The latest oil rally started to unwind on a flurry of bearish news, but the prospect of Iran joining the OPEC meeting has boosted oil prices once again.
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• By 2040, the EIA projects in its latest forecast that tight oil production will rise to 7.08 million barrels per day, up from 4.89 mb/d in 2015.
• The energy agency expects the U.S. to lose 700,000 in shale oil production between 2015 and 2017, but will bounce back after that.
• Interestingly, the EIA believes that the Bakken will surpass the Eagle Ford by 2019 in terms of production, with output rising to 1.3 mb/d. By 2040, the Bakken could see output jump to 2.3 mb/d.
Market Movers
• Seadrill (NYSE: SDRL) saw its stock drop by more than 2 percent on Monday after Pemex announced that it had cancelled its West Pegasus rig contract. Seadrill had already discounted other rig rates to ensure that Pemex would not cancel the contract.
• Exxon (NYSE: XOM), Chevron (NYSE: CVX) and Hess (NYSE: HES) have agreed to jointly bid on offshore oil tracts in an upcoming auction in Mexican waters. The December auction will be Mexico’s first deepwater drilling offer, and the government hopes to raise $44 billion.
• The WSJ reports that Wilbur Ross, a notable distressed-debt investor, is pouring hundreds of millions of dollars into distressed energy debt. Ross wants to take some ownership stakes in Breitburn Energy Partners and has bought debt in Permian Resources.
Tuesday August 23, 2016
The bull market for oil sputtered at the start of this week, putting an end to the longest run in four years on Monday. WTI and Brent closed in on $50 per barrel but fell back again, losing ground again during on Tuesday morning, but bounced back on Iranian rhetoric. At issue were the prospect of more oil exports from Iraq, and the possibility of the return of shuttered output in Nigeria (more on that below). Morgan Stanley said that it views the prospect of a meaningful OPEC agreement in Algeria in September as “highly unlikely,” and said that oil prices could slide back as a result.
Analysts doubt sustainability of oil price rally. A handful of oil analysts suggested that the sudden bull market for oil was a bit overblown. Having rallied from near $40 per barrel up to almost $50 in just a few weeks, the rally could already be out of steam. "Positioning data seems to confirm our view that the latest oil bounce is more technical and positioning-oriented than fundamental. In fact, new buyers have been mostly absent the past few months," Morgan Stanley said. The investment bank says that the rally was driven by oil traders taking the opportunity to close out short positions following OPEC’s announcement to hold a meeting in September. But with price gains of more than 20 percent, the opposite trend could now be unfolding as traders close out bullish bets and pocket profits.
Goldman Sachs added its weight to the debate on Tuesday, reiterating its forecast for oil to hover between a $45 to $50 range through the summer of 2017 – not exactly a bullish call. In fact, the investment bank says that the return of Iraqi, Libyan and/or Nigerian oil could tip the global supply balance back into surplus this year.
Shale band restricts prices. The seesawing of oil prices adds credence to the theory that U.S. shale oil has created a band around prices. Below $40, for example, shale production drops off, but once prices rise to around $55 or $60 per barrel, shale drilling comes back, capping further gains. The upshot is that oil prices could continue to trade within this band for the foreseeable future. Further down the line, the large capex cuts seen in deepwater drilling, among other places, could mean a shortfall in supply, but for the rest of this year and next, some analysts see prices trading within this relatively narrow $40-$55 shale band.
Ceasefire in Nigeria? Nigeria has lost more than 700,000 barrels of oil production per day because of attacks on pipelines and platforms by the Niger Delta Avengers. But the Avengers said recently that they were willing to engage in dialogue with the government and enter into a ceasefire. That raises the prospect of a return of oil production if the attacks stop and companies can make repairs to damaged infrastructure. But that outcome is far from assured, not least because the militants in the Niger Delta are splintered, and the Avengers do not speak for everyone. The oil majors – Shell, Chevron, and Exxon – are not offering any clues into when they can lift the force majeure on several key streams of crude from the region. Related: Russia-Iran-Turkey Alliance Could Change Energy Dynamics For Good
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Shale drillers return to the oil patch. Several high profile shale drillers, including Devon Energy (NYSE: DVN) and Pioneer Natural Resources (NYSE: PXD) have indicated that they will step up drilling later this year as oil prices have firmed up. With shale companies continuing to achieve cost reductions, many can drill profitably at $50 per barrel, or even lower. But a return to drilling threatens to kill off the price recovery. The EIA has already revised up its weekly production figures, surprised by the resilience of U.S. shale production. If companies head back to drilling in a much more robust way than many anticipated, there could be little chance that oil prices rise much more significantly. “Being at $50 or $52 was probably the worst thing ever for oil,” Ben Ross, a commodities portfolio manager at Cohen & Steers Inc., told The Wall Street Journal.
Iraq set to boost oil exports. Iraq said that it will step up oil exports after a deal could pave the way for resumed shipments of oil from the fields around Kirkuk. Local officials said that shipments from three oil fields could restart, increasing exports by 150,000 barrels per day. The oil fields surrounding Kirkuk have been the victims of political jockeying – the state-run company from Baghdad ostensibly controls them, but the Kurds operate the pipeline that allows the oil to flow.
China steps up fuel exports. Yet another bearish factor for oil prices came from fresh data out of China that showed that diesel and gasoline exports jumped in July by 181 percent and 145 percent, respectively, according to Reuters. That adds to the global glut and puts pressure on refining margins. Meanwhile, Bloomberg reports that the Chinese government is ordering factories and oil refineries to curtail production in September ahead of the G20 summit to ensure clean air and blue skies. The restrictions, which could affect 445 companies, could cut into Chinese consumption, dampening global crude oil demand.
Saudi Arabia boosts oil exports. Saudi Arabia’s oil exports reached a three-month high in June, and overall production hit all-time high. Exports jumped to 7.5 million barrels per day in June and output rose to 10.67 mb/d in July, the highest on record. Saudi Arabia tends to produce more oil in summer months to meet domestic demand, and production could be throttled back as temperatures cool heading into the latter half of the year.
By Evan Kelly of Oilprice.com
More Top Reads From Oilprice.com:
- Iraq Moves To Pump More Oil Before The OPEC Summit
- Goldman: The Rally Will Stall Regardless Of OPEC Freeze
- Boom, Balance Or Bust: What's Next For Oil?
