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The Oil Price Relief Rally Has Begun

Oil Rig

We begin with a quick look at some of the critical figures and data in the energy markets this week, which show that oil prices have rallied following a two day drop after the Brexit vote. Meanwhile, the total rig count fell by three despite four new gas rigs coming online. 

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Chart of the Week

• In recent days the Panama Canal Authority inaugurated a third set of locks, a much anticipated historic expansion to the canal, and the first expansion since 1914.

• The new lock system will allow larger ships to pass through the canal between the Pacific and Atlantic Oceans. The so-called “Neopanamax” vessels equipped to handle 400,000 to 600,000 barrels of petroleum products per day will be able to use the canal, whereas up until now only Panamax-sized ships (300,000 to 500,000 bpd) could fit through.

• Still, the impact on crude oil trade will be limited. Most oil is shipped on Very Large Crude Carriers (VLCCs), which are too big for the canal, even with the expansion.

• Refined products are often carried on smaller ships, so trade for propane, gasoline and diesel could rise.

Market Movers

FMC Technologies (NYSE: FTI) and Technip (OTCQX: TKPPY) gained the approval of U.S. antitrust regulators for their proposed tie up, although reviews are pending in other countries. The greenlight stands in stark contrast to the rejection of the Halliburton-Baker Hughes merger earlier this year, two larger oilfield services giants.

Whiting Petroleum (NYSE: WLL) saw its share price plunge last week on news that it planned on exchanging $1.06 billion in notes for new mandatory convertible notes, leading to equity dilution. The company’s share price has dropped 27 percent since then.

Total (NYSE: TOT) won a 30 percent stake in Qatar’s largest offshore oil field, according to Reuters. Total will have beat out a handful of other large international firms for the contract. The field currently produces 300,000 barrels per day and used to be operated by Denmark’s A.P. Moller-Maersk.

Tuesday June 28, 2016

Oil prices firmed up on Tuesday, after several days of huge sell offs. The Stoxx Europe 600 Index rose after falling 11 percent in the last two trading days. Commodities increased, the sterling steadied and the dollar rally came to a halt. The markets are anticipating more central bank intervention in the coming year to stabilize the faltering financial system. Related: Saudi Arabia’s Oil Storage Falling As Exports Exceed Production

The correction was a welcome one, after several down days led to the loss of $3 trillion in stock market value around the world. The markets are still sifting through the wreckage and digesting the consequences of the Brexit. Even though volatility will stick around for some time, the gains posted during midday trading on Tuesday provide some degree of confidence that the effects of the Brexit on global financial markets could be temporary, even if damage to the UK is more lasting. WTI and Brent traded up more than 2 percent during midday trading on Tuesday.

ExxonMobil hits oil in Guyana. ExxonMobil's (NYSE: XOM) appraisal well off the coast of Guyana reportedly came back with very strong results. Officials from Guyana said that the oil major found very large deposits of oil and gas and the company could drill more wells in the coming months. Previous wells are thought to put the deposit at more than 700 million barrels of oil.

ExxonMobil under investigation in Nigeria. The oil major is under investigation from Nigerian financial crime officials over a 2009 bid for Nigeria’s “crown jewel” oil fields, according to a report from The Guardian. Exxon won contracts even though its $1.5 billion bid was vastly lower than a $3.75 billion bid from China’s Cnooc.

Nigeria looks to attract $40 to $50 billion. Separately, Bloomberg reported that Nigeria is hoping to continue to boost oil output after attacks crippled the country’s production in recent months. By the end of June, Nigerian officials said production had climbed from 1.3 million barrels per day (mb/d) to 1.9 mb/d, successfully bringing back a sizable portion of its disrupted output. In July, if pipeline repairs can be completed, Nigeria hopes to reach 2.2 mb/d. The next step is to attract $40 to $50 billion in investment from international companies to shore up the country’s oil sector. Nigeria recently inked a deal with China North Industries Group Corp. for $8.5 billion.

Canada’s oil production to grow 42 percent by 2025. IHS Energy projects a 42 percent increase in Canadian oil sands production, bringing output up to 3.4 mb/d over the next decade. That would mean Canada’s oil sands, torn apart by fires in recent weeks, would add 1 mb/d in the coming years. However, most of those gains will come from projects that are already under construction and received final investment decisions before the collapse of oil prices. After 2018, when the backlog of these projects are completed, there will likely be no more greenfield projects in the pipeline. Any further gains will have to come from brownfield sites, IHS says. Related: Does The U.S. Really Need A Strategic Petroleum Reserve?

New hiring in the Bakken. Oilfield service companies in the Bakken are beginning to hire again for completion services, a sign that oil producers could start to work through their backlog of drilled but uncompleted wells (DUCs). “We are starting to see a definite increase,” Cindy Sanford, a manager at the Williston office of Job Service North Dakota, told the Forum News Service. She said that companies are looking for workers for fracking crews and well completion. “It’s not as crazy as it was before, but we’re starting to see some activity.” If drillers are moving to complete old wells, that could bring new production online, a month after the Bakken reported a huge decline in output. It also suggests that companies can turn a profit at $50 per barrel, a threshold that could trigger well completions in other parts of the country.

Argentine oil workers go on strike. Argentina’s oil workers went on a two-day strike on Monday and Tuesday, demanding a 30 percent pay hike. The strike will continue “indefinitely” if wage demands are not met, a union representative said. The workers strike affects 99 percent of Argentina’s oil production and 88 percent of its natural gas. Separately, Chevron (NYSE: CVX) reported that its well costs to drill in Argentina’s Vaca Muerta have declined by 20 percent this year, dropping from $14 million to $11.2 million per well. Chevron is targeting $10 million per well. “There are a lot of companies watching Chevron and YPF in Argentina,” Ali Moshiri, Chevron’s president for Latin America and Africa, told Bloomberg in Buenos Aires last week. “The performance of those wells is coming very close, very competitive to the United States.”

Norway workers to strike. Another workers strike could disrupt some production in Norway. Oil workers are demanding a pay raise, and are threatening to strike this coming weekend. Norway produces 1.5 million barrels per day.

New SEC rules require energy companies to report payments. Finalized rules from the U.S. Securities and Exchange Commission will require oil, gas, and mining companies to report their payments to foreign governments for the production of natural resources. The rules are an outgrowth of the 2010 Dodd-Frank regulatory reform law, and are intended to reduce the corruption in developing countries that stems from resource extraction. Mineral rich countries with weak institutions often suffer from a “resource curse,” in which the wealth of commodity extraction only flows to the elite. By 2018, an estimated 755 energy companies will have to comply with the new rules. The industry says that the rules are burdensome.

By Evan Kelly of Oilprice.com:

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