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Oil Holds Gains After OPEC Deal

Oil Rig

We begin with a quick look at some of the critical figures and data in the energy markets this week, with both oil prices and the rig count rising, as news of an OPEC agreement saw markets turn bullish.

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Chart of the Week

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• The disruption of the Colonial Pipeline, the largest pipeline carrying gasoline from the Gulf Coast to the U.S. southeast, led to a temporary spike in gasoline prices.
• The two-week outage also led to a drawdown in gasoline stocks, particularly in PADD 1C, the region covering the southeast. PADD 1C saw stocks fall by almost 6 million barrels during mid-September, the largest draw on record.
• The Gulf Coast (PADD 3) saw an increase in gasoline inventories of about 4.8 million barrels, a record high. Refined product was trapped on the coast without the pipeline. The downed line is back up and running.

Market Movers

Transocean (NYSE: RIG) saw its share price drop more than 7 percent on Monday after it revealed that Reliance Industries cancelled an ultra-deepwater drillship. The contract consisted of a dayrate of $508,000, through January 2021. The loss more than outweighs a contract that it won with Suncor Energy (NYSE: SU).
SM Energy (NYSE: SM) was up nearly 2 percent on Monday after it said that it planned on selling off 54,000 acres in North Dakota. SM plans on focusing its efforts in the Permian Basin.
• Disasters hit oil majors: a helicopter transporting people to Chevron’s (NYSE: CVX) platform off the coast of Angola crashed, killing at least four people. Separately, BP (NYSE: BP) reported an oil spill in the North Sea. The oil, the company said, will disperse into the sea.

Tuesday October 4, 2016

Oil prices rose to a three-month high as the markets took a more optimistic view of the OPEC deal announced last week. Hedge funds and money managers made highly bullish bets on oil in the lead up to the meeting in Algiers, and while the rally has slowed, oil prices are holding onto their gains. Brent closed above $50 per barrel for the first time in weeks.

Hurricane Matthew barrels through Caribbean. The Category 4 hurricane is threatening small islands in the Caribbean, with Haiti expected to bear the brunt of the storm’s carnage. In addition to the pending humanitarian disaster in the region, the storm could also disrupt petroleum trade. The hurricane could shut in about 33 million barrels of oil in storage in the Bahamas, and could disrupt gasoline shipments along the Atlantic seaboard, potentially delaying cargoes into New York Harbor, for example. A few weeks ago, a major storm in the Gulf of Mexico interrupted shipments, leading to huge drawdowns in oil inventories in the weekly EIA data, which led to higher prices. Hurricane Matthew could also have unpredictable effects on short-term prices for crude and refined products.

Related: Expert Analysis: A Long Road Ahead For OPEC

Canada introduces carbon tax. The Canadian government unveiled a plan to implement a carbon price beginning in 2018. The carbon tax plan from Prime Minister Justin Trudeau calls for a C$10 per tonne charge beginning in 2018, rising C$10 each year until it tops off at C$50 per tonne in 2022. The government in Alberta, home to the vast majority of Canada’s oil production, demanded that in exchange for its support, it demanded the federal approval of a major pipeline, which would help open up new markets for Canada’s oil sands.

Libya increases oil production to 0.5 mb/d. After years of outages, Libya is finally poised to breathe new life into its oil sector. The war-torn North African country has succeeded in bringing some key oil ports back online, and production has jumped to 500,000 barrels per day (bpd), up from 260,000 bpd as recently as this August. The National Oil Company says that is just the beginning. It expects to see output rise to 600,000 bpd by the end of October, and is ultimately targeting 950,000 bpd by the end of the year. Libya is exempt from the recently announced OPEC production cut, and if it succeeds in ramping up production, it could potentially overwhelm the cartel’s planned cutbacks.

Iran signs $2.2 billion oil contract, with new model. Iran secured a contract with Persia Oil & Gas Industry Development Co. to increase oil production at three oil fields along Iran’s border with Iraq, Bloomberg reports. The $2.2 billion contract was based on Iran’s overhauled framework, a contract that offers oil companies more incentives to boost production. The new oil contract is intended to attract more international investment to help Iran ratchet up oil production in the years ahead.

U.S. shale industry increases 2017 hedging. Bloomberg reports that a range of shale companies have moved over the past week to secure hedges for their 2017 oil production, protecting themselves from any renewed downturn in oil prices and guaranteeing them a certain price for their output. The 6 percent jump in oil prices after the OPEC deal provided a lifeline to shale companies, and they are reportedly hedging their output “in droves.” The spike in hedges suggests that a substantial slice of the shale industry will keep production steady or even increase oil flows, potentially prolonging the slump.

Related: Smoke And Mirrors: What Did OPEC Really Agree On?

Nigeria says oil companies illegally export oil. The Nigerian government is suing several oil majors over what it says were illegal oil exports with an estimate value of about $12.7 billion. The companies – Shell (NYSE: RDS.A), Chevron (NYSE: CVX) and Eni (NYSE: E) deny the allegations, but the government says that about 57 million barrels of oil were exported and not declared between 2011 and 2014. The government wants $407 million from Shell and $463 million from Chevron.

BP oil spill in North Sea. BP (NYSE: BP) shut down an oil well after leaking oil into the North Sea near the Shetland Islands. A “technical issue” caused the company to spill roughly 700 barrels of crude oil into the sea. The Clair platform, as it is known, produces about 20,000 barrels per day and will be offline until the exact cause of the leak can be determined.

Pemex sells $4 billion debt. The state-owned Mexican oil company issued $4 billion in bonds in order to pay off old debt and also finance its 2017 plans. Pemex is selling off assets to whittle away at its massive debt pile, and is also looking for partners to drill in deepwater in the Gulf of Mexico. The Mexican oil company has $97 billion in total debt.

EU, India move to ratify Paris climate treaty. The Paris climate change accord agreed to last year required the ratification of countries representing at least 55 percent of the world’s greenhouse gas emissions for it to take effect. With India and the EU approving the treaty, the necessary number of countries has been reached and the treaty should take effect before the end of the year. The treaty calls for keeping global average temperatures from rising no more than 2 degrees Celsius.

By Evan Kelly of Oilprice.com

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