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This Week In Energy: Don’t Be Fooled By Latest U.S. Production Data

This Week In Energy: Don’t Be Fooled By Latest U.S. Production Data

Despite the volatility, which has become the norm, oil prices close out the week not much changed from Monday. After growing evidence that U.S. supply was contracting, the EIA reported that U.S. oil production rose in July (the latest month for which data is available) by 94,000 barrels per day, compared to June. The monthly figures are much more reliable than the weekly estimates, so the increase can be considered more of a solid barometer of where the U.S. supply picture has been heading, although only in retrospect.

However, the uptick needs some context. The increases came exclusively from the Gulf of Mexico where output jumped by 147,000 barrels per day. The Gulf of Mexico has entirely different time horizons for projects than U.S. shale. Projects take years to develop, so increases are coming from projects planned before the crash in oil prices.

The production gains blur what is actually going on in the U.S., which is ongoing decline in output.

Without the Gulf of Mexico, U.S. output would have dropped by another 53,000 barrels per day in July from a month earlier. And in the key shale states, which are garnering much of the attention in terms of trying to figure out how quickly U.S. output will adjust to lower prices, the drop offs continue. Texas lost 12,000 barrels per day; North Dakota lost 3,000 barrels per day, and Oklahoma lost 17,000 barrels per day. Only Colorado saw a decent increase in production. Still, even when leaving out the gains in the Gulf of Mexico, a decline of 53,000 barrels per day is a slower decline than the 115,000 barrels per day lost between May and June. That, coupled with the news that the U.S. saw another uptick in the level of crude oil in storage, was bearish for oil this week. Related: Shell’s Loss Is Eni’s Gain

As everyone watches and tries to pinpoint the bottom for the oil markets, many have maintained that a flurry of mergers and acquisitions would signal that the market is turning. But according to the Wall Street Journal, there has been $323 billion of M&A activity announced or proposed so far this year. That compares to a previous record for a comparable period of time of just $100 billion.

In other words, the M&A activity has been explosive, even if only a few individual deals splash across the headlines (the Shell-BG purchase comes to mind). The Shell-BG deal accounted for $70 billion; Schlumberger (NYSE: SLB) announced in August its decision to purchase of Cameron International (NYSE: CAM) for $12.7 billion; and earlier this week Energy Transfer Equity LP (NYSE: ETE) finally sealed a deal with the pipeline operator Williams Companies (NYSE: WMB) for $32.6 billion. The M&A activity suggests that larger firms sense an opportunity to grow during the downturn, and while it may seem like a lot of companies are sitting on the sidelines, deals are getting done.

ExxonMobil (NYSE: XOM) announced this week its decision to sell its troubled Torrance refinery in Southern California. The refinery, which has been offline since February due to an explosion, will be sold to PBF Energy (NYSE: PBF), a New Jersey-based downstream company. PBF agreed to pay $537.5 million, and the deal is expected to close in the second quarter of 2016. The Torrance refinery produces about 10 percent of California’s gasoline supply, and 20 percent of supply in Southern California. Gasoline prices within the state have spiked because of the outage. ExxonMobil will maintain liability for the accident.

A slew of regulatory news from Washington DC came out this week. The Obama administration released new rules on ozone emissions from industrial sources, lowering limits to 70 parts per billion (ppb) from the current 75 ppb set under former President George W. Bush in 2008. The limits were criticized by the industry, but the EPA decided on the softest approach under consideration, with many expecting the agency to issue tighter limits. The EPA says the regulations will cost the industry $3.9 billion by forcing companies to install scrubbers, but the agency says it will prevent hundreds of thousands of childhood asthma attacks each year by reducing toxic emissions. Related: Clinton A Continuation Of Obama On Energy

Separately, a U.S. District Court shot down a rule from the Department of Interior that sought to set standards on hydraulic fracturing. The judge said Interior lacked the authority to regulate fracking. The rules intended to put standards on well casing and other drilling techniques, as well require operators to disclose the chemicals used in their fracking processes. Interior is weighing whether or not to appeal the judge’s decision.

The U.S. Senate Banking Committee passed legislation to repeal the ban on oil exports, as efforts in both houses of Congress gain steam. But even though the movement is picking up momentum, it is also at risk of getting bogged down in partisan politics. The Senate bill that passed out committee included a provision that would require Iran to use any proceeds gained as a result of the nuclear deal to compensate victims of terrorism. Just as the movement appeared to be picking up Democratic support, even if only slightly, the provision will guarantee the bill won’t pass in the full Senate. The oil export debate appears to be hardening along partisan lines, with President Obama coming out against any efforts to lift the ban. Any hope of actually repealing the export ban will have to somehow bring some Democrats on board, and that will necessarily mean removing the provision on Iran.

Petrobras, the besieged state-owned oil firm in Brazil, has announced its plans to raise fuel prices across the country, as it struggles with sky-high debt and a widening corruption investigation. Petrobras will raise gasoline prices by 6 percent and diesel prices by 4 percent at its downstream assets. It is unclear how that will trickle down to the price at the pump. The move comes after a November 2014 decision to hike prices by 3 percent for gasoline and 5 percent for diesel. Petrobras has to sell fuel at a regulated price, as the government tries to keep prices affordable for consumers. However, that saddles the company with debt as it takes in less revenue than it otherwise would if it could sell its product at market rates. Petrobras also has to import fuels because of shortages, and the plummeting value of the country’s currency has made imports much more expensive. The company had over $100 billion in debt as of June 30, an increase of 18 percent since the end of 2014. Related: Second Oil Auction Goes Much Better For Mexico

Tensions are heating up in the Middle East as Russia has begun conducting air strikes on targets in Syria. Russian President Vladimir Putin says Russia is targeting ISIS, but the U.S. is skeptical, suggesting Russia is merely trying to prop up Syrian President Bashar al-Assad by striking his rebel opponents. The involvement of Russia and the growing international attention on the ceaseless conflict in Syria is not directly affecting oil markets at this point, but is one to keep an eye on.

Meanwhile, ISIS attacks in Libya could have a much more direct impact. On October 1, ISIS militants attacked one of Libya’s main oil ports, Es Sider. The port is under the control of the recognized government and has been closed since December 2014, preventing Libya from reviving oil exports. One guard at Es Sider was reportedly killed but the attack was repelled. Still, Libya has been torn apart by conflict, and the two warring factions are at a stalemate, with a security vacuum across most of the country. Libya is producing less than 400,000 barrels per day, far below the 1.6 million barrels per day it produced during the Gaddafi era.

By Evan Kelly of Oilprice.com

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