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Oil Prices Waver As OPEC Makes Final Push

Power plant

Oil prices falter at the end of a week full of OPEC rhetoric as a result of a soaring dollar.

(Click to enlarge)

Friday, November 18, 2016

Oil prices spiked this week on the renewed push by OPEC to overcome differences on a production cut. WTI and Brent rose back above the mid-$40s per barrel, up from lows seen earlier in the week. The bullish move came from news that OPEC is trying hard to actually seal a deal. Saudi Arabia’s energy minister Khalid al-Falih said that OPEC was targeting the lower end of its proposed range of 32.5 to 33.0 million barrels per day. That sparked a rally in oil prices. "I'm still optimistic that the consensus reached in Algeria for capping production will translate, God willing, into caps on states' levels and fair and balanced cuts among countries," Al-Falih said. Oil prices moved down slightly during midday trading on Friday, hovering at $45 for WTI and $46 for Brent. The strength of the U.S. dollar continues to put downward pressure on crude prices.

Iran a problem, but might not sink deal. The two major hurdles to an OPEC deal are the cartel’s second and third largest producers, Iraq and Iran. However, Algeria’s energy minister Nouredine Bouterfa said that Iran would not scuttle a deal. "Iran is not a problem. Iran is a particular situation and needs particular treatment. They will not have the same rule for the reduction. We will study what the best solution is for Iran,” he told Reuters. "There is strong consensus among OPEC producers for a freeze.”

Iraq could undermine the deal. Iraq, on the other hand, is still an open question. A separate Reuters report finds that Iraq would be forced to compensate international oil companies who operate in country if Iraq signs onto an OPEC cut. Iraq pays private oil companies a fixed fee per barrel of oil produced, and contracts with these companies include stipulations requiring compensation if Iraq forces them to cutback. That could make it much more difficult for Iraq to agree to a cut in Vienna. A source at the Iraqi state-owned South Oil Company said this won’t be a problem because Iraq has no intention of cutting its output. "On the contrary, we're encouraging the foreign companies to raise production as much as they can," the official told Reuters. But to confuse matters even further, Iraq’s oil minister Jabbar al-Luaibi, told the Wall Street Journal on Friday that he is optimistic about a deal on Nov. 30. As always, we won’t know the outcome of the OPEC meeting until it happens.

IEA does not see peak oil demand. Projections for a peak in oil demand have become much more commonplace over the past year. Even the CFO of Royal Dutch Shell (NYSE: RDS.A) predicted earlier this month that demand would peak within the next 5 to 15 years. But in its annual World Energy Outlook, the IEA sees demand growing through the end of 2040. The agency sees slow adoption of EVs, and growth in oil demand in a variety of sectors not related to passenger vehicles, including petrochemicals, aviation and long-haul trucking. At the same time, the IEA warned of a shortfall in supply towards the end of this decade as the industry scales back investment. The agency said that if investment remains low in 2017 – the third consecutive year of declines – then a supply shortfall around 2020 would be hard to avoid.

Related: Does A Link Remain Between Inflation And Oil Prices?

Obama might block Arctic, Atlantic drilling. President Obama only has two months left in office, but on his way out of the door he is hoping to make drilling in the Arctic and Atlantic Oceans more difficult going forward. Bloomberg reports that the Department of Interior is finalizing its five-year lease plan for 2017-2022, and it could leave out leases for tracts in the Arctic and Atlantic Oceans, two highly controversial regions for drilling. President Trump could reverse this order, but the five-year plan takes time to produce, so it could delay offerings to the industry. The plan is not yet finalized but the Obama administration is rushing to get it done before the end of the term. Separately, the Bureau of Land Management published its final rule for methane emissions from natural gas operations on public lands. The rule cracks down on venting and flaring. Industry groups immediately filed a lawsuit. Again, the Trump administration is expected to try its best to overturn the rule.

Tesla shareholders approve SolarCity takeover. Elon Musk won the approval of the takeover of SolarCity by Tesla (NYSE: TSLA). Critics viewed the purchase as a bailout of SolarCity, which as posted steep losses in recent quarter. But Musk argues that the acquisition would streamline the two businesses, creating an integrated clean energy company. Tesla is also planning to roll out a solar-powered roof next year that looks like an ordinary roof with shingles. Musk argues that the solar roof will be as cheap or cheaper than a traditional roof, hoping to pave the way for an expansion of its residential solar business.

UN warns Iran on nuclear deal. The IAEA, the UN nuclear watchdog, warned Iran last week on its stockpile of heavy water. Spent nuclear fuel can be extracted from heavy water, and Iran has more than its allowed limit as part of the 2015 nuclear deal. The stakes are high as incoming U.S. president-elect Donald Trump has vowed to rip up the nuclear agreement. The latest IAEA warning could add fuel to that fire.

Israel launches auction for gas. On Tuesday, Israel opened an auction for gas exploration in the Mediterranean. Israel believes that its waters could hold up to 75 trillion cubic feet of natural gas. The bidding process will end in April.

By Evan Kelly of Oilprice.com

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