This week’s key figures for the oil and gas industry show that oil has rallied while U.S. production has experienced a slight decline.
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(Click to enlarge) Related: Oil Prices Seesaw On Declining U.S. Production, Increasing Stockpiles
Friday, March 4, 2015
Oil prices have had a relatively quiet week, posting a handful of less volatile trading sessions compared to what we have become used to. WTI moved up to about $35 per barrel this week and Brent rose to nearly $38. Oil prices have gained more than 30 percent since early February.
Storage. Oil storage levels in the U.S. continue to break records. For the most recent data available, the EIA says that crude inventories surged by 10.4 million barrels to a record high of 518 million barrels. The ongoing gains in storage levels will continue to act as a drag on oil prices, a sign that the glut still is not over. On the bullish side of things, more and more companies are reporting expected declines in production, signaling that the supply overhang will ease with time. These two forces seemed to have cancelled each other out this week as oil prices rallied and then flattened out.
Supreme Court. The U.S. Supreme Court denied a request to issue a stay on the EPA’s mercury emissions rule. The request was brought by a coalition of 20 states, who were no doubt encouraged by the Court’s decision to put a hold on the EPA’s greenhouse gas rule just before the death of Justice Antonin Scalia. However, the Supreme Court rejected the mercury rule request and did not issue a comment, suggesting it did not think there was a serious case for it. The mercury rule limits mercury emissions from power plants, and it went into effect in 2015. Related: Does This "Panic Index" Show A Major Crisis Coming In Oil And Gas?
Petrobras corruption case ensnares former president. The wide-ranging corruption case at the state-owned oil company Petrobras has now stretched to former Brazilian president Luiz Inacio Lula da Silva, who was questioned on Friday by police. The corruption scandal involved Petrobras overpaying contractors who then kicked back some of the earnings to top ruling party officials and Petrobras executives. Lula, a revered figure in Brazil because he presided over a huge economic boom between 2003 and 2010, denies any wrongdoing. So does his hand pick successor, current President Dilma Rousseff.
Meanwhile, Brazil’s economy contracted by 3.8 percent last year, the worst performance in over 25 years. GDP could shrink by another 3.45 percent in 2016 and an outright depression is not off the cards. There is little sign that the government of President Rousseff, fending off a campaign to impeach her, has the political capital to push through needed reforms to kick start the economy. Brazil’s economy is heavily dependent on commodity exports, and with commodity prices at cyclical low points, Brazil is feeling the pain.
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Iraq to pay oil companies $2 billion. The Iraqi government said that it would pay the outstanding $2 billion that it owes international oil companies operating in the country by April. The collapse in oil prices and Iraq’s heavy security costs have left the government short on funds, and it racked up $2 billion in arrears to companies like BP (NYSE: BP), Royal Dutch Shell (NYSE: RDS.A), ExxonMobil (NYSE: XOM), Eni (NYSE: ENI), and Lukoil, all of which collectively produce the bulk of the Iraq’s oil near the southern city of Basra. The contracts in Iraq consist of fixed payments to companies for barrels produced, a scheme that has become burdensome with oil prices collapsing.
The Iraqi government is trying to negotiate an overhaul to the contract terms by linking the payments to crude prices. Insufficient finances have also forced the Iraqi government to send requests to the oil companies, asking them to trim their drilling plans for this year. As a result, any production gains from Iraq will be “very modest” in 2016, as the head of Iraq’s upstream operations put it to Reuters in an interview. Still, paying off the money owed to the companies and reaching an agreement with them to change the payment arrangement could help Iraq move forward. Related: Iran’s Election Results Could Be Good News For Oil Majors
Gazprom secures €2 billion loan from China. Russian state-owned gas giant Gazprom took out a €2 billion loan from the Bank of China, the largest bilateral loan in the gas company’s history and also one of the largest loans ever from a Chinese bank to a Russian company. Gazprom is hurting from tumbling natural gas prices in Europe, a phenomenon that has occurred due to the rising levels of global LNG capacity and also the collapse of oil prices, which heavily influence the price of natural gas in some parts of the world. Gazprom says that it will cut annual capital expenditures to $17 billion for the rest of the decade, down from the $47 billion it spent in 2011. The Russian gas giant and the Russian state have hyped up several large deals with China in the last few years, including the “Power of Siberia” pipeline, a large conduit that would send Russian gas to China. However, the market has turned sour since then and the high cost of construction and the onerous terms demanded by China have damaged the project’s prospects.
Former Chesapeake CEO died after indictment. The energetic and colorful former CEO of Chesapeake Energy received an indictment earlier this week for an alleged oil and gas lease-rigging scam in Oklahoma. A day after his indictment, Aubrey McClendon died in a car crash. He was known for building Chesapeake Energy into an enormous producer of shale gas, a pioneer for the industry during the so-called “shale gas revolution.” More recently, he had setup another shale drilling company, American Energy Partners, and had hoped to drill for shale oil and gas in Argentina. American Energy Partners said that it would continue to operate, but the loss of McClendon will damage the company’s ability to raise money and attract talent, Bloomberg reports.
“Massive” coal bankruptcy possible. SNL reports that there is a growing possibility that Peabody Energy (NYSE: BTU), the largest private-sector coal company in the world, could be forced into bankruptcy. If that were to occur, it would mean that more than 44 percent of the coal mined in the United States would come from mines controlled by companies in bankruptcy. SNL reports that BB&T puts a greater than 50/50 chance on Peabody falling into bankruptcy. Moreover, if the world’s largest private coal miner declared bankruptcy, it would be hugely symbolic of the trajectory for the industry as a whole. In other words, even if it takes time, the world is clearly shifting away from coal as a source of energy.
By Evan Kelly Of Oilprice.com:
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