country is an oil deal that the government reached with China, which provides Venezuela with some “oxygen.” The terms on some of the $50 billion in loans owed to China have been improved, the government says, although details were not provided. Venezuela’s government declared a state of emergency on Friday, as looting, unrest, and shortages spread across the country.

Will U.S. shale comeback? Many in the U.S. shale patch have vowed to return some rigs to the field if oil prices rose to $45 or $50 per barrel. With WTI trading in that range, many are watching to see if drilling activity picks up. More cuts are still hitting the industry, and the rig count continues to plunge, falling by another 10 oil rigs last week. If oil prices hold steady at today’s levels, or even rise a bit, shale drillers could begin to gain confidence and ratchet up drilling. But for now, there is little sign of that.

By Evan Kelly of Oilprice.com

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