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A Return to $40 Oil? Rally Runs Out of Steam

Oil rigs

When taking a quick look at some of the critical figures and data in the energy markets this week, we see that the U.S. oil rig count remains unchanged, while oil prices are falling as a result of a stronger U.S. dollar.

(Click to enlarge)

Chart of the Week

(Click to enlarge)

• OPEC members earned $404 billion in oil export revenues last year, a decline by roughly half from the $753 billion they earned in 2014, according to the EIA.

• The 2015 total was the worst performance since 2004. The EIA says that OPEC members earned about $606 per capita for its population from oil export revenue, down from about $3,500 per person in 1980.

• This year will likely be worse. The EIA projects OPEC oil revenue to fall to $341 billion this year but could rebound to $427 billion next year. However, those are just rough estimates, using assumption for oil prices for the next 18 months.

Market Movers

Royal Dutch Shell (NYSE: RDS.A) said that it would sell some of its Gulf of Mexico assets for $425 million to Houston-based EnVen Energy. The sale includes the Brutus/Gilder assets, which include four blocks plus a subsea pipeline and platform.

• Oil production at Eni’s (NYSE: E) Goliat oil platform in the Barents Sea was shut down last week because of a power failure, requiring a partial evacuation. The Norwegian government is requesting that Eni come up with a plan to prevent future interruptions.

• An anti-fracking vote failed to qualify for the November ballot in Colorado, falling short of the signatures needed to make the cut. The measures could have been severely restrictive to oil and gas drilling in the state.

Tuesday August 30, 2016

Oil prices dipped on Monday as oil traders took a more pessimistic view of the forthcoming OPEC meeting in Algeria. A stronger dollar and an improved security outlook in Nigeria also weighed on prices. Last week, a surprise build in crude oil inventories dashed hopes that the bull market would continue. On top of these fundamentals, the U.S. dollar also gained strength as the Fed appeared to put a near-term rate hike back on the table last week. Taken together the glut has kept oil prices from rising back to $50 per barrel.

The bearish news was offset on Tuesday by a temporary shutdown in recent days of about 170,000 barrels per day in the Gulf of Mexico because of tropical storm concerns. Oil traded up slightly on Tuesday – WTI moved above $47 per barrel during midday trading and Brent was just shy of $50.

Oil price volatility “here to stay.” Top oil executives do not see an end to the volatility in the oil markets for the foreseeable future. “The volatility is here to stay,” ConocoPhillips (NYSE: COP) CEO Ryan Lance said at a Conference in Norway on Monday, according to Bloomberg. The ongoing process of adjustment to oil supply and demand “will extend into 2017. The inventory levels are still quite high." Other oil executives agree. Martin Bachmann, the top official from Wintershall AG’s exploration and production unit for Europe and the Middle East, said that “[t]here will be a rebalancing. Over what timeframe is the big question.” He went on to add, “[b]asically, volatility is the word.”

A return to sub-$40 oil? "While we see high probability of some 80 to 90 percent of a return to $39 WTI, we also feel that achievement of this objective could still be some four to five weeks away," said Jim Ritterbusch of the oil consultancy Ritterbusch & Associates, according to Reuters.

Strong rebound next year. While some analysts are concerned that oil could dip again in the short run, Bank of America Merrill Lynch says that oil is set for strong gains in 2017, expecting WTI and Brent to rise to $70 per barrel. BofA Merrill Lynch says that the oil market will flip from glut to deficit next year, with demand outstripping supply by as much as 800,000 barrels per day. Francisco Blanch, head of global commodities research at BofA Merrill Lynch drew a parallel with the 2010 rally, which saw strong price gains amid a supply deficit. In 2010 oil surged to the mid-$90s per barrel because of the supply shortfall, but Blanch says that the potential for tighter monetary policy could keep oil prices from reaching that level this time around.

Oil majors pull out of Alaska LNG. A massive project to build a long-distance natural gas pipeline and LNG export terminal in Alaska just took a hit, as one of the main private sector sponsors pulled out amid high costs. ExxonMobil (NYSE: XOM) said that despite the 20 percent reduction in the expected cost for the project, it is still not economically viable. Exxon is a joint owner of the project, along with BP (NYSE: BP), ConocoPhillips (NYSE: COP), and the state of Alaska. The companies say they believe the project will cost $45 billion, at the lower end of a previous estimated range of $45 to $65 billion. Instead, they support a state-led ownership model for the project, but exactly how that would work has yet to be determined. The 800-mile pipeline and LNG export terminal is among one of the world’s costliest on the drawing board. LNG prices have crashed in recent years, throwing the project’s economic case into doubt. Related: Dakota Access Pipeline Is Set To Become The Second Keystone XL

Mexico hedges $9.5 billion worth of oil. Mexico once again hedged a large volume of its oil sales for the year ahead, locking in the equivalent of $9.5 billion of oil sales to ensure predictable prices. Mexico does not like to play with chance – it is the largest sovereign oil hedger in the world, according to Bloomberg. Mexico locked in 250 million barrels of oil at $38 per barrel, a few dollars below last week’s close of $41 per barrel (Mexico’s crude stream trades at a discount to the more widely traded international benchmarks). That is the lowest price it has hedged at since 2008. But while last year’s hedging looked too cautious at the time, it ended up yielding $6.4 billion in savings, and Mexico’s hedging could save $3 billion this year. Still, the willingness to hedge at $38 per barrel says a lot about where Mexico believes the oil price is heading over the next 12 months.

Oil discoveries continue to plummet. In 2015 the oil industry logged new discoveries that represented just one tenth of the annual average dating back to 1960, Bloomberg reports. This year could be even worse as the industry slashes spending on exploration. The figures come from a new Wood Mackenzie report, which found that only 2.7 billion barrels of new oil was discovered in 2015, and only 736 million barrels have been discovered so far this year. The poor results raise questions about the industry’s ability to bring enough supply online to meet future demand.

U.S. regulators says fix to faulty offshore drilling bolts needed. The U.S. Bureau of Safety and Environmental Enforcement (BSEE) warned offshore oil drillers and equipment suppliers that faulty bolts used in the drilling process could lead to a catastrophic oil spill. “Fortunately, as of today we’ve had no major catastrophes from bolt failures,” Brian Salerno, Director of BSEE, said at a forum on Monday hosted by the agency. “We believe it may only be a matter of time before our luck runs out.” A pattern of bolt failures used in key equipment such as blowout preventers have been reported in recent years, parts manufactured by General Electric (NYSE: GE), Schlumberger (NYSE: SLB) and National Oilwell Varco (NYSE: NOV), according to The Wall Street Journal. “We could have another Macondo or something similar from this piece of equipment,” said Joe Levine, a BSEE official. BSEE is working with industry trade groups to figure out the problem.

By Evan Kelly of Oilprice.com

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  • George Sam on August 31 2016 said:
    The so called" oil oversupply" is a BIG LIE!

    USA alone import MASSIVELY oil from middle east.

    China's oil import has increased! (15-25%)

    USA published all sorts of FAKE inventory reports (probably included the oil they imported from Middle East) and by raising dollar rate to HURT russians and Venezuelians.

    If OPEC make production cut, it'll be a seriously oil DISRUPTION in the world.

    China also bribes Hussein Obama by doing this dirty job!

    When Obama leaves the white house, the oil price will significantly rise!

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