Why OPEC’s Inaction Didn’t Harm Oil Markets

In this week’s key data for the oil and gas industry, we continue to see a decline in U.S. crude inventories and gasoline stocks while U.S. production keeps on following its downward trend.

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Friday, June 3, 2016

The OPEC meeting in Vienna ended with no agreement on production targets, despite some rumors ahead of time that Saudi Arabia had floated a reinstatement of those limits. Iran still has no use for OPEC’s coordinated action, and Iran’s oil minister says that it still has some lost ground to regain. Iran won’t consider any possibility of limiting its production until it reaches 4 million barrels per day (mb/d) of production; its output currently stands at about 3.8 mb/d. As a result, OPEC couldn’t agree on anything, but such an outcome was largely expected by oil analysts. Still, prices plunged by more than 1 percent on the news from Vienna.

Oil storage levels fall. But the losses were quickly regained on June 2 as the fundamentals continue to provide some reassurance. Storage levels in the U.S. fell by another 1.4 million barrels, the first time that the U.S. has posted consecutive weeks of declines in a long time. Also, U.S. oil production fell by yet another 32,000 barrels per day last week – the losses continue to mount and output is down by more than 900,000 barrels per day from last year’s peak at nearly 9.7 mb/d. The oil markets were buoyed by these figures, pushing WTI and Brent back towards $50 per barrel following the disappointment from Vienna. Related: Dollar Weakness Fails To Stimulate Oil Prices

Weak jobs report. On the other hand, the Labor Department released the worst monthly jobs report in years on June 3, revealing that the U.S. added only 38,000 jobs in the month of May. The unemployment rate fell to just 4.7 percent, but largely because of people dropping out of the labor force. The dismal report could put downward pressure on crude oil, but it could also cause the Fed to delay a rate hike, which would be seen as a positive for oil prices.

Nigeria output back up. Nigeria’s oil minister said that his country’s output has climbed to 1.6 mb/d, up from 1.4 mb/d in May. Still, the Niger Delta Avengers continue their aggressive campaign against oil companies operating in the Delta. This week the militant group claimed that it successfully carried out attacks against two oil wells controlled by Chevron (NYSE: CVX). The Nigerian government has had very little success in slowing the attacks and much of the country’s oil production remains offline.

ExxonMobil considers $10 billion investment in Argentina. Argentina could be home to the next shale revolution, as the vast Vaca Muerta shale holds large volumes of oil and gas. Several oil majors have had a presence there for several years, but have not yet been able to crack the shale basin in a massive way. ExxonMobil (NYSE: XOM) announced that it is considering a $10 billion investment in the Vaca Muerta over the next few decades. The oil major has already poured $200 million into Argentina, and is now looking at another $250 million for a pilot project. If that is successful, Exxon’s CEO Rex Tillerson says that the company would make investments over the next 20 to 30 years “that would be well in excess of $10 billion.”

Banks require more liquidity from oil and gas companies. Lenders are increasingly requiring oil and gas drillers to set aside cash in order to keep a certain level of liquidity. The measures are intended to reduce the banks’ exposure to debt that might not be paid. Also, the banks are concerned that indebted drillers might exhaust their credit lines ahead of a bankruptcy event. Banks are under their own scrutiny from regulators to minimize their vulnerability to bad energy debt. Related: Why $50 Oil Makes Sense

Natural gas inventories rise at slower pace. Natural gas prices jumped to a nearly six-month high on EIA data showing that inventories increased at a much smaller-than-expected rate. Spring typically brings strong gains in natural gas storage levels because of lower demand. The EIA reported that inventories climbed by 82 billion cubic feet last week, lower than the 86 bcf expected by some analysts surveyed by The Wall Street Journal. In the last week of May, inventories stood at 35 percent above the five-year average, down from 37 percent a week earlier. In other words, inventories are still extraordinarily high, but the glut is a bit smaller than was expected only a few weeks ago. Low prices since last year have halted production levels, which should help narrow the supply overhang going forward. Natural gas prices jumped to $2.42 per million Btu (MMBtu), sharply up from the sub-$2/MMBtu range where gas had been trading at for weeks.

BP reaches $175 million settlement. BP (NYSE: BP) reached a $175 million settlement related to some outstanding legal claims from the Deepwater Horizon disaster in 2010. The claims were brought by investors that purchased BP shares following the disaster, a class-action suit that was about to go to trial.

Petrobras could undergo major changes. The new head of Brazil’s state-owned Petrobras backs reforms that would scrap the legal requirement that Petrobras operate all of the pre-salt oil fields. If the law is loosened, it would be a huge opportunity for international oil companies, opening up some of Brazil’s most prized oil fields in the Atlantic Ocean. Petrobras has $130 billion in debt and can no longer afford the expenditures required to develop many of the pre-salt fields. The political crisis and the change of government in Brazil could accelerate market reforms and liberalize Brazil’s oil sector.

ConocoPhillips offers best value. Bank of America Merill Lynch said in a report that ConocoPhillips (NYSE: COP) offers the best relative value in its peer group. Although its dividend is only 2.2 percent, lower than some of the other oil majors, Conoco offers the “top ‘free cash’ yield idea.” BofA Merrill Lynch’s Doug Leggate said that Conoco was best positioned to deliver outsize returns to shareholders from share buybacks.

By Evan Kelly of Oilprice.com

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