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Oil Prices Volatile Ahead of OPEC Meeting

Drill mountains

Oil prices rallied 6 percent on Tuesday after hitting a 3-month low on Monday.

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Chart of the Week

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• The election of Donald Trump to the U.S. Presidency has raised questions about his promise to revive the coal industry. The short answer is: probably not.

• Coal production has been in decline for years. Output fell 10 percent in 2015. Obama-era regulations accelerated its decline, by forcing the closure of coal-fired power plants. But the vast majority of coal plants were more than four decades old and were nearing retirement anyway.

• Utilities, on their own, have been replacing them with natural gas plants. EPA regulations have hurt, but cheap gas is the real culprit.

Market Movers

Petrobras (NYSE: PBR) saw its stock price fall 5.5 percent on Monday after it said that oil production has declined 2 percent year-on-year in October. Petrobras suffered a 19 percent drop in its share price since releasing third quarter numbers.

Royal Dutch Shell (NYSE: RDS.A) is mulling plans to sell $3 billion in Norwegian assets. Shell’s CFO said recently that its North Sea assets are “not the most profitable assets in the portfolio.”

• Citi is enthusiastic about ConocoPhillips’ (NYSE: COP) plan to sell $5-$8 billion in North American gas assets, which Citi thinks are stranded anyways. The plan could return $3 billion to shareholders.

Tuesday November 15, 2016

Oil prices sunk to fresh three-month lows on Monday amid growing doubts about OPEC’s ability to reach a deal on production cuts. Gary Ross, executive chairman of PIRA Energy Group predicts that oil could drop as low as $35 per barrel if OPEC fails to come to an agreement in two weeks’ time. On the other hand, he says that oil could jump to $60 per barrel if they do agree on cuts.

Prices rebounded at the end of the trading day on Monday, and jumped by nearly 3 percent in early trading on Tuesday, after news surfaced from OPEC that member countries were in the midst of a renewed push to overcome their differences to seal a deal. Of course, one could take a pessimistic perspective on those comments: unable to overcome their differences up until now, they have one last shot to prevent the meeting from turning into a disaster. Prices tend to move on every new comment from OPEC about efforts to resolve differences, so as always, take this piece of news with a grain of salt and a heavy dose of wait-and-see skepticism. The problem for OPEC is that its collective output rose quite a bit in October, which will require deeper cuts from its members than originally envisaged.

Stronger dollar, lower oil. The dollar is surging in the wake of Donald Trump’s election as the markets start to price in some of the potential policies of the new administration. The markets ultimately see higher inflation because of Trump. "Infrastructure, deficit spending, protectionism, immigration reform; everything he's mentioned so far is going to push prices higher in the U.S.," Tai Hui, market strategist at JPMorgan Asset Management, told CNBC. "If you block immigrants, or even illegal immigrants working in the states, wages will rise. If you think about trade policy, if you block Chinese exports to the U.S. prices will rise." Higher inflation would likely force the U.S. Federal Reserve to hike interest rates, which would strengthen the dollar. That all sounds convoluted, but the bottom line right now is that a rising dollar is putting some downward pressure on oil prices.

Harold Hamm on short list for Energy Secretary. Continental Resources’ (NYSE: CLR) chief Harold Hamm was long been rumored to be in the race to lead the U.S. Department of Energy, but U.S. Rep. Kevin Cramer (R-ND) recently confirmed to Reuters that Hamm was indeed at the top of the list to head the agency. Hamm made billions of dollars drilling for shale oil and gas, particularly in North Dakota and Oklahoma. If he is chosen, he will be the first Energy Secretary that will come directly from the oil and gas industry since the agency’s creation in 1977. It would also mark a tone set by the Trump administration, indicating his intention to fully support oil and gas drilling during his term.

Obama punts on Dakota Access Pipeline. Late Monday afternoon, the Army Corps of Engineers issued a statement saying that it has completed its review of the Dakota Access Pipeline, which it started in September after delaying an easement for the controversial pipeline. But the Corps said that more consultation is needed with the Standing Rock Sioux Tribe “in light of the history of the Great Sioux Nation’s dispossession of lands.” The move prevents construction by Energy Transfer Partners (NYSE: ETP), likely delaying the project until the Trump administration assumes power.

Trump policies could hurt gas trade to Mexico. Mexico has become a rapidly growing buyer of U.S. natural gas, which has been a boon to Texas shale drillers. But President-elect Donald Trump’s promises to revisit trade agreements and build a wall with Mexico could cause problems for U.S. gas exporters and pipeline builders. If that were to happen, the gas glut in the U.S. would grow, pushing down prices, which would inflict damage on the Texas oil and gas industry.

Related: Is India Seriously Considering A Gold Import Ban?

Mediterranean oil market most oversupplied. Rising output from Libya, Iraq, Iran, Russia and even Kazakhstan are putting a strain on the Mediterranean market, which is now drowning in oil, according to Reuters. Oil shipments to the Mediterranean have grown by around 2 million barrels per day.

Signs point to approval of Trans Mountain expansion. Canadian Prime Minister Justin Trudeau has handed greens a list of wins this year, proposing a carbon tax, spending billions on marine protection and conserving rain forests that could block a key pipeline. Bloomberg News believes that all of this has laid the groundwork for an approval of the Trans Mountain pipeline, an expansion of Kinder Morgan’s (NYSE: KMI) existing pipeline that runs from Alberta to the coast of British Columbia. A decision is expected in the next few weeks and it could grant the Canadian oil industry its first pipeline victory in years.

Earthquakes in Oklahoma on the rise. It is becoming harder and harder to ignore the frequency of earthquakes that routinely hit the state of Oklahoma. The Nov. 6 earthquake to hit Cushing, where so much of the region’s oil and gas storage is located, is just the latest occurrence. The science now convincingly points to the practice of disposal wells, but the state is struggling to deal with the issue. Bloomberg reports that there are new companies springing up in Oklahoma with new and innovative technologies hoping to solve the issue of wastewater disposal. Nothing is proven or scalable yet, but there are huge opportunities if one of them can present a solution.

By Evan Kelly of Oilprice.com

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