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Oil Hits Ceiling At $50 Per Barrel

Oil prices fell back to $50 on Friday afternoon, after the U.S. rig count hit eight year highs.


(Click to enlarge)

(Click to enlarge)

Friday, October 14, 2016

Crude oil is set to close out the week not much different from where it started, seesawing a bit along the way. Oil prices sank on EIA data showing rising crude inventories – the first increase in six week – but that was offset by a large drawdown in refined product stocks. “It could simply be the fact that selling couldn’t sustain itself below $50,” Mark Anderle, director of supply and trading at TAC Energy, told the WSJ in an interview. “Clearly to me this says the bulls are still in charge.” Oil prices are looking for some direction with conflicting data emerging this week.

North Dakota’s oil production drops below 1 mb/d. The Bakken continues to feel the effects of low oil prices. New data shows that North Dakota’s oil production dipped below 1 million barrels per day for the first time in more than two years. Output fell to 981,000 bpd in August, down from a peak of over 1.2 mb/d in December 2014. The Bakken has seen drilling vanish and companies decamp to more profitable plays such as the Permian in West Texas. "It does send a signal to the world markets that U.S. producers are serious about reducing activity, reducing costs, reducing production and I think that should help support the recent price increase we saw," Lynn Helms, director of state’s Department of Mineral Resources, told reporters.

Permian gas on the rise. The flurry of drilling in the Permian basin is leading to an increase in the volume of associated natural gas produced. Gas production has topped 7 billion cubic feet per day, according to Bloomberg Intelligence, equivalent to about 8 percent of U.S. supply. Natural gas markets are growing tighter in the U.S. as demand rises and drilling slows (in most places), but the Permian remains as one region where gas output is expected to climb in the near-term. As such, it could be one of the few downside risks to natural gas prices. Nevertheless, Henry Hub is up to $3.30 per MMBtu as overall supply in the U.S. falls.

U.S. energy emissions at 25-year low. The EIA says that energy-related emissions in the U.S. in the first half of 2016 have declined to their lowest levels since 1991, due to mild weather and a cleaner energy mix. A warm winter led to weak demand for electricity, and renewable energy and energy efficiency continue to eat into the market share for fossil fuels, particularly for coal. But the upcoming winter is expected to be colder, which could lead to higher emissions, and as the EIA noted in a separate report, higher natural gas prices and more expensive electricity.

Kashagan exports first oil. One of the most expensive oil fields in history finally began operations. The Kashagan project in Kazakhstan sent its first shipment of oil, after 16 years of development and more than $50 billion spent. Kashagan has suffered from repeated delays, equipment failures, and massive cost overruns – the project had a price tag of $38 billion in 2008 but that mushroomed to at least $53 billion by 2015. Nevertheless, the project is expected to be significant, potentially adding 370,000 barrels per day by the end of next year, something oil analysts and investors need to keep an eye on in the context of global supplies. Eni (NYSE: E) is the lead operator, working with ExxonMobil (NYSE: XOM), Total (NYSE:TOT) and Royal Dutch Shell (NYSE: RDS.A).

First energy IPO in two years. Extraction Oil & Gas succeeded in going public this week, the first public offering since 2014. The Denver-based company sold more than 33 million shares at $19 per share, valuing the company at $2.4 billion. The successful IPO suggests that investors are still hungry for energy exposure, and could once again be warming up to the sector as oil prices rise. Related: U.S. Rig Count Rises To 8 Month High As Permian, Eagle Ford See Decline

Russia’s Rosneft to acquire India’s Essar Oil. Rosneft is leading a group that will purchase Essar Oil in a deal valued at about $7.5 billion. Rosenft will take a 49 percent stake, and Trafigura Group and a Russian investment fund will split the remainder. Essar has a large 450,000 barrel-per-day refinery in western India. The deal will also offer Russia’s Rosneft access to over 2,700 retail gas stations in India, giving it a greater ability to market its fuels.

Gazprom nears deal with EU antitrust regulators. The Russian gas giant and EU regulators are expected to reach a deal within the next few weeks that would settle antitrust concerns. The multi-year saga could come to a close, forcing changes in how Gazprom operates. The EU has accused Gazprom of charging unfair prices to certain Eastern European countries. The WSJ reports that Gazprom might avoid paying billions of dollars in fines but will agree to change its pricing practices. The deal could be a boon to Eastern Europe.

Williams Partners and Cabot see share prices fall on pipeline delay. Williams Partners LP and Cabot Oil & Gas (NYSE: COG) have seen their share prices slip as a major shale gas pipeline in Pennsylvania faced a setback. The federal pipeline regulator, FERC, extended a public comment period for the $3 billion Sunrise project, which would carry Marcellus shale gas to market.

By Evan Kelly of Oilprice.com

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