We begin by looking at some of the critical figures and data in the energy markets this week, which show that oil markets have remained steady, with global outages continuing but Canada set to bring its supply back online.
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Chart of the Week
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• The United States is the world’s largest producer of both natural gas and petroleum liquids. The U.S.’ hydrocarbon production is roughly split evenly between natural gas and petroleum on an energy equivalent basis.
• Saudi Arabia looms large over the oil markets, but the U.S. actually produced twice as much petroleum and natural gas hydrocarbons in 2015.
• Saudi Arabia’s influence over oil markets is due to the fact that it has some of the largest oil reserves in the world and in addition to being one of the world’s top producers, it also has the most spare capacity in the world – it is the only country that can turn the taps on and off quickly.
• The U.S., on the other hand, produces a variety of petroleum products – crude oil and lease condensate, tight oil, extra-heavy oil, and bitumen. It also produces large volumes of biofuels. More importantly, all of these liquids are produced by hundreds of independent companies, who don’t act collectively or cooperatively.
Market Movers
• Eni (NYSE: ENI) suffered another attack from Niger Delta militants. On Sunday, Agip, the subsidiary of Eni, said that militants attacked the Tebidaba-Brass pipeline with dynamite, although data on the outage is unclear. The Niger Delta Avengers have disrupted more than 800,000 barrels per day in oil production from Nigeria.
• GE (NYSE: GE) announced plans to invest $1.4 billion in Saudi Arabia as the country tries to transition away from its dependence on oil sales. The flurry of investments will target a variety of sectors including aviation, water, marine and energy.
• Statoil (NYSE: STO) cancelled a drilling contract for the semi-submersible West Hercules with Seadrill (NYSE: SDRL) because of its decision to defer the startup of a Norwegian field by at least a year. Seadrill’s stock dropped more than 3 percent on the news.
Tuesday May 24, 2016
Oil prices have held remarkably steady between $47 and $49 per barrel for several days, as the markets wait for new direction. On the bullish side, outages continue, U.S. oil production has posted solid and consistent declines, and demand is holding steady. On the bearish side, Canada is set to bring oil back to the market, and Iran has vowed to continue to ramp up production. Prices could stay in this holding pattern until new signs/data emerge that provide a clearer path forward.
Evacuation notices lifted for Canadian worker camps. The threat of Alberta’s wildfires has receded a bit, and the mandatory evacuation at many worker sites has been lifted. People will allowed to return in a phased way, and oil sands production should start to trickle back online. The move is a welcome one for Alberta and all of the companies that operate there – including Suncor Energy (NYSE: SU), ConocoPhillips (NYSE: COP), Enbridge (NYSE: ENB), and Nexen Energy – but bearish for oil prices.
U.S. gasoline prices up. Average retail gasoline prices continue to rise, and for the first time in months, there are no major regions in the U.S. that have gasoline prices below $2 per gallon. The Gulf Coast (PADD 3) saw gasoline prices jump by 7 cents last week to bring average prices region-wide above $2. Gasoline prices usually track crude oil on a time lag, so the increase is connected to the crude oil rally between February and early May. Related: Saudi Market Share Takes A Hit As Russia Doubles Oil Exports To China
Goldman Sachs tells investors to look at Schlumberger, Halliburton, and Nabors Industries. The oilfield service giants are beaten down and Goldman Sachs says the time is ripe, or nearly ripe, to start buying these stocks. Goldman says any further pullback in Schlumberger’s (NYSE: SLB) share price would present a buying opportunity. They give Schlumberger a “Buy” rating, arguing the world’s top oilfield services company is “best positioned for the New Oil Order.” Goldman also gave Halliburton (NYSE: HAL) and Nabors Industries (NYSE: NBR) a “Buy” rating, citing exposure to onshore U.S. and Middle East drilling. All three will see higher demand for drilling services in the U.S. and Saudi Arabia when oil prices pick up further.
Brazil minister steps aside because of recordings. Brazil’s Planning Minister Romero Juca temporarily stepped down after a Brazilian newspaper released recordings that proved he actively tried to remove the President from power in order to impede the sweeping investigation into Petrobras, as he was a target of the probe. The bombshell report provides further evidence that the push to remove President Dilma Rousseff from power was driven at least in part by politicians trying to protect themselves from corruption investigations. The extent of the immediate fallout is unclear, but the report is a massive setback to the new President Michel Temer. Juca is a close ally of President Temer.
North Dakota oil spill. More than 120,000 gallons of oil and drilling wastewater spilled from a tank in North Dakota near Marmarth. The facility is operated by Denbury Onshore LLC.
French strikes lead to fuel shortages. The giant French workers union CGT has sidelined fuel production at all eight of France’s oil refineries. That has led to fuel shortages at around 2,000 refueling stations around the country. The union is protesting major changes to labor rules that the government is pushing through. Total (NYSE: TOT) runs 5 of the 8 refineries, and Esso, a subsidiary of ExxonMobil (NYSE: XOM) runs two. Exxon said that its production has not been affected. Related: Russian Natural Gas Dominance Under Threat From Croatian LNG Terminal
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Fracking permit moves ahead in UK, first since 2011. The North Yorkshire County Council voted to approve a fracking permit for shale gas this week, the first greenlight in nearly five years. The British company Third Energy merely hopes to use hydraulic fracturing on an existing well, but it is hugely controversial. The British government has tried to speed up permitting for shale gas drilling, but fierce public opposition has slowed any progress. Last year, a country denied a permit for Cuadrilla Resources after large protests. The UK believes it could develop sizable volumes of shale gas for domestic use, but so far has not been able to do so.
Lending terms tighten for oil and gas. Bloomberg reports that several major banks are tightening their lending standards on oil and gas companies, and have hired law firms to include protections in their credit agreements and prevent drillers from drawing down their credit lines. The moves go above and beyond the twice-a-year credit redeterminations. “Lenders are looking for ways within the four corners of their credit agreements to stop borrowers from borrowing more” David Feldman, an attorney at Gibson, Dunn & Crutcher, told Bloomberg. “They don’t want to keep throwing good money after bad.”
Saudi Arabia might be forced to issue IOUs. Bloomberg News reported that Saudi Arabia is considering issuing IOUs to contractors because of a wide budget deficit this year. The IOUs, sources told Bloomberg, would be like bonds, allowing contractors to hold onto them until they mature, or sell them. The government reported an almost $100 billion budget deficit last December. Issuing IOUs would be an extraordinary step, highlighting the magnitude of the predicament the government finds itself in because of low oil prices.
Mozambique set to default. A state-backed company from Mozambique will default on a $535 million loan to build new shipyards to service the country’s budding offshore natural gas industry. The loan for the firm was backed by the government, meaning the country will be heading for a sovereign default, although because of a grace period, such a classification has not occurred yet. Undisclosed until now, Mozambique’s debt goes beyond the aforementioned loan. Now that billions of dollars of undisclosed debt has been unveiled, the IMF has suspended its assistance to the country. The financial problems have arisen due to a construction rush to service offshore natural gas drilling that has yet to materialize. With LNG prices having crashed, large natural gas production is probably still a decade away. East Africa has been described as the next major source of natural gas production and LNG exports, but so far it has failed to live up to the hype. Now Mozambique will pay the price of rushing too quickly.
By Evan Kelly of Oilprice.com
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