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Oil On Firm Footing at $50?

Shale Oil Rig Canada

This week’s key data from the oil and gas industry shows that both the ongoing decline in U.S. oil production and decreasing crude stockpiles have bumped up oil prices, whereas U.S. average gasoline prices continue to increase this Memorial Day weekend.

 

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Friday, May 27, 2015

Oil hit a milestone this week, with Brent crude briefly touching $50 per barrel on May 26 before falling back again. Supply outages continue to tighten the market in Canada and Nigeria. But the catalyst for price gains this week came from the EIA, which reported a surprisingly strong drawdown in crude oil stocks – down 4.2 million barrels – which beat estimates. Also, U.S. oil production fell by another 24,000 barrels last week as the contraction continues. Oil prices appear to be on sound footing more than at any time during the nearly two-year downturn. Related: Why $50 Oil Is Here To Stay

More production? Of course, higher prices raise the specter of a resumption in drilling. Short-cycle shale drilling allows for quicker response times than, say, offshore projects that have long lead times. Shale was the first to go offline because of low oil prices, but drillers could once again open up the taps if they feel that they can turn a profit. The jury is out on whether $50 oil is enough to do the trick, but oil slipped back on May 26 as traders grew concerned that drilling could pick up again. Also, the major supply disruptions, particularly in Canada, are temporary. There are still trap doors for the oil price rally to fall through.

One company is thinking of stepping up drilling. Pioneer Natural Resources (NYSE: PXD) said in in its earnings release in April that it would consider adding five to ten rigs this year if oil prices rebound to $50. "I think it is fair to say we're more optimistic than we were last month and even the month before that. We're cautiously optimistic that we're going to see improvement here in the second half of the year," Frank Hopkins, Pioneer’s senior vice president of investment relations, said in an interview. Now that oil is back at $50, will Pioneer add rigs? "It's not so much getting to $50 at a particular point in time. It's having a view that oil at $50 will stay at $50. The industry supply/demand fundamentals have to improve. We have to have a view that it's a positive price environment," Hopkins said. And there is at least one other metric that will convince Pioneer that the market has turned. "What's really going to convince us is that inventory levels continue to come down," he said. The EIA just reported a strong 4.2 million barrel drawdown in inventories. A few more weeks of numbers like that, and Pioneer could be set to resume drilling.

Natural gas prices fall on higher inventory. Natural gas prices fell to their lowest levels in a month on Thursday after the EIA reported a stronger-than-expected uptick in storage levels. Inventories rose by 71 billion cubic feet, putting total storage levels at 2,825 Bcf, well above the five-year average. Natural gas prices dipped back below $2/MMBtu on May 26 and are likely to remain a little above or below that level for quite a while.

U.S. restrictions on banks limit Iran’s return to oil markets. Lingering sanctions on Iran from the U.S. government are hindering the Islamic Republic’s ability to ramp up oil exports, according to the WSJ. For example, Total (NYSE: TOT) had to work with some small European banks that do very little business in the U.S. to arrange financing for the purchase of Iranian oil. Banks that do business in the U.S. are in danger of running afoul of U.S. sanctions if they do business with Iran. The sanctions are related to Iran’s support for terrorism.

Trump to approve Keystone XL. Presumptive Republican presidential nominee Donald Trump gave a much anticipated speech on energy policy in North Dakota on Thursday, at which he said that he would reduce government regulations on the oil, gas, and coal industries. He said market forces should rule the day but also made some comments that contradict that sentiment. Trump vowed to approve the Keystone XL pipeline if elected but added a caveat: he would renegotiate a “better deal” to get the U.S. government “a piece of the profits because we’re making it happen.” Related: How Fast Can Solar And Wind Grow

Three straight years of spending declines. According to Statoil (NYSE: STO), global oil supplies will begin to decline this year, and post several consecutive years of declines as new sources of supply fail to offset natural depletion. That will largely be due to a severe cutback in exploration spending. The world is about to see three consecutive years of spending declines through 2017. “For the first time in history, we’ve seen cutting of capex two years in a row and potentially we risk a third year as well for 2017,” Statoil’s CFO Hans Jakob Hegge said in an interview with Bloomberg. “It might be that we see quite a dramatic reduction in replacing the capacity and of course that will have an impact, eventually, on price.”

ExxonMobil and Chevron defeat shareholder push on climate. Activist shareholders forced a series of votes on whether or not to require ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) to disclose their risks to climate change. The logic is that the oil majors’ assets could lose significant value in a carbon-constrained world, posing financial risks to shareholders. The votes fell short, but posted relatively strong support – 41 percent of Chevron investors supported the climate resolutions and 38 percent of Exxon shareholders supported the moves. The financial risks to climate change are heating up as a point of concern and controversy in the industry.

OPEC to choose new Secretary-General. Changes are afoot in OPEC. The secretary-general, Abdalla Salem el-Badri is set to depart and the cartel is expected to choose a replacement at its meeting next week. El-Badri has been in the position for years, and was expected to retire in 2013 but stayed in the position because OPEC members could not agree on who would replace him. The choice of a new secretary-general at the upcoming meeting might be the only thing that member states agree on.

Fuel shortages and protests in France. The large strike that French unions have initiated to oppose a change in labor laws has led to fuel shortages. French riot police were deployed at a fuel distribution depot to break up the protest.

By Evan Kelly of Oilprice.com

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