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Crude Tests $50 As OPEC Deal Seems Unlikely

Shale oil drillers

Oil prices are testing the $50 mark as uncertainty about the OPEC deal impacts oil markets.

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Chart of the Week

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Offshore oil production made up about 30 percent of the global total in 2015, the highest level since 2010.

• A litany of offshore projects have come online in the past few years, projects that were planned when oil prices were in triple-digit territory.

• Still, over the past decade, onshore output, particularly from U.S. shale, has taken a larger share of production away from the offshore sector.

• Five countries account for 43 percent of all offshore oil output – the U.S., Saudi Arabia, Brazil, Mexico and Norway.

Market Movers

Valero Energy (NYSE: VLO) saw its share price jump more than 2 percent in premarket trading on Tuesday after reporting better than expected third quarter numbers. Valero’s costs fell by 8 percent in the third quarter, saving it $2 billion and allowing it to post a $1.24 Q3 EPS, which beat estimates by $0.27.

Baker Hughes (NYSE: BHI) reported Q3 EPS of -$0.15, which beat estimates by $0.30 per share, but the oilfield services giant saw revenues plunge by 36 percent year-on-year, down to $2.4 billion.

Petrobras (NYSE: PBR) announced an exploration and production partnership with Total (NYSE: TOT), with a focus on natural gas and electrical projects. Separately, Petrobras also announced an agreement with investors to settle lawsuits surrounding the Car Wash corruption scandal. Petrobras’ stock has surged 186 percent so far this year and recently hit a 52-week high.

Tuesday October 25, 2016

Oil prices are largely unchanged from a week ago, with the late-September rally now firmly at a standstill. There are conflicting signs over what to expect next for crude. Supply still exceeds demand and inventories are still at extraordinary heights, although stocks are starting to draw down. Restored supply from countries like Nigeria and Libya have extended the supply overhang, while weak Chinese demand remains one of the most pivotal factors moving forward. We are still a month away from the OPEC meeting, which is likely the next big catalyst on the horizon.

DUCs to come online. The WSJ reports that a large chunk of the backlog of drilled but uncompleted wells (DUCs) could start to get worked through in the next year and a half. There were 5,069 DUCs in September, sharply up from the 3,768 tally in January 2014. And while it is entirely normal to have a few thousand DUCs, the huge increase in the total over the past two years was due to companies drilling but waiting completion until oil prices regained ground. Wood Mackenzie estimates that the industry could work through roughly 2,000 DUCs, which would bring the total back to a more normal level. If that were to occur, it could add about 250,000 barrels per day of additional supply.

Oilfield service companies tired of getting squeezed. Halliburton (NYSE: HAL) and Schlumberger (NYSE: SLB) have suggested that they will no longer grant concessions to production companies looking for lower rates. Over the past two years oilfield service companies have been forced to cut their prices for services and equipment as drilling has dried up. But Schlumberger’s CEO said last week on a call with investors that his company will only take projects that are profitable and will no longer cut rates just to secure work. His position is important because if oilfield service companies begin charging higher rates as drilling picks up, then the efficiency gains touted by production companies over the past two years could prove to be transitory. If the cost of services rises, the cost to produce a barrel of oil will begin to rise again as well.

Oil and gas companies restructure debt. Three oil and gas companies reached an agreement with creditors to restructure some of their debt, which could allow them to quickly move through the Chapter 11 bankruptcy process. The WSJ reports that Key Energy Services, Stone Energy Corp., and Basic Energy Services either have already or are in the process of restructuring their debt in a prepackaged bankruptcy process ahead of Chapter 11. The deal with creditors could allow them to avoid a drawn out bankruptcy, and allow them to swiftly recover.

Iraq wants to be exempt from OPEC deal, casting further doubt on agreement. Iraq said this week that it wants to be exempted from any production limits imposed by OPEC at its upcoming November meeting. Iraqi officials argue that its costly war against the Islamic State is a justification for allowing it to produce as much oil as possible. "We should be producing 9 million if it wasn't for the wars,” the head of Iraq state oil marketer SOMO, Falah al-Amiri, told reporters. "Some countries took our market share.” Iraq’s insistence is yet another blow to the prospects of the cartel reaching an agreement on meaningful production cuts.

Venezuela swaps debt. A last minute deal with investors allowed Venezuela’s state-owned PDVSA to avoid a default on its debt. Creditors accepted a deal that swaps debt due this year and next for payments spread out over the rest of this decade. Venezuela has descended into a deep economic and political crisis from which there is no easy way out. Oil production is falling and the state is nearly out of funds. The swap deal allows Venezuela a little bit of breathing room, but it does not mean that the situation will improve.

Lukoil starts up Arctic field. Russian oil giant Lukoil said that it had started up an Arctic oil field on Tuesday, which will help Russia maintain record levels of output. The field, known as Pyakyakhinskoye is located in the Yamal region, and is one of the region’s largest.

Related: Ayatollah Khamenei Accuses OPEC Members Of Waving The Oil Weapon

Earthquake caused by disposal wells. The USGS linked disposal wells to an earthquake that hit Oklahoma in February 2016, the state’s third largest on record. Evidence is piling up that disposal wells contribute to earthquakes, and the state government has begun cracking down on their use.

Clean energy exceeds fossil fuels in 2015. Renewable energy outpaced fossil fuels for installed electricity capacity across the globe last year, according to the IEA, a milestone that could prove to be an inflection point for the transition to cleaner sources of energy. The world saw installations of 153 gigawatts of renewable energy in 2015, or about 55 percent of the total. It was the first time that the world installed more renewable energy than fossil fuel-based capacity. The IEA said that an average of 500,000 solar panels were installed every single day last year.

Climate change to trigger financial crisis? Paul Fisher of the Bank of England warned that climate change could spark the next financial meltdown. A sudden drop in the value of fossil fuel assets as a result of climate change could be “a systemic risk,” he says. The notion of “stranded assets” has become more popular in just the past two years, but Fisher goes further, explaining that not only will stranded assets be a problem for oil and gas companies themselves, but the write down of hundreds of billions of dollars could trigger a financial crisis.

By Evan Kelly of Oilprice.com

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