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Oil Prices Withstand Increased Saudi Production For Now

Oil Prices Withstand Increased Saudi Production For Now

Oil prices nudged upwards slightly on March 23 and 24, ignoring several troubling signs for energy markets. WTI traded above $48 per barrel and Brent hovered around $56. The weaker dollar seemed to outweigh news from China that the Middle Kingdom has seen manufacturing activity drop to its lowest level in 11 months. China is seeing its economy – the world’s second largest – slow more and more, raising questions about the growth in global oil demand. Morgan Stanley slashed its price targets for an array of commodities because of slumping Chinese industrial activity. Nickel, iron ore, copper, coking coal, and other metals are likely to see tepid demand as China disappoints.

Also, Saudi Arabia reiterated its position that it would not unilaterally cut oil production in order to prop up prices. The leading OPEC member said that it would consider production cuts only if other non-OPEC producers did as well. Dr. Ibrahim Al-Muhanna, the advisor to Saudi Arabia’s oil minister, spoke at a conference in mid-March in which he said that OPEC sat down with Russian and Mexican officials last fall to discuss coordinated production cuts. However, when Russia and Mexico decided against cutting output, OPEC decided to leave its production quota unchanged. Saudi Oil Minister Ali al-Naimi said on March 22 that Saudi Arabia is now pumping 10 million barrels per day, suggesting a 350,000 barrel-per-day increase over February. He emphasized once again that Saudi Arabia would not go it alone in balancing out the oil markets. Related: No Country For King Coal – The Changing U.S. Energy Mix

Low prices have raised speculation about the potential for mergers and takeovers in the U.S. oil patch, as weaker minnows get swallowed up by bigger fish. One of the most significant possibilities was Whiting Petroleum (NYSE: WLL), a major shale producer in Colorado and the Permian basin in West Texas. Whiting has suffered from the collapse in oil prices, a development of unfortunate timing. Just as Whiting bought up a rival producer at the end of 2014, taking on over $2 billion in debt, low prices blew a hole in its revenue projections. Over the last few weeks, Whiting has sought a suitor, hoping to sell itself to a larger company. But, unable to find a willing partner, Whiting announced in aftermarket hours on March 23 its decision to issue new stock in order to raise cash. It will offer 35 million shares at $30 each. Its share price cratered on the news, falling about 20 percent on March 24 alone. The announcement also put to rest for now the rumors that Whiting could be bought up by a bigger player.

Negotiations over Iran’s nuclear program are coming down to the wire, with new reports surfacing that Israel spied on the talks and revealed intelligence to the U.S. Congress in order to scuttle a deal. The plan has backfired as Israel has alienated both the White House and certain members of Congress that have bristled at Israel’s meddling. Israel is also lobbying France and the U.K. to oppose an emerging deal between the P5+1 nations and Iran. Overcoming hardline elements in both the United States and Iran will be an uphill battle to any deal, but last ditch negotiations will resume at the end of this week to try and come to a final agreement. Sensing a “historic opportunity,” U.S. President Barack Obama is pushing hard for a “grand bargain” between the U.S. and Iran, despite aggressive attempts by Israel to derail the negotiations. Iran hopes to ramp up its oil production once sanctions are lifted. Related: The $6.8 Billion Great Wall Of Japan: Fukushima Cleanup Takes On Epic Proportion

Beginning on April 1, Ukraine plans on not buying natural gas from Russia as their interim deal expires. “At the moment we don't need to buy Russian gas. We will simply stop buying it,” Ukrainian Energy Minister Volodymyr Demchyshyn said. Ukraine says that since it can access natural gas from its European neighbors at a lower price than what Russia is demanding, “there’s no reason to buy” Russian natural gas. With that said, Demchyshyn is engaging in a bit of bluster. Ukraine and Russia are in the midst of negotiations over a new natural gas contract, which could be signed in mid-April. With the sticking point once again over the price that Ukraine ultimately pays, Ukraine stands to gain if it can credibly demonstrate that it does not need Russian gas as much as Russia thinks it does. Therefore, Ukraine may stop importing Russian gas on April 1. But even if it does, given Ukraine’s energy needs, it will likely only be temporary.

The conflict with Ukraine has led to western sanctions on Russia that have inflicted some real pain on its oil industry. The western campaign has made any dollar-denominated financing in Russia enormously risky and fraught with legal dangers. With western banks scared away, Chinese finance is stepping into the fray. The French oil giant Total (NYSE: TOT) is hoping to build a $27 billion liquefied natural gas (LNG) terminal on the Yamal Peninsula on Russia’s northern coast. But, in a departure from convention, Total will tap credit at Chinese banks. Total is seeking $15 billion in euro and yuan-denominate notes, allowing it to proceed with the major Arctic LNG project without worrying about western sanctions. It is also a big opportunity for Chinese influence in finance, energy, and in Russia in particular. The deal could mark the largest private financing deal involving Chinese banks. Related: Low Prices Help Arctic Avoid A ‘Gold Rush’ Scenario

Speaking of the Arctic, Royal Dutch Shell (NYSE: RDS.A) expects to receive a greenlight this week to resume its drilling campaign in the Chukchi Sea off the coast of Alaska. The U.S. Department of Interior has been reviewing Shell’s drilling plans, and appears to be convinced that Shell is prepared for all possible contingencies should something go wrong in the far north. Shell has spent the better part of a decade trying to drill in the Arctic, but has suffered repeated setbacks due to permit delays, weather, sea ice, and its own mishandling of drilling operations. After several billion dollars spent with little to show for it, Shell has mulled the possibility of putting its Arctic plans on ice after the fall in oil prices. But for now, Shell appears to be moving forward, and could resume drilling this summer.

By Evan Kelly of Oilprice.com

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