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The Oil Price Tug Of War

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Oil Majors To Boost Production As IEA Warns Of Supply Deficit

Oil drillers

Oil prices traded sideways in a quiet market as traders digest the news coming from Houston where the world’s opinion leaders in oil & gas have gathered for this year’s CERA Week.

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Chart of the Week

 

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• Total installed wind capacity surpassed hydropower in the U.S. for the first time last year.

• Hydro has been a pillar of the U.S. electricity system for decades – not as large a share of the sector as coal, natural gas or nuclear, but hydro has held a sizable share since the post-WWII build out in the 1940s and 1950s.

• On February 12, in the Southwest Power Pool, which covers North Dakota down to Northern Texas, wind accounted for half of the entire system’s generation, the first time that has occurred in one of the seven regional transmission organizations (RTOs).

Market Movers

ExxonMobil (NYSE: XOM) says it will spend $5 billion on developing its Guyana discovery.

• Natural gas prices rose this week on cooler weather reports for the U.S., with prices up nearly 4 percent to $2.931/MMBtu. Prices are still down sharply from December’s highs.

Range Resources (NYSE: RRC) is one of the lowest cost producers of natural gas in the U.S., according to JP Morgan. The bank gave Range Resources a target price of $46 per share.

Tuesday March 7, 2017

IHS CERAWeek got underway this week in Houston, a top oil and gas conference that will feature the most notable faces of the oil world in one place. There will be plenty of news coming from oil executives, ministers, analysts and government agencies.

IEA: supply deficit looms unless drilling picks up. The IEA issued a new report at the conference that looks at the oil market over the next five years, and the agency warned that although shale drilling is coming back and the market is currently oversupplied, relentless demand growth will soak up all the excess. By the early 2020s, the market could be short of supply, resulting in a price spike. The IEA says the draconian cuts to exploration spending over the past three years will result in too few barrels coming online in the five-year timeframe. OPEC will be stretched to its limits as demand soars.

Russia says it will comply with promised cuts. Russia’s energy minister Alexander Novak said that Russian oil production will drop by 300,000 bpd by late April, which will allow Russia to comply with the cuts it promised as part of the OPEC deal. Together with Russia, other non-OPEC countries pledged to reduce output by 558,000 bpd. Russia’s compliance will further boost confidence in the deal.

Oil majors to boost growth. A Reuters analysis finds that the largest oil companies in the world are planning on ramping up production over the next five years, after three years of contraction. Together, ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A), Chevron (NYSE: CVX), BP (NYSE: BP), Total (NYSE: TOT), Statoil (NYSE: STO) and Eni (NYSE: E), will grow output by a combined 15 percent by 2021. Related:  Why The U.S. Military Is Fully Backing Renewables

Argentina shale costs drop by half. Argentina’s state-run YPF (NYSE: YPF) said that drilling in Argentina’s shale is getting more cost effective. At the CERAWeek conference, YPF CEO Miguel Gutierrez said horizontal drilling costs have declined by half, falling from $17 million per well to just $8 million – still above U.S. shale drilling costs but rapidly converging towards parity. Also, the time it takes to drill a new well fell from 40 days to just 15 days. As a result, breakeven costs have dipped below $40 per barrel, making Argentina one of the most attractive places for shale drilling outside of North America.

Exxon to spend $20 billion in Gulf of Mexico. ExxonMobil’s CEO Darren Woods laid out plans on Monday at CERAWeek to spend $20 billion on refineries, petrochemical plants and other oil and gas projects in the Gulf of Mexico. The move comes on top of Exxon’s announcement last week that it would step up spending on shale drilling in the U.S. Exxon has made a name for itself for drilling complex projects around the world, but in this new era of low prices, Exxon is increasingly focusing on the U.S.

Frac sand prices soaring. Demand for frac sand is soaring and could even eclipse previous peaks despite fewer wells being drilled. That is because the volume of sand used in each well has surged as companies discover more sand leads to more production. The amount of sand used per foot of well depth was up 40 to 50 percent in 2016 compared to 2014. The surge in demand for sand is pushing up prices. The result could be a 10 percent increase in the cost of the average shale well, which will erase some of the “efficiency gains” the industry achieved over the past few years. Bad news for shale drillers, but good news for frac sand producers, including Hi-Crush Partners (NYSE: HCLP) and U.S. Silica Holdings (NYSE: SLCA), whose share prices are up 170 percent and 380 percent over the past year, respectively. Related: Regulation May Stall The Future Of Energy Storage

U.S. refined product exports soar. U.S. refineries exported 3 million barrels per day of refined products in 2016, more than double the 1.3 mb/d shipped a decade ago. The U.S. is now a net exporter of crude and refined products in its relationship with Latin America for the first time, upending longstanding trade flows from south to north.

Libyan oil production down on turmoil. Clashes near Libya’s largest oil export terminals started to cut into output, with production falling by roughly 50,000 bpd to 650,000 bpd in recent days. It is not clear if the outage will be lengthy, but violence will likely bedevil the North African OPEC member for the foreseeable future.

WSJ survey puts oil below $60 for 2017. A WSJ survey of 15 investment banks finds an average oil price forecast at $57 per barrel for Brent in 2017 and $55 for WTI. Going forward, the analysts expect oil to trade within the narrow range that it has been residing in for much of this year. “There doesn’t seem to be many catalysts to throw us out of the current range,” Christopher Main, oil analyst at Citigroup, told the WSJ. “We should be treading water until springtime.”

China deploys largest oil platform. China’s drilling platform, Bluewhale 1, is heading into operation. The nearly $1 billion platform is as tall as a 37-storey building, the largest oil platform in the world. It will be used in the South China Sea.

By Evan Kelly of Oilprice.com

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