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Is The Latest Rally Yet Another False Start?

Is The Latest Rally Yet Another False Start?

Firstly we will look at some of the critical figures and data in the energy markets this week, before examining some of the key market movers and analyzing the top news events taking place in the global energy complex over the past few days.

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(Click to enlarge)

Chart of the Week

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• Crude-by-rail shipments surged between 2012 and 2014. But rail shipments have plunged since the oil price downturn.

• Shipments peaked at 928,000 barrels per day in October 2014. Most of the rail shipments occurred from the Bakken in North Dakota to East Coast refineries.

• Rail is more expensive as a transit route than pipelines. The economics worked because of the WTI/Brent spread, which was once rather large. Slower U.S. production, and more recently the lifting of the oil export ban, have contributed to a narrowing of the price spread between the two benchmarks.

• The result is that East Coast refineries can now import crude more cheaply than purchasing oil that has traveled by rail from North Dakota. Related: Choking And Lifting Preventing The Decline In U.S. Shale?

Market Movers

Eni (NYSE: E) finally began producing from its Goliat platform in the Arctic, the northernmost platform in the world. The offshore oil field, the first producing field in the Barents Sea, suffered from repeated delays and cost overruns. The $6 billion project will eventually produce 100,000 barrels per day.

• The government of Tanzania said that Total SA (NYSE: TOT) has the funds to build a major oil pipeline from Uganda to a port on the Tanzanian coast, and construction should begin as quickly as possible. The $4 billion pipeline could connect Uganda’s oil fields to the global market, opening up a regional hub for East African oil exports that could benefit multiple companies prospecting in the area. Despite the government’s statement, Total declined to comment.

Linn Energy (NASDAQ: LINE) said in its Q4 results that it “does not expect to remain in compliance with all of the restrictive covenants contained in its credit facilities throughout 2016.” That “raises substantial doubt about the Company’s ability to continue as a going concern.” Linn Energy’s share price traded down by almost 20 percent in early trading on March 15.

Tuesday March 15, 2016

Oil prices lost some of their shine over the past week, as reality set in. Oil markets remain oversupplied, inventories are still rising, and hopes have faded surrounding OPEC’s ability to negotiate some kind of production cut. Iran punctured bullish sentiment when it said that it would not accept the OPEC-Russia production freeze deal until it had returned output to pre-sanctions level, which means that it has no intention of choking off output until it ramps up production by an additional 1 million barrels per day. Related: $67 Oil Has All The Majors Converging Here

Rally is too early. Even leaving aside Iran and the record high levels of oil sitting in storage, there could be a ceiling to the oil price rally due to the responsiveness of U.S. shale. A rally above $40 or $50 would bring U.S. shale production back online, due to the short lead times between new drilling and production. That would send prices back down. The key to a sustained rally is a more substantial cut back in production, which can only be possible if drillers are starved of capital, Goldman Sachs concluded recently. “An early rally in prices before a deficit materializes would prove self-defeating,” Jeffrey Currie, head of commodities research at Goldman Sachs, wrote in a March 11 report.

A reaction from the shale industry could take longer than expected, others argue. With battered balance sheets, thousands of laid off workers, idled equipment, and depleted access to capital, it is not as if oil drillers can spring into action immediately. For example, North Dakota’s Director of Mineral Resources, Lynn Helms, thinks it could take oil prices rising above $60 per barrel before drilling picks up. “If you’ve been on a strict diet for a long period of time, it takes a while to put the weight back on,” Helms told reporters last week. As a result, even if oil prices rise, it will take time for damaged drillers to repair their balance sheets.

“Light at the end of the tunnel” for oil prices. The IEA, for its part, weighed in last week with a cautiously optimistic take. The Paris-based energy agency said in its latest Oil Market Report that oil prices may have reached a bottom. Supply disruptions from Iraq to Nigeria, coupled with falling U.S. production and a weaker U.S. dollar are all working together to push oil prices up from their lows. That could mean that oil prices have “bottomed out.”

The IEA revised its estimate for supply cuts, expecting a deeper contraction than it did in last month’s report: increasing its estimated cuts from non-OPEC producers from 600,000 barrels per day to 750,000 barrels per day. Iran’s expected ramp up in production has also been less impressive than expected. The oil markets will remain oversupplied through much of this year, but the supply and demand will converge much more rapidly in the second half of 2016. There is a lot of uncertainty, to be sure, but the IEA said that there is “light at the end of the tunnel.”

Related: Oil Price Crash Was Not Saudi Arabia’s Fault

Obama admin cuts off Atlantic drilling. There was growing speculation that the Obama administration would take initial steps to open up the Atlantic seaboard to oil and gas drilling as part of the Interior Department’s latest five-year plan. Instead, the administration surprised the industry by removing the suspected lease sale for the Atlantic Ocean in its 2017 to 2022 proposed plan, released on March 15. The oil and gas industry have expressed strong interest in exploring the Atlantic outer continental shelf, which could hold 3.5 billion barrels of oil and 30 trillion cubic feet of natural gas. But the latest development may not be all that significant, given the fact that a new administration next year can reverse course. No drilling had been expected before the end of the decade anyways. Low oil prices would also mean that any E&P companies would probably proceed slowly with high-cost exploration. For now, though, the region remains off limits.

Apache and Shell drill in Egypt. Apache Corp. (NYSE: APA) and Royal Dutch Shell (NYSE: RDS.A) are set to start drilling Egypt’s first unconventional gas well by the end of March, with production slated for June. The projected will be located in Egypt’s Western Desert and will be a milestone for Egypt, a country that is in desperate need of natural gas. The project comes as Eni is also developing a massive offshore deposit of natural gas.

Electricity sales down in the U.S. In a new report, the EIA found that electricity sales in the U.S. declined on an absolute basis in 2015, down by 1.1 percent from the previous year. Steadily increasing energy efficiency, particularly from appliances, combined with slow economic growth have cut into electricity consumption. It was also the fifth time in eight years that electricity sales declined. As efficiency continues to improve, the growth prospects for utility companies are highly questionable.

U.S. West Coast LNG export terminal rejected. The Federal Energy Regulatory Commission rejected a permit for an LNG export terminal in Oregon late last week. The Jordon Cove LNG export terminal has been seeking permits for years, but FERC said the developers failed to demonstrate how the benefits from a pipeline that would feed the terminal would outweigh the adverse effects on landowners. The more than $5 billion project was one of the leading candidates to export natural gas from North America’s west coast.

Russia announces withdrawal from Syria. In a surprise move, Russian President Vladimir Putin announced the withdrawal of troops from Syria on March 14, after declaring victory. Putin had propped up his ally, Syrian President Bashar al-Assad, fighting off an array of opposition groups. UN-led negotiations are seeking an end to the multiyear war, and while any solution remains extremely difficult, there are glimmers of hope that a political settlement can be reached by all parties involved.

By Evan Kelly of Oilprice.com

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Leave a comment
  • Sally W. on March 15 2016 said:
    Is there a conclusion/summary or just words?
  • Richard T. on March 15 2016 said:
    "Bring US shale production back on line" you make it sound like turning on a light. Thankfully it's not quite that simple and most shale companies are either bankrupt or about to be. It's ironic. Capitalism is cutting it's own throat and the life blood gushing out is oil.

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