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Midweek Sector Update: Have We Reached A Bottom For Oil Prices?

Midweek Sector Update: Have We Reached A Bottom For Oil Prices?

Bouncing off of four-month lows, oil prices rose a bit on August 10, as WTI tried to climb back to $45 per barrel and Brent jumped above $50. The slight uptick was due to data showing that China’s oil imports so far this year are up 10 percent from a year earlier. That supported the notion that demand is rising and could (very slowly) start to soak up extra supply. However, don’t get too excited just yet – analysts say that China’s oil imports are temporarily elevated as the government seeks to capitalize off of low crude prices for its strategic petroleum reserve. Seizing on the opportunity to buy up oil on the cheap, once the stockpile build is achieved, China’s oil demand could level off.

Moreover, China announced a surprise devaluation of its currency, the yuan, on August 11. The move could provide fresh worries over its oil demand because a weaker currency would make oil more expensive. The devaluation by the central bank was intended to keep growth humming along, but for oil markets, it is a negative.

Meanwhile, OPEC announced that its production levels have hit a three-year high as Iran managed to boost output. The oil cartel produced 31.5 million barrels per day in July, or an increase of 100,700 barrels per day over the previous month’s total. Iran posted a gain of 32,300 barrels per day, reaching 2.86 million barrels per day. That was the highest tally for the Islamic Republic in over three years. Iraq also saw its output jump by 45,700 barrels per day to 4.1 million barrels per day. Related: Bullish Bets On Oil Go Sour

The production gains throw up new bearish signals for oil, although the increases in output are relatively small. And as oil prices have dropped to fresh lows, they have hit resistance at a very similar threshold for the second time this year (~$44 for WTI and $45-$52 for Brent), and the markets have demonstrated a reluctance to trade oil any lower, perhaps expecting oil prices can’t fall any further than where they are currently at.

Iran’s foreign minister stated that his country would reveal new oil contract terms in December, widely expected to include more attractive terms for international oil companies. Iranian officials have identified more than 50 oil and gas projects that will require more than $185 billion in investment. There will also be new upstream blocks. For years, Iran has not allowed foreign oil companies to own and operate fields in country, but that could finally change. International companies will be able to become operators and book reserves, and there will be certain stipulations such as entering into joint ventures with the National Iranian Oil Company and agreeing to technology transfer. Royal Dutch Shell (NYSE: RDS.A), Eni (NYSE: ENI), Total (NYSE: TOT), BP (NYSE: BP), and others have expressed interest.

The EIA published another piece of evidence to suggest that U.S. shale production is declining. In its new Drilling Productivity Report, the EIA expects shale production to decline by 93,000 barrels per day in September, marking several consecutive months in which the agency estimates that shale production will contract. The declines will be led by the Eagle Ford (a loss of 56,000 barrels per day), the Bakken (down 27,000 barrels per day) and the Niobrara (down 18,000 barrels per day). Related: Congress To Lift Oil Export Ban Next Month?

A campaign to repeal the crude oil export ban in the United States is gathering momentum, and the House of Representatives plans on voting on a bill this fall. Sponsored by Rep. Joe Barton (R-TX), and backed by another 113 co-sponsors, the bill is the surest sign yet that a meaningful push to lift the export ban is upon us. For months we have watched this closely and speculated on what it would mean for the oil markets, and pretty soon we may find out. “We’ve got green lights in the House all the way,” Barton said in an interview with Bloomberg BNA. “The whip, the majority leader, the speaker are all on board to move the bill.” Lobbyists from the downstream sector are going to fight this with everything they’ve got, but for now, the political winds are blowing at the backs of those pushing for a repeal. It won’t happen immediately however. The house could pass their bill in September, but action in the Senate may have to wait until early 2016.

A removal of the export ban would allow a lot of crude to leave American shores. That would ease the glut at certain storage hubs, and provide a boost to prices. WTI would close its gap with Brent, adding a couple of dollars per barrel of oil. That would provide an incentive for drillers to add rigs back to the field and resume drilling and it would throw them a financial lifeline at a time when oil prices are depressed. Conversely, opening up for exports would be bad news for refiners (thus their opposition to any legislative action), as their margins would shrink.

Royal Dutch Shell (NYSE: RDS.A) had announced plans in June to form a strategic alliance with Russia’s state-owned firm Gazprom (OTCMKTS: OGZPY) on global natural gas projects, which would also consist of some asset swaps. Shell had been expected to take a stake in Sakhalin-3, an expansion of a Russian LNG project on the island of Sakhalin off of Russia’s Pacific Coast. However, the asset swap may be blocked by the U.S. government, which just included Sakhalin-3 under its list of sanctions as part of its response to the violence in Ukraine, prohibiting exports, re-exports, and technology transfers, according to Reuters. Expansion of LNG exports at Sakhalin could be delayed as Gazprom needs western technology, and the move by the U.S. government is seen as a warning to international companies to stay away. Related: Frack Now, Pay Later: A New Era In U.S. Oil?

On the other side of the Pacific, Shell is moving to drill in the Chukchi Sea. After repairing its icebreaker in Portland, OR (and running into stiff resistance from environmental groups), Shell is now ready to finally get down to business. The company has started drilling a well in the Burger Prospect, but has been prohibited by federal regulators from drilling into oil-bearing zones until its oil spill response equipment is on hand, and that equipment is onboard the icebreaker. The company has officially requested permission to enter oil-bearing zones with its icebreaker set to arrive on site this week.

Japan restarted its first nuclear reactor since shutting its entire fleet down following the Fukushima meltdown. After years of legal fights, public protests, and halting progress, Kyushu Electric Power Co. (TYO: 9508) announced that its Sendai unit could begin sending electricity to the grid by the end of this week, and resume full commercial operations in September after inspections.

By Even Kelly of Oilprice.com

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  • Phil Will on August 12 2015 said:
    Tell me Mr. Kelly... if the gap between WTI and Brent has been averaging $5 - $6, why do you only give credit for WTI potentially rising just $2 ("a couple of dollars per barrel") with the passage of lifting the oil export ban, in your obviously bearishly-biased article? If the gap "closes" between WTI and Brent with the passage of the legislation (which it undoubtedly will), WTI will most likely gain
    $5 - $6 per barrel, not just $2 !!!

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