Rally Over? Oil Down 4 Percent

We begin by taking a quick look at some of the critical figures and data in the energy markets this week, which show a sharp fall in oil prices following the jump in U.S. rig count at the end of last week.

(Click to enlarge)

(Click to enlarge)

Chart of the Week

• Fossil fuels only made up about 81.5 percent of the total energy consumption in the United States in 2015, the lowest total in the past century.
• But despite the rapid deployment of renewable energy and electric vehicles expected in the years ahead, the EIA still sees fossil fuels dominating the energy landscape.
• By 2040, fossil fuels will only see its market share fall to 76.6 percent.

Market Movers

• Royal Dutch Shell (NYSE: RDS.A) requested $2 billion from Saudi Aramco as part of the breakup of their joint venture Motiva Enterprises. Negotiations will be difficult, Reuters reports, but the breakup is expected to be completed in October.
• Petrobras has announced its decision to put nine small, shallow-water oil fields up for sale, in an effort to reduce its $12 billion pile of debt. But a source told Reuters that “the fields are junk” and will require substantial investment.
• Chevron (NYSE: CVX), ExxonMobil (NYSE: XOM) and their partners have agreed to move forward on a $36.8 billion expansion of the Tengiz oil field in Kazakhstan. The expansion could add roughly 200,000 barrels per day of output beginning in 2022.

Tuesday July 5, 2016

Oil prices fell sharply on Tuesday, down more than 4 percent as the U.S. rig count shot up at the end of last week. Ongoing fears about economic turmoil in Europe are also weighing on WTI and Brent. An assessment from Genscape also predicted that oil inventories increased in Cushing, a bearish sign that excess supply remains. $50 oil remains elusive once again, after a brief period of time above that threshold in June.

U.S. has more oil reserves than Saudi Arabia. A new assessment from Oslo-based Rystad Energy finds that the United States has the world’s largest oil reserves, not Saudi Arabia or Venezuela. The U.S. is sitting on an estimated 264 billion barrels of reserves, compared to Russia’s 256 billion barrels, and Saudi Arabia’s 212 billion barrels. More than half of the U.S. reserves are located in shale. Venezuela is commonly thought to have the world’s largest reserves, but Rystad says that much of that is not discovered.

Venezuela pays bond holders as country falls apart. Venezuela’s economy is melting down, but the government has prioritized meeting bond payments even as food riots spread across the country and medical supplies and other basic items run dangerously low. Bloomberg notes that in the recent past, other countries have defaulted on bond payments long before the crisis has blown up to the extent it has in Venezuela. The situation is curious, especially for a socialist government. But a much bigger test looms later this year when larger debt payments fall due. Between the sovereign and the state-owned PDVSA, a combined $5.8 billion in debt payments will fall due in the second half of 2016. As Barclays noted in a recent research note, there are very large downside risks to Venezuela’s oil production – with several hundred thousand barrels per day of output at stake. Related: Tensions Between India And Pakistan May Rise Over Nuclear Deal

U.S. shale drillers increase hedging. Oil prices are rising, and shale drillers are increasingly choosing to lock in production. According to a Reuters survey, 17 out of 30 companies increased their hedging in the first quarter, the most since early 2015. EOG Resources (NYSE: EOG) and Devon Energy (NYSE: DVN), for example, obtained hedges for the first time in six months. An uptick in hedging activity typically suggests that more drilling is sure to follow. But as Reuters notes, one interesting aspect of the hedging is that some producers even locked in hedges at lower prices than what currently prevails in the market, and even at prices lower than breakeven levels. That highlights the fear that prices could crash again, but also the desire for certainty.

Vitol sees oil prices remaining flat through 2017. The CEO of Vitol Group, the world’s largest independent oil-trading house, does not see oil prices rising much more than today’s levels for the next year and a half. “I cannot see the market really roaring ahead,” Vitol Group CEO Ian Taylor told Bloomberg TV. Taylor sees Brent only rising to about $60 per barrel by the end of next year. He sees weak demand, particularly from China, plus elevated storage levels of both crude oil and refined products. Meanwhile, the supply disruptions in places like Nigeria and Canada are likely temporary.

Niger Delta attacks return. After nearly a three-week hiatus, the Niger Delta Avengers have resumed attacks on the oil industry in Nigeria. Oil prices rose in recent months, in part because of huge supply outages in Nigeria. Estimates vary, but Nigeria lost somewhere around 700,000 to 900,000 barrels per day because of supply outages in recent months. However, after a ceasefire, pipelines and oil wells saw repairs, and Nigeria managed to bring back nearly 500,000 barrels per day, with hopes of a return to full capacity of 2.2 million barrels per day in July. But the Avengers struck two oil sells owned by Chevron (NYSE: CVX) over the weekend, and also pulled off three attacks against pipelines owned by the Nigerian National Petroleum Corporation. Oil prices recently sank as Nigeria brought supply back, but the new round of attacks will put upward pressure on prices. Related: Texan Oil Production May Not Be Falling As Fast As Analysts Believe

Rival Libyan oil companies merge. The rival oil companies in eastern and western Libya have decided to merge, a major political breakthrough that could see Libyan oil return to the market. Libya’s oil production was below 400,000 barrels per day in May, and has hovered around that level for more than a year. Before the civil war began in 2011, Libya was producing 1.6 million barrels per day. Political reconciliation could bring some output back, and Libyan officials have said that output could double in a short period of time.

Unsubsidized solar competitive with natural gas. A new report from Greentech Media found that solar power, even without subsidies, can be cost-competitive with natural gas-fired power plants in the United States. Unsubsidized utility-scale solar projects cost $50 to $70 per megawatt-hour compared with the $52 to $78 for the most efficient natural gas power plant. And for the first time on record, solar is expected to account for the most electricity added to the U.S. power grid, more than any other energy source.

By Evan Kelly of Oilprice.com

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