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Oil Rises As Markets Regain Faith In OPEC Deal

OPEC

After having tanked as a result of the Fed rate hike, oil prices rose towards 17 month highs on Friday as a result of renewed faith in OPEC’s production cuts

Friday, December 16, 2016

Oil prices are ending the week largely where they started, with the strong gains from the non-OPEC deal having worn off as the week progressed. The non-OPEC deal strengthened credibility in the collective cuts from OPEC, with an expected 1.8 million barrels per day slated to be pulled off the market in early 2017. However, on Wednesday, the U.S. Federal Reserve poured cold water on the party with its interest rate hike – the strong dollar did a number on commodity prices. Oil prices closed the week in the green as markets regained faith in OPEC’s compliance to the deal.

Libya and Nigeria set to boost oil exports. A key oil export terminal as well as a pipeline in Libya are about to come back online, bringing disrupted oil production back onto the market. Libya has already doubled production from 300,000 to 600,000 bpd since September. Now more capacity is about to come online as the political situation improves. Separately, the Nigerian government signed a deal with ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A), Eni (NYSE: E) and Chevron (NYSE: CVX) to resolve a dispute over back payments of $5 billion on joint ventures. The deal could pave the way to more investment and lead to a resurgence in Nigeria’s output, which is down to 1.8 mb/d from a peak last year of 2.2 mb/d. If the two OPEC countries, Libya and Nigeria, restore capacity, it could threaten the efficacy of the OPEC deal.

IEA: Oil demand in 2017 to slow. In its latest Oil Market Report, the IEA said that global oil demand growth will slow to just 1.3 mb/d next year, down from 1.4 mb/d this year and 1.9 mb/d in 2015. The growth rate will be the smallest since 2014 and it poses a threat to a market on the mend. Other analysts put the 2017 growth rate much lower – Citigroup thinks demand will only expand by an unimpressive 1.1 mb/d.

Related: How Vision 2030 Will Transform The Oil World

Goldman Sachs increases oil price forecast. Goldman Sachs issued a revised oil price forecast for 2017 to reflect the effects of the non-OPEC agreement and greater confidence in the compliance of OPEC members to their historic deal. The investment banks expects WTI to average $57.50 in the second quarter of next year, up from its previous estimate of $55. Brent will average $59 instead of $56.50. Goldman is assuming an 84 percent compliance rate from OPEC, which will lead to cuts of 1.6 mb/d from the cartel instead of the announced 1.8 mb/d.

Pioneer expects $70 oil. While Goldman Sachs is offering a sort of middle-of-the-road forecast on oil prices – not too bullish or bearish – Pioneer Natural Resources (NYSE: PXD) is a lot more optimistic. The Texas shale driller sees WTI rising to $70 per barrel by the end of 2017 as the world quickly draws down on storage levels. Pioneer’s COO Tim Dove told Bloomberg that his company has hedged 85 percent of its production through 2017, but has declined to hedge much for 2018 as it plans on profiting from much higher prices. “We haven’t done much hedging for just that reason," Dove said. “We think there’s a chance that ’18 can be better."

WTI faces pressure from inventories at Cushing. While U.S. oil inventories are slowly coming down, they remain near record highs at the key oil hub of Cushing, OK. Part of that is a seasonal phenomenon as Gulf Coast refiners put extra product in storage in Cushing for tax reasons. But also refiners process less in winter months. Another reasons is that production is booming in Texas, keeping pressure on storage tanks. The inventories are pushing the market into a deeper contango than what has been seen in recent weeks, and also putting pressure on the WTI-Brent differential. Related: Combatting Cyber-Attacks In The Oil And Gas Industry

Statoil to sell off Canadian oil sands. Statoil (NYSE: STO) announced its decision to sell off its oil sands assets to Athabasca Oil Corp. (TSE: ATH) in a deal that could be worth up to $832 million. Statoil spent nearly a decade in Alberta’s oil sands, and will exit the play with a loss of at least $500 million. “This transaction corresponds with Statoil’s strategy of portfolio optimization to enhance financial flexibility and focus capital on core activities globally,” Lars Christian Bacher, the company’s executive vice president for international development and production, said in a statement. Translation: Canada’s oil sands are too expensive.

Chesapeake Energy’s “Prop-a-geddon.” Chesapeake Energy (NYSE: CHK) is conducting the largest frac job in the history of the Haynesville shale in Louisiana, a process the company is calling “prop-a-geddon.” The natural gas well the company is drilling is an experiment in economies of scale, drilling a well that is 2 miles deep and runs 2 miles horizontally, using 51 million pounds of sand. The monster frac job, Chesapeake believes, is a world record. Shale companies have been figuring out ways to use more frac sand, or drill longer laterals, to improve well economics, but Chesapeake is arguably pushing the bounds further than anyone. Chesapeake hopes it can cut costs by 75 percent compared to the average well. The WSJ reports that the experiment is integral to the turnaround of a deeply indebted company.

Trump selects Rep. Ryan Zinke (R-MT) for Interior. The Republican Congressman was chosen to lead the Interior Department, a former Navy SEAL. He is a supporter of oil and gas drilling, as expected, but he has also shown a bit of an independent streak, bucking his party on matters of public lands. While many Republicans want to privatize public lands to accelerate industry development, Zinke has fought to keep public lands public, offering a small sliver of hope for environmentalists fearing an onslaught from the Trump administration. Still, Zinke will likely oversee greater drilling opportunities on public lands.

By Evan Kelly for Oilprice.com

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