Oil Prices are flirting with a rebound, poised to jump the most in four years for the week ending on February 6. The markets do not know what to make of the current pricing situation, as volatility is also at a multi-year high. But major capital expenditure cuts from the big boys – billions of dollars are set to be slashed by ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A), Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), and BP (NYSE: BP) – are signaling that the bottom is coming into view. Rig counts also continue to slide at a rapid clip. Oil prices took a pause mid-week, erasing much of their 19% gain after the EIA reported that oil inventories were at an 80-year high. But WTI and Brent posted further gains to close out the week, providing some serious evidence that a rally could be in the making.
Adding fuel to the fire was violence in Libya, a country that last year helped contribute to the historic collapse in oil prices. Oil production in the North African country has broken down, falling from 900,000 barrels per day down to 325,000 barrels per day over the last three months. Militias have attacked airports and a major oil export terminal, igniting oil storage facilities that Libyan officials struggled to put out. The violence is cutting off significant volumes of production from several international oil companies – Total (NYSE: TOT), ConocoPhillips (NYSE: COP), Marathon Oil (NYSE: MRO), and Hess Corp. (NYSE: HES). Total has shuttered a 40,000 barrel-per-day oil field in Libya, and ConocoPhillips says its Libyan production fell to just 8,000 barrels per day in 2014, compared to an average of 30,000 barrels per day the year before. The violence has blocked exports from Libya’s enormous Sidra port. The loss of more than a half of a million barrels per day from this war-torn OPEC country is taking a non-trivial volume of supply off the market.
Meanwhile, tensions are rising in Eastern Europe after reports surfaced that the U.S. is considering arming Ukraine in its fight against Russian-backed separatists. Rushing to attempt to reach a diplomatic solution, German Chancellor Angela Merkel and French President Francois Hollande flew to Kiev on February 5 to discuss the situation with Ukrainian President Petro Poroshenko. The duo then moved on to Moscow to huddle with Russian President Vladimir Putin to try and diffuse the situation after rejecting a Russian proposal to grant more autonomy to rebels in eastern Ukraine. There was no immediate breakthrough, but Merkel and Hollande hoped to push diplomatic progress forward. The diplomatic campaign suggested there was a divide between the U.S. on the one hand, and European countries on the other in terms of how to deal with a recalcitrant Russia. France and Germany oppose American weapons heading to Ukraine. The standoff raises the prospect of more violence in Ukraine and a deterioration of already terrible relations between east and west.
Geopolitical crises may be contributing to a rise in oil prices in recent days, but prices are still below $60 per barrel. And that is not enough to entice oil companies to continue drilling in high cost areas. Oil explorers are scrolling through their list of projects and are coming to the conclusion that oil in the Arctic is some of the most expensive out there, as the region suffers from remote and unpredictable drilling conditions as well as a lack of infrastructure. Chevron and ExxonMobil have already withdrawn their Arctic plans, but Statoil (NYSE: STO), an Arctic veteran, became the latest company to suspend their Arctic drilling campaign, at least for the time being. Even Russia’s Rosneft has pulled back from the far north. The Financial Times wrote that Arctic drilling is entering a “deep freeze,” a chill that may not thaw out for years.
While the oil business in the far north is facing a cold spell, economic activity across the U.S. is heating up. The U.S. Department of Labor reported very robust employment numbers on February 6, reporting that employers added more than 257,000 jobs in January and also included an upward revision in jobs figures for the months of November and December. The U.S. economy appears in full recovery mode, in doubt pushed on from low gasoline prices. However, in turn, the economic jolt should lead to higher demand for fuels, giving added support to the rise in oil prices.
Although prices are rising, the oil industry is not out of the woods yet. Saudi Arabia did indeed raise prices for its oil being exported to the United States, but it also slashed its prices by almost $1 per barrel to oil heading to Asia. The move suggests that the de-facto OPEC leader is playing the long game and is still fighting for market share. Other OPEC members have increased their exports to Asia, and China in particular has increased its imports to take advantage of soft prices. But Saudi Arabia, learning the lessons of the 1980’s when it lost market share, is stubbornly fighting for every sale. That muddies the picture as far as the oil rally goes, so stay tuned.
By. James Stafford of Oilprice.com