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Oil Set For A Drop After Inventory Data Excitement

Offshore rig dusk

Oil prices fell on Friday, after spiking on Thursday afternoon as a result of an exceptionally strong draw to U.S. crude inventories.

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Friday 9th September 2016

Oil prices surged on Thursday following news from the EIA that showed a colossal drawdown in crude oil stocks. Inventories plunged by 14.5 million barrels for the week ending on September 2, the largest drawdown for this time of year on record. However, before the oil bulls get too excited, it is important to note that the huge drawdown could be a one-off, owing to the hurricane that disrupted shipments in the Gulf of Mexico. Imports were down sharply, leading to a larger-than-usual draw on stocks. "This is an aberrant report of the first order," John Kilduff of Again Capital, told CNBC. Others agree: "I suspect over the next few weeks we're going to see inventories recover to a certain extent, as the imports catch up," said Andrew Lipow of Lipow Oil Associates. "There's still plenty of oil out there. What we're seeing is the result of storm impacts on vessel shipping at the same time we still see members of OPEC to increase their oil production."

Oil prices surged more than 4 percent on the news on Thursday. WTI and Brent pared their gains during early trading on Friday as traders took profits.

Oil prices below $55 for years? Oil prices could remain within a range of $35 to $55 per barrel for years, according to Dennis Gartman of The Gartman Letter. Shrugging off any action from OPEC, Gartman says that the global market is very well supplied, and will continue to be for quite some time. He points to the wide contango in the oil futures market, which indicates a short-term glut in supply.

Apache makes huge discovery in Texas. Apache Corporation (NYSE: APA) announced a massive oil discovery in West Texas this week, which could turn out to be one of the largest finds over the past decade. The “Alpine High” discovery in the Delaware Basin could hold as much as 3 billion barrels of oil and 75 trillion cubic feet of natural gas. Alpine High could be worth as much as $8 billion on the lower end of estimates, or ten times as much on the higher end. The exciting thing for Apache is that it says it can turn a 30 percent profit on wells even at today’s prices. The company also says that some of the best natural gas wells could be profitable with natural gas prices at $0.10 per million Btu. Obviously, with natural gas prices much higher than that, the wells could be hugely profitable. As of Friday, Apache’s share price was up more than 15 percent for the week.

Asian oil supply in decline. Bloomberg estimates that Asia’s five largest oil producers – China, India, Malaysia, Indonesia and Vietnam – could see output fall by a combined 255,000 barrels per day because of low oil prices this year. They could also lose an additional 309,000 barrels per day next year.

California judge shoots down fracking plan. A judge in California put a halt to a plan for fracking on public lands, citing inadequate study on the behalf of the U.S. Bureau of Land Management. BLM has leased out public land in central California, allowing the use of fracking on about a quarter of new wells. The judge said that BLM should have taken a “hard look” at what the effects would be on public lands. The ruling is another setback for drilling in the state.

Iran’s oil production growth stalls. A new report from Reuters finds that Iran has succeeded in ramping up oil production, but the gains have come to a standstill in recent months. Output hit 3.64 million barrels per day in June, up 800,000 barrels per day from 2015 levels. But June’s high was followed by two months of zero gains, with output standing at 3.63 million barrels per day in August. Iran has shown new willingness to consider coordinated action with OPEC members, but has stopped short of endorsing a production freeze. Iran still insists that it has a right to return to pre-sanctions production levels, which amounts to another 0.5 mb/d in production. The Reuters data suggests Iran, for the time being, is struggling to continue its upward momentum towards that goal.

Enterprise Products Partners LP Abandons Williams Cos. takeover. Enterprise Products Partners LP (NYSE: EPD) officially pulled the plug on its pursuit of Williams Companies (NYSE: WMB), a deal that was thought to be worth about $33 billion. Enterprise said its rival pipeline company refused to engage in talks, something that Williams denies.

Total last company standing in Barnett Shale. Total SA (NYSE: TOT) just became the only company operating in the Barnett Shale in Texas after Chesapeake Energy (NYSE: CHK) pulled out. Total will take on the 75 percent of the shale paly that it doesn’t already own, according to the WSJ. In August, Chesapeake paid Williams Partners LP (NYSE: WPZ) $334 million in cash to break its pipeline contract. With Chesapeake’s exit, only Total remains. The Barnett Shale was once a major source of natural gas production, but low gas prices have caused drilling to dry up. There are only 3 rigs left in the Barnett, down from more than 80 back in 2011. The Barnett only produces about 65,000 barrels of oil equivalent per day.

Natural gas prices rise on small inventory build. Natural gas prices rose the most in a single day since July after the EIA reported a smaller-than-expected increase in inventories. Stockpiles only rose by 36 billion cubic feet, compared to the expected 43 billion cubic feet. Natural gas prices for October delivery jumped by 13 cents to $2.80 on Thursday.

OPEC officials huddle in Paris. The energy ministers of Algeria and Saudi Arabia are set to meet with the Secretary-General of OPEC on Friday in Paris, putting in place some preparation for the Algiers meeting.

By Evan Kelly of Oilprice.com

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