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OPEC Deal Still Wobbly, But Oil Investment Takes Off

US Refinery

Oil prices traded sideways on Tuesday morning but were slightly up on Tuesday afternoon ahead of this week's inventory reports.

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Chart of the Week

• Oil production from the Bakken continues to fall, having recently dipped below 1 million barrels per day for the first time in two years.

• North Dakota has suffered from an exodus of capital and drilling equipment, with new drilling taking place elsewhere.

• The EIA expects output to continue to fall in the Bakken, dropping by another 21,000 barrels per day in November compared to October. That could take production down to just 946,000 barrels per day, compared to a peak of 1.23 mb/d in December 2014.

Market Movers

Statoil (NYSE: STO) stopped production at its Statfjord A platform in the North Sea after a fire. The fire was brought under control but it is not clear when operations can restart at the field, which produces 24,700 barrels of oil equivalent per day.

Chesapeake Energy (NYSE: CHK) saw its price target increased to $8 per share by Citigroup this week. Citi sees falling costs and rising production as reasons for its upgrade.

Alon USA Energy (NYSE: ALJ) saw its share price jump by more than 12 percent on Monday after it confirmed that it received a buyout offer from Delek US Holdings (NYSE: DK).

Tuesday October 18, 2016

Oil prices wobbled to start off the week, rebounding a bit during early trading on Tuesday. A slightly weaker dollar supported prices, while energy analysts suggested the oil market is not as oversupplied as some think. "Global oil inventories (industry and government) increased by 17 million barrels to 5.618 billion barrels in 3Q16. This is the smallest build since 4Q14, confirming that inventory builds are slowing as the market comes back into balance," Bernstein Energy analysts said, according to Reuters. Wood Mackenzie is even more aggressive, predicting a balanced market by the end of the year.

OPEC deal wobbles on Iran data dispute. Iran became the third OPEC member to question the data being used to calculate baseline production figures for the group. Venezuela and Iraq already said that OPEC was underestimated their production levels, an important point that would affect what the countries can produce after the pending deal to cut output is finalized in November. The head of the National Iranian Oil Co. said on Monday that it is actually producing 300,000 barrels per day more than it is getting credit for. The fight over data threatens to undermine the whole deal, and a failure in Vienna in November could reverse the latest oil price rally. “If nothing concrete emerges on production control, the market will lose patience, with the risk of an end-year price bloodbath,” David Hufton, CEO of PVM Group, told Bloomberg.

Iran wooing oil and gas investment. Iran is soliciting interest from international oil and gas companies, asking them to submit documents to pre-qualify as bidders for future oil auctions. Iran is hoping to attract $100 billion in investment over the next decade in order to increase output by some 1 million barrels per day. In the short run, Iran plans on increasing production to 4 mb/d by the end of this year, up from 3.8 to 3.9 mb/d currently.

BP considers green investments. Before the end of the year, BP (NYSE: BP) will decide whether or not to move forward on its first investment in renewable energy in five years. The British oil giant decided against additional investments in renewables years ago, but is now weighing a decision to expand its U.S. wind business. The extension of federal tax credits for renewables through the end of the decade makes wind particularly attractive in the U.S., but it will benefit from more generous incentives if it moves ahead before the end of 2016. Ultimately, BP’s decision may not be all that consequential in terms of size, but it could be closely watched as a harbinger of what oil companies face as the global transition towards cleaner energy continues to pick up momentum.

BP also moving towards increasing oil investments. The oil markets may finally be turning a corner, and after two years of cutbacks, BP may finally step up new drilling. At this week’s Oil and Money Conference in London, BP’s CEO Bob Dudley said that his company could make final investment decisions on several projects this year and more next year. “Investments are back,” Dudley said. “But it’s only going to be the very best.” Dudley expects oil prices to trade between $50 and $60 per barrel in 2017.

Dakota Access Pipeline sees construction equipment destroyed. Energy Transfer Partners (NYSE: ETP) suffered another setback on its campaign to build the Dakota Access Pipeline, which would carry Bakken crude from North Dakota to refineries in Iowa and Illinois. Over the weekend, about $2 million worth of construction equipment was intentionally burned. The destruction occurred in Iowa along the pipeline route, but the individuals responsible are not known at this point. The pipeline has sparked an enormous backlash among Native American tribes affected by the pipeline and environmental groups. The $3.7 billion pipeline was also put on hold by the U.S. government.

Related: U.S. Ease On Cuban Sanctions To Benefit Foreign Oil Producers

Natural gas price rally halts as rigs rise. Natural gas prices have surged about 15 percent since the start of October, as supplies have declined and demand ticks upwards. But traders sold off gas contracts in recent days as the U.S. gas rig count jumped at the end of last week. Gas rigs increased by 11 for the week ending on October 14, the largest weekly gain in years. The gains come as both oil and natural gas prices have showed gains since September, encouraging companies to send crews back to work. The higher rig count, however, spooked traders on Monday.

Oil and gas industry donate to Republicans, but not to Trump. Recognizing that the presidency is slipping away from Republican nominee Donald Trump, the oil and gas industry is focusing its political efforts down ballot. According to E&E, the oil and gas industry has donated more than $70 million to federal candidates, but less than $1 million to Donald Trump. They are convinced they will be dealing with a President Clinton, which could pose some challenges.

Green groups advise Clinton against Colorado Governor. A collection of environmental groups are eyeing a Hillary Clinton presidency, and called on her to not pick Colorado Governor John Hickenlooper (D) for Secretary of Interior, due to his support for hydraulic fracturing. Hickenlooper is viewed as a centrist, and has supported the drilling boom underway in his state. Green groups are pressing Clinton to focus on climate change and crack down on oil and gas drilling.

Fitch Ratings warns about EVs. Widespread adoption of electric vehicles will be “resoundingly negative” for oil and gas companies, Fitch Ratings said in a new report. The ratings agency urged the industry to plan for the potential disruption from new technologies, which could spark an investor sell off in fossil fuels. Such a sell off would make debt and equity more expensive, threatening the financial prospects for many companies. “If they stick their heads in the sand and try and pretend it will all go away, we think they will ultimately have issues,” the report’s lead author, Alex Griffiths, a Fitch managing director, told the Financial Times.

By Evan Kelly of Oilprice.com

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