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In Spite Of Plunging Rig Count, Oil Erases Earlier Gains

In Spite Of Plunging Rig Count, Oil Erases Earlier Gains

As we look at some vital statistics on the oil and gas industry. We see that U.S. crude inventories have surpassed the 500 million barrels milestone and that nationwide average gasoline prices keep falling.

(Click to enlarge)

(Click to enlarge)

(Click to enlarge) Related: Iran Looking To Ramp Up More Than Just Oil Production

Another rocky week for oil prices. WTI and Brent bounced up and down throughout the week along with the rise and fall of expectations for a potential OPEC meeting in February. Also, the top official at the New York Federal Reserve hinted at the fact that the latest turmoil in the global financial markets might alter the calculus for interest rate hikes later this year in the United States. That led to a sharp two-day loss for the U.S. dollar, helping to push up oil prices.

There are growing fears that the collapse in oil prices is now bleeding over into the broader global economy. We have covered the ongoing deterioration in commodity-exporting countries pretty closely, from Saudi Arabia to Russia, Venezuela, Iraq, Nigeria, and more. Normally cheap energy should bolster consumption, but the drop in commodity prices has been so sharp that questions continue to arise about the creditworthiness of some oil producers. Venezuela tops the list. With billions of dollars in debt due this year a rapidly shrinking ability to deal with the crisis, a debt default may not be too far off.

Citigroup added its voice to those concerned about the health of the global economy, citing four interlinked forces – a strong U.S. dollar, low commodity prices, weak trade, and soft growth in emerging markets – for the sudden fragility and potential for a global recession. "It seems reasonable to assume that another year of extreme moves in U.S. dollar (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop and make it very difficult for policy makers in emerging markets and developing markets to fight disinflationary forces and intercept downside risks," Citigroup analysts warned. "Corporate profits and equity markets would also likely suffer further downside risk in this scenario of Oilmageddon." The bank no doubt captured some headlines by coining that new term. Related: Global Oil Production On Pause, But Decline Seems Imminent

"We should all fear Oilmageddon," Citigroup wrote in conclusion. "Global recession, as we define it, would leave nowhere to hide in equities. Cash wins."

ConocoPhillips (NYSE: COP) made news this week when it became the first U.S.-based oil major to slash its dividend. Italian oil giant Eni (NYSE: E) was the only other oil major to have done so – it cut its dividend almost a year ago. ConocoPhillips cut its dividend by 65 percent this week, and the company’s CEO argued that the move would save $4.4 billion in 2016.

The oil majors are having trouble covering spending and also their shareholder payouts with their underlying cash flow. By and large, they are making up for the shortfall with new debt. Chevron took on an additional $9.6 billion in debt to cover dividend obligations, ExxonMobil added $10.8 billion in fresh debt, and BP took on another $4.6 billion. At some point, something has to give. S&P downgraded a long list of oil companies this week, including Chevron and Shell. It also put BP and ExxonMobil on review for a possible downgrade.

A quick rundown of the full-year earnings from some of the oil majors:
BP (NYSE: BP) lost $6.5 billion in 2015, one of the company’s worst on record.
ConocoPhillips (NYSE: COP) posted a loss of $4.4 billion in 2015.
ExxonMobil (NYSE: XOM) saw profits halve to $16.2 billion.
Royal Dutch Shell (NYSE: RDS.A) posted a profit of $3.8 billion, down 80 percent from 2014.
Chevron (NYSE: CVX) reported a loss of $588 million, its first loss since 2002.

U.S. President Barack Obama will propose a $10-per-barrel tax on oil companies when his administration unveils its FY17 budget next week, a move that would raise more than $30 billion per year. The revenue would be used to pay for $300 billion worth of proposed investments in clean energy, high-speed rail, mass transit, self-driving cars, and other energy efficient initiatives, according to Politico. Obviously, the proposal has little chance of becoming law with a Republican controlled Congress. But according to a White House memo, the fee and the new investments would help provide “a clear incentive for private-sector innovation to reduce our reliance on oil and invest in clean-energy technologies that will power our future.” Related: The $2 Trillion Gift From Oil Companies To Consumers

The modest energy bill working its way through the U.S. Senate – a bill that would liberalize LNG exports – got bogged down this week. Democrats want to include funding to address the Flint water crisis, in which people have been subjected to water contaminated with lead. Republicans tried to push the energy bill without Flint funding, and the bill failed on a 46-50 vote. The two sides could still work out their differences though, and do not seem to be too far apart.

Bloomberg reported that China’s oil production may fall this year by 3 to 5 percent. China is the second largest oil consumer in the world, but it is also a sizable producer – the world’s fifth largest, in fact. Output hit a record 4.3 million barrels per day in 2015, but low prices could end up leading to a decline in 2016, the first in seven years. The breakeven cost for China’s main producer, Cnooc, is around $41 per barrel. The company has announced that it will cut spending and production this year.

The glut in global supplies persists, and the rising crude oil inventories in the United States presents a bit of a worry. U.S. oil storage levels jumped again last week, surpassing 502 million barrels and hitting a new record high. Much of that has to do with resilient production across the shale patch, despite the ongoing slump in active drilling rigs. The elevated storage levels will weigh on the markets, and the adjustment to some sort of more sustainable price level could take longer than many had anticipated.

By Evan Kelly of Oilprice.com

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