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Oil Is Set To Rally Beyond $50

Oseberg North Sea

This week’s key data for the oil and gas industry shows a small rebound in U.S. oil production after months of declines. While U.S. crude stocks continue to fall, we notice a small build in gasoline stocks as refinery runs continue to increase.

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Friday, June 10, 2016

Oil prices closed and opened above $50 per barrel this week, the first time that has happened in 2016. The highest supply outages in years have rapidly shrunk the global surplus, providing bullish momentum to WTI and Brent. Prices fell back on Friday due to a stronger dollar, however, and speculators also appeared willing to pocket some profits and take a breather on the rally. Some Canadian oil production is coming back online but the fundamentals continue to firm up. The EIA reported inventory drawdowns for the third week in a row, providing some clearer direction on which way the markets are heading.

Demand is strong. Oil demand looks bright, with record gasoline consumption taking place in the United States. Also, global refining demand is nearing record highs as the world takes advantage of cheap fuel. In August, Reuters projects that global refining demand could hit 101.8 million barrels per day, which would be a new all-time high. Record demand combined with falling supply offers clear signs that there is strong bullish momentum behind crude oil.

Not everyone agrees that the rally will continue. Top analysts from Argus media and S&P Global, among others, are not convinced that oil prices will move higher, arguing that the rally could be running out of room. Supply outages in Canada are starting to be resolved. Also higher oil prices could restart some drilling in the shale patch. The dollar could strengthen, putting downward pressure on prices. And oil inventories are still at record highs.

Continental Resources starts completing wells. Harold Hamm, the chief of Continental Resources (NYSE: CLR) said that his company has begun completing some of the drilled but uncompleted wells (DUCs) in the Bakken now that oil prices are up to $50 per barrel. Continental will wait until prices hit $60 per barrel before they start to redeploy new rigs for fresh drilling. Hamm sees a supply shortage coming as U.S. oil production has declined, and he also said that oil could rise to $70 per barrel this year. Related: Only Five Oil Majors Make The Fortune 500 List

More outages in Nigeria. The Trans Niger Pipeline was shut down on Wednesday due to a leak, and will be shuttered for at least a week, taking another 130,000 barrels per day offline. The pipeline carries Bonn Light and is run by Shell, Eni, Total, and the Nigerian National Petroleum Corporation. Shell declared force majeure on Bonny Light in May when another pipeline that carries the oil stream, the Nembe Creek Trunk Line, was damaged from an attack. The Nembe Creek conduit, however, was just repaired, which could bring back 75,000 barrels per day. Separately, the Niger Delta Avengers successfully hit the Obi Obi Brass Pipeline on Friday, a pipeline operated by Eni. Nigeria says that oil production fell to 1.8 million barrels per day in March, but that assessment does not accurately depict what is going on now. Production as of today is likely sharply lower, perhaps as low as 1 mb/d.

Middle East oil producers turn to debt markets. Oman sold $2.5 billion in bonds on Wednesday, as it seeks to improve its financial position. The Gulf state oil producer, who is not a member of OPEC, went to the debt markets for the first time in more than twenty years, a sign of how badly it has been damaged from low oil prices. The move comes after some of Oman’s neighbors issued new bonds earlier this year – Qatar sold $9 billion in debt and Abu Dhabi sold $5 billion. Saudi Arabia is also expected to turn to the bond markets, perhaps selling as much as $15 billion worth of bonds. But the IMF warns that the Gulf States are going to need to do a lot more to cut spending in order for them to hold onto their currency pegs.

Speculators gamble on $100 oil. Bloomberg reports that some oil traders are buying contracts that will only pay out if oil surpasses $100 per barrel at some point in the next few years. The contracts do not suggest that such an outcome is necessarily likely, but only that some traders view it as a potential profitable position. The fact that traders are buying up these kinds of contracts suggests that the markets are starting to believe that today’s severe cutbacks in exploration and development will create the conditions for a supply shortage somewhere down the line. Related: Is Colorado Ground Zero For The Next Shale Gas Boom?

More gas in Egypt. Eni and BP made new gas discoveries off the coast of Egypt, another “significant” find in the Eastern Mediterranean. The two companies are working together on the Baltim South license, with Eni as the operator. The discovery follows Eni’s August 2015 find of the Zohr field, one of the largest gas discoveries ever recorded in the Mediterranean. Neighboring Israel has had high hopes of developing gas fields off its coast, but regulatory delays have held up drilling. Egypt appears to be moving much quicker.

North Sea job losses mount. By the end of 2016, the UK oil and gas industry will lose 120,000 jobs compared to 2014 levels because of low oil prices, according to a trade group in the UK. The North Sea has high costs of production and mature output levels, making it less attractive for investment than some other prominent regions when oil prices are low.

U.S. solar market to double in 2016. Solar installations could reach as high as 14.5 gigawatts this year, almost double the 2015 record high of 7.28 GW. First quarter installations are already up 27 percent from the same period a year ago. The rapid growth of the industry is being spurred along by federal tax breaks that were extended late last year through the end of the decade.

By Evan Kelly of Oilprice.com

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