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Oil Under Fire As OPEC Head Sees No Deal

Rig sunset

Oil prices dived on Monday after OPEC Secretary General Barkindo downplayed a potential output freeze deal, but rebounded slightly on Tuesday morning.

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Chart of the Week

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• The EIA initiated data coverage on drilled but uncompleted wells (DUCs), to be included in its monthly Drilling Productivity Report.

• The current estimates put the DUC list at 4,117 across the four major shale basins (Bakken, Eagle Ford, Niobrara, and Permian). There are also 914 DUCs in the three large natural gas basins (Haynesville, Marcellus, and Utica).

• The DUC list in all of the oil regions increased between 2014 and 2015, but has declined by about 400 over the past five months. The natural gas DUC list, on the other hand, has more or less declined since December 2013.

Market Movers

• Gasoline prices in the southeast U.S. spiked over the weekend due to an outage at the Colonial Pipeline, the largest gasoline pipeline in the country. The line sprung a leak and has been temporarily shut down.

GE says its will spend $10 billion in Argentina over the next decade, building out 1 GW of electrical capacity.

Chesapeake Energy (NYSE: CHK) fell by more than 4 percent after news surfaced that Carl Icahn reduced his 9.4 percent stake in the company to just 4.55 percent.

Tuesday September 20, 2016

OPEC’s Secretary-General said over the weekend that the upcoming meeting in Algeria between OPEC members and a handful of non-OPEC countries would not end with a definitive agreement. For its part, Venezuela says that OPEC and non-OPEC countries are close to a deal. But that could simply be a bit of bluster. “It is an informal meeting, it is not a decision-making meeting,” Secretary-General Mohammed Barkindo said, according to Algerian state media. The oil markets could end up disappointed next week if OPEC has little news to announce. The only way this turns out bullish for oil is if OPEC agrees to a production limit to be finalized at a future meeting. Even then, the devil will be in the details.

New York AG investigates ExxonMobil accounting practices. The NY Attorney General initiated an investigation into ExxonMobil (NYSE: XOM) last year, focusing on the oil supermajor’s shady history with climate science. But more recently, the AG has suggested that he is less concerned with the company misleading the public on climate science decades ago, and more interested in it misleading investors today. At issue is whether or not Exxon is defrauding investors by failing to write down assets that may no longer be worth as much as once thought. While competitors have written down $200 billion in assets over the past two years, Exxon has written down nothing. Exxon says the assets could still be worth their stated value if oil and natural gas prices rebound. The NY AG is not so sure. What began as a climate investigation is turning into one over accounting practices.

Oil majors grow through M&A, not exploration. Wood Mackenzie says that the oil majors have slashed their exploration budgets to such a degree that they appear to be forgoing growth through the drill bit. Growth in oil reserves will increasingly come from M&A activity, the consultancy says. The industry will cut $1 trillion from their exploration and development budgets over the next five years, ensuring that very little new discoveries will be made. “The need for M&A in exploration is likely to be here for a considerable time," Andrew Latham, vice president of exploration research at WoodMac, said in an interview. Companies will focus their efforts “on assets rather than on taking over companies.”

Libya targets 1 million barrels per day, but fresh fighting raises obstacles. Libya has ruled out any cooperation with a potential OPEC freeze deal as it aims to triple oil production from today’s levels. Despite the ambitious target, Libya’s main oil ports continue to change hands, as rival factions battle for control. Oil prices rose on the news that fresh fighting will delay petroleum shipments from the North African OPEC member. Libyan oil is very uncertain, but if output comes online, it presents a large downside risk to oil prices.

Niger Delta Avengers…the sequel? A militant organization calling itself the Niger Delta Greenland Justice Mandate blew up an oil pipeline operated by Nigeria’s state-owned NNPC on Sunday. "The Niger Delta Greenland Justice Mandate is just starting, you are yet to see what we are about," the group said. The Niger Delta Avengers made international headlines this year after a long list of successful attacks against oil pipelines and platforms brought Nigeria’s oil production down by 700,000 barrels per day. The Avengers have since agreed to negotiation with the government. But the problem for Nigeria is that militants have splintered into a variety of groups, not all of which are willing to adhere to a ceasefire. The latest attack shows that despite the Avengers agreeing to halt attacks, violence in the Niger Delta is not over. The good news for Nigeria is that oil production is now back up to 1.75 million barrels per day, up from about 1.4 mb/d earlier this year. Nigeria’s oil minister expects output to keep climbing if they can keep a lid on the violence in the region.

Related: Is U.S. Shale Nearing Collapse?

PDVSA rebuffed by investors on debt swap. Venezuela’s state-owned oil company PDVSA has been shopping a proposal to swap $7 billion in upcoming debt payments for notes that instead have repayments over the next several years. But investors are not interested. PDVSA did not offer any more than face value, but instead offered a lien on Citgo, its U.S. refining division. “PDVSA considers its Citgo collateral to be attractive, but I’m not sure the market will take it the same way,” Anthony Simond, a money manager at Aberdeen Asset Management, which holds PDVSA notes due in 2016 and 2017, told Bloomberg in an interview. “This may be too optimistic an assessment of Citgo’s potential market value,” Francisco Rodriguez, the chief economist at Torino Capital LLC, said in an email to Bloomberg. The poor response from investors increases the odds that PDVSA may not be able to meet its debt payments.

Petrobras slashes spending plan again. The Brazilian state-owned firm, the most indebted oil company in the world, once again revised its five-year spending plan down, lowering it to $74.1 billion. That is down sharply from the $98.4 billion the company previously laid out for its five-year program, and from the $236.5 billion the company planned on spending back in 2012. Petrobras is desperately trying to lower its debt.

India's oil imports rise to record. Led by a hunger from Indian refiners, India’s crude oil imports rose to a record high of 4.45 million barrels per day in August, up 9.1 percent from a year ago. Gasoline consumption is also up by a massive 25 percent from 2015. India is the largest source of demand growth in the world right now and will continue to play that role for years to come.

Oil markets, investors await central banks. Both the U.S. Federal Reserve and the Bank of Japan are due to release decisions on Wednesday on whether or not they will raise interest rates. Most analysts see the Fed punting for now.

By Evan Kelly of Oilprice.com

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  • SH on September 20 2016 said:
    Media needs to stop putting out articles on meaningless OPEC.

    Just a few days prior the OPEC head put out a media release saying the output freeze is likely to occur.

    Then now it won't happen.

    OPEC no longer holds any significance or credibility and the media should start focusing on sources that actually carry weight.

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