We start this newsletter by taking a look at some key data for the U.S. oil and gas industry in which we see further declines in U.S. production, but an increase in U.S. crude oil stocks.
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Friday, April 22, 2015
It has been a wild week for the oil markets, with the collapse of Doha, a workers strike in Kuwait, and the seeming dissolution of any possibility of cooperation within OPEC. But oil prices have jumped to their highest levels in five months, breaking through a key threshold at the low-$40s per barrel. Related: Eni Hopes To Develop Supergiant Gas Field By 2017
Can prices continue to rally? Prices have surged on news of supply outages from around the world, particularly from Kuwait (more on that below). But can WTI and Brent hold onto the gains? Oil storage levels jumped once again in the U.S., a bearish sign that the glut continues. On the positive side of the ledger, production fell by another 24,000 barrels per day last week, and declines are expected to continue. The supply/demand adjustment continues apace, and the markets appear to be gaining confidence that the worst is over.
OPEC to discuss freeze in June. The collapse of Doha has laid bare the degree of infighting in the oil cartel, but a Saudi official said that OPEC members would resume negotiations over a production freeze at its June meeting in Vienna. OPEC’s Secretary-General downplayed that prospect when he responded, “maybe the ministers will discuss it.” It is hard to imagine OPEC rebounding from the failed Doha talks to secure an agreement. The only thing working in favor of improved cooperation is the possibility that Iran reaches its pre-sanctions level of oil production by then. This week, Iran’s deputy oil minister was quoted in Iran’s state news agency, saying that Iran could achieve pre-sanctions oil production levels by June. Since Iran has previously stated that it would not join a freeze deal until it restored output, the comments raise the possibility that it could come around to a deal when the cartel meets in Vienna.
Kuwait workers strike ends. The oil workers union ended their strike, claiming that the outage and the temporary disruption of more than 1.5 million barrels per day (mb/d) of oil supply clearly demonstrated their power and their importance. For a few days, the strike knocked off the equivalent of the current global supply surplus, an eye-opening event that few saw coming. But Kuwait’s state-owned oil company should be able to ramp up production in the coming days.
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Obama visits Riyadh. U.S. President Barack Obama sought to repair damaged relations with Saudi Arabia, shoring up an alliance that has spanned seven decades. Obama met with King Salman where they discussed their joint efforts to fight ISIS, as well as how to deal with the economic problems from low oil prices. The U.S. president attended a summit of the Gulf Cooperation Council. Related: Sanctions Lifted, Now Iran Wants To Get Paid
U.S. Senate approves energy bill. The first energy bill since 2007 is making its way through the U.S. Congress. The bill includes measures to improve energy efficiency, enhance cyber and grid security, and it also expedites the permitting of LNG export terminals. The House passed a similar version in late 2015, and the two chambers now need to reconcile the package in order to send it to the President’s desk.
First U.S. LNG to Europe. Cheniere Energy (NYSE: LNG) just sent its sixth LNG cargo, and it will mark the first shipment to Europe. U.S. LNG has been hailed as a major plank in Europe’s energy security, but there are questions over how well it can compete with pipeline gas from Russia. A shipment of LNG will arrive in Portugal soon, marking the first U.S. LNG cargo to arrive on the continent, and also providing Cheniere with a foothold in Europe.
Schlumberger (NYSE: SLB) lays off 2,000. The largest oilfield services company in the world, Schlumberger, said that it cut another 2,000 positions from its payroll in the first quarter, and also announced that its quarterly earnings fell 49 percent. Since the end of 2014, Schlumberger has cut 36,000 people from its workforce. The first quarter of 2016 was one of the worst yet, and Schlumberger’s CEO Paul Kibsgaard said that the “decline in global activity and the rate of activity disruption reached unprecedented levels as the industry displayed clear signs of operating in a full-scale cash crisis.” The problem for the oilfield services sector is that with the balance sheets of the E&P companies so damaged, drilling may not return immediately even if oil prices rise. Kibsgaard says the operating environment “is expected to continue deteriorating over the coming quarter given the magnitude and erratic nature of the disruptions in activity.”
Credit lines for oil and gas could be cut by 15 percent. Moody’s estimates that the credit redetermination period could result in a decline of 15 percent in the volume of credit offered to oil and gas drillers in the U.S. shale patch. Moody’s also said that about three-quarters of the companies that it they surveyed expected to see their credit lines lowered, and none expected an increase. The rate of defaults from oil and gas drillers could rise if struggling companies run out of funds. Related: What A Recovery For Oilfield Services Might Look Like
Oil industry’s earnings season set to begin. First quarter earnings reports are just starting to be released, and the numbers will reflect the worst quarter yet experienced for the industry. The first quarter of 2016 saw oil prices at their lowest levels in more than a decade. The full damage of the quarter will start to come into view when the oil majors announce their numbers in early May.
San Francisco requires solar on all rooftops. The city of San Francisco passed an ordinance that would require the installation of solar panels on the rooftops of all new small and medium-sized buildings. The requirement is the first of its kind in a city as large as San Francisco. SolarCity’s (NYSE: SCTY) share price surged nearly 8 percent on the news.
SunEdison files for bankruptcy. The solar industry is doing well but one of its largest companies just filed for Chapter 11 bankruptcy. SunEdison had piled on too much debt in recent years as it recklessly pursued growth. SunEdison hopes to trim more than $16 billion in debt through the bankruptcy process. The solar company’s nearly $2 billion deal to takeover Vivint Solar fell apart as its finances deteriorated over the past year.
By Evan Kelly of Oilprice.com
More Top Reads From Oilprice.com:
- Oil Prices Show No Sign Of Weakness After Doha
- This Six-Year Running Oil And Gas Trend Just Reversed Itself
- Why Are Bankrupt Oil Companies Still Pumping?
