Oil prices rose at the beginning of the week on the back of drawing inventories and increased support for an extension of the OPEC output cut deal.
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• The combined capex for 44 onshore U.S. oil companies increased by $4.9 billion, or 72 percent, in the fourth quarter of 2016 compared to the same period a year earlier.
• That is the largest year-on-year increase since 2012.
• Spending and drilling is expected to rise this year as well, and first quarter numbers will be released next month.
Market Movers
• Seadrill’s (NYSE: SDRL) share price melted down on Tuesday after the oilfield services company warned about the impairment on some of its bonds and the increasing likelihood that shareholders will “receive minimal recovery for their existing shares.” SDRL’s share price fell by more than 46 percent at one point on Tuesday.
• EOG Resources (NYSE: EOG) was updated to a “Buy” rating by UBS, with a $109 price target. The Texas shale driller has some of the lowest breakeven costs in the industry.
• ExxonMobil (NYSE: XOM) announced a new discovery in Guyana, the latest among a string of successful wells drilled off the coast of the South American nation. Exxon is prioritizing Guyana this year, fast-tracking development of its offshore discoveries.
Tuesday April 4, 2017
Oil prices showed gains in recent days and held onto them to start off the week. There is growing confidence in an OPEC extension and also there are finally some signs that the market is tightening.
OPEC: Inventories starting to decline. The head of OPEC says that the production cuts from the cartel are starting to bear fruit. “I remain cautiously optimistic that the market is already rebalancing," OPEC’s Secretary-General Mohammad Barkindo told reporters Sunday in Baghdad. “We have started seeing stock levels coming down.”
$60 oil not far away. Investment bank UBS said in a recent report that the oil market is heading towards balance even after taking into account rising U.S. output. UBS says demand will soak up the excess supply, and as a result of a tighter market, oil could be heading towards $60 within three months. BNP Paribas also made a bullish call, expecting inventory drawdowns every quarter of this year. The bank says Brent could average $60 per barrel this year.
Or will it go to $70? Pierre Andurand of Andurand Capital Management expects oil to hit $70 before the end of the year. "I think oil prices are likely to recover to around $70 … I think the market will switch to backwardation – sustainable backwardation – by late summer and that will bring the next wave in oil prices," he said on CNBC. His switch from bearishness to bullishness is notable, given his track record at successfully predicting some previous swings in the market. Related: The End Of OPEC Is Near
Oil trade down 16 percent this year. The FT reports that the volume of oil moving on tankers at sea has declined by 16 percent so far this year compared to a year earlier, a sign that the OPEC cuts are having a tangible effect. The rise of U.S. shale output could be distracting from a tighter market in the rest of the world. “Water is where the market changes first,” Fabio Kuhn, CEO of Vortexa, an oil tracking company. “We think this is some of the first evidence that supply cuts are having a major effect.”
Oil inventories in Caribbean on the decline. U.S. crude inventories are at record levels, but that is not reflective of global conditions. Bloomberg reports that oil storage in the Caribbean has seen inventories decline by between 10 and 20 million barrels since mid-February. This can be interpreted as another sign of a tightening market.
Iraq increases compliance to 98 percent. Iraq said that it cut production to 4.46 million barrels per day in March, taking output down closer to its promised target. The reduction puts Iraq close to 98 percent compliant with the 4.351 mb/d it pledged to reach over the course of the six-month deal. The cuts made by Iraq – one of the biggest laggards on the OPEC deal – will boost confidence in the group’s cooperation. It could also build trust in the run up to negotiations over a six-month extension.
Libyan output coming back online. The unexpected outage of 252,000 bpd of Libyan oil production last week sent a jolt through the oil market, providing some unanticipated bullishness. But one of the disrupted fields brought 120,000 bpd back online by Monday, deflating some of the confidence around prices.
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Oil majors barely breaking even. Several oil majors are still not producing positive cash flow after taking into account their dividend payments to shareholders. ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A), Chevron (NYSE: CVX) and BP (NYSE: BP) did not generate positive cash flow in 2016, according to the WSJ. BP needs $60 per barrel to breakeven. Shell and Exxon had better fourth quarters, and Shell even paid down some of its huge debt pile. Despite the problems, the majors are steadfastly refusing to cut their dividends. Related: Why An OPEC Deal Extension Won’t Lift Oil Prices
Maduro seizes power on oil deals in Venezuela. Venezuela’s political crisis took an unexpected turn over the past week with the defanging of the legislature by the judiciary, which is largely in the hands of President Maduro. The court backtracked since then, but President Maduro will still have the ability to cut deals on behalf of the state-owned oil company PDVSA without the approval of the congress. That could potentially lead to the sale of some oil fields long under state control, given the government’s desperate need for cash.
Qatar Petroleum to develop world’s largest gas field. Qatar is expected to start new development at its massive North Field, which is connected to the South Pars field in Iran, the largest gas field in the world. Qatar has become one of the largest LNG exporters in the world because of the North Field, and its new phase of development is a signal that Qatar is confident in rising global demand for gas despite the current glut of supply.
LNG markets in flux. Bloomberg reports on the rapidly changing LNG market – the growing volumes of supply are leading to shorter contract terms, a more liquid market, and lower prices. For decades, global gas trade relied on long-term bilateral contracts with prices linked to the price of oil. The opening of LNG export terminals in the U.S. is accelerating this transition.
Tesla larger market cap than Ford. Tesla (NYSE: TSLA) announce sales of 25,000 vehicles in the first quarter, a record high for the company. The announcement led to a sharp uptick in the company’s stock price, allowing Tesla to officially pass Ford (NYSE: F) in terms of its market capitalization. Tesla sold 76,000 vehicles last year while Ford sold 6.6 million.
By Tom Kool of Oilprice.com
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