Oil prices fluctuated up and down over the course of this week, with a wider gulf opening up between WTI and Brent crude. The U.S. Energy Information Administration reported higher than expected inventories for the week ending on February 13, jumping by 7.7 million barrels. The figures continue to astonish – even as rigs drop at a surreal pace, down 30 percent since October, production continues at elevated levels.
The disparity has opened up a bit of a debate among energy analysts about the utility of using rig counts as a metric to evaluate the status of the U.S. oil industry. Rig counts have been held up as an early marker that provides details about the future trajectory of production. But rigs have become much more efficient and capable of drilling multiple wells, meaning that they no longer provide a linear connection with production figures. Not only that, but there is evidence that many producers are postponing well completions, which could delay oil markets from finding a balance between supply and demand. Reuters says that at current rates, there is a three to four month backlog of wells awaiting completion. The approach is deliberate – given the short-term flood of production followed by a steep drop off, shale wells earn the bulk of their lifetime revenues in the first few months. As such, it makes sense for production companies to wait until prices have rebounded before they sell their valuable resources onto the market. Moreover, by delaying completion, companies can achieve short-term cost reductions.
While each individual company is acting rationally, collectively we are left in limbo. With another week in the books, we are no closer to finding any clarity in the oil markets.
Low oil prices are even beginning to hurt Saudi Arabia, arguably the strongest global player to weather the oil price downturn. The Wall Street Journal reported that Saudi Aramco is cutting costs in line with lower prices, negotiating lower fees for everything from phone bills to major contracts with oil field service companies like Halliburton (NYSE: HAL) and Schlumberger (NYSE: SLB). It goes to show that even the world’s largest oil producer is feeling the heat, and is trying to find ways to make its operations leaner.
The economic pain inflicted upon Russia, on the other hand, has been well-documented. However, despite a weakening ruble and collapsing budget revenues, Russia has been unbowed in its support for pro-Russian rebels in eastern Ukraine. Despite the ceasefire agreement signed just a few days ago in Minsk, fighting continues in Ukraine, with the Ukrainian military pulling back from a strategic rail hub after being encircled by rebel forces. Fighting has subsided somewhat after Ukraine’s retreat, but Ukrainian President Petro Poroshenko called for international peacekeepers to come to Ukraine to keep the peace. All sides are clinging to any shred of hope that the ceasefire may yet hold, with each party calling upon the other side to adhere to the terms of the Minsk accord. It’s safe to say that not only does uncertainty reign in eastern Ukraine, but we probably haven’t seen the end of fighting just yet.
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Meanwhile, back in the U.S., the labor strike at many of American oil refineries continues, with the United Steelworkers rejecting the latest offer by Royal Dutch Shell (NYSE: RDS.A), the company that is negotiating on behalf of the broader industry. Representing more than 5,000 striking refinery workers, the Steelworkers said that Shell’s proposal “fails to improve safety,” and instructed its members to reject Shell’s seventh offer. The largest strike at U.S. refineries in 35 years continues.
And the union has more ammo to use in its negotiations after a massive explosion at an ExxonMobil (NYSE: XOM) refinery in Torrance, California. The blast injured four people and shook buildings and houses in the nearby area. With a daily refining capacity of 155,000 barrels per day, the refinery produces about 1.8 billion gallons of gasoline each year. That is a sizable contribution to California’s overall fuel supply, and the outage could lead to a spike in gasoline prices, perhaps as much as 15 cents in the near-term. Tesoro (NYSE: TSO) has another major refinery that is out of production, due to the aforementioned workers strike. Together, the two refineries account for 17.5 percent of California’s refinery capacity.
This past week was riddled with other industrial accidents. In a remote corner of northern Ontario, a train carrying crude oil derailed and caught fire. There were no injuries reported. The following day saw a much more spectacular derailment and explosion of another crude oil train, this time in West Virginia. The massive explosion released a fireball into the sky, forcing local residents to flee and seek shelter outside of the immediate area.
The incident reignited debate over the safety of transporting crude oil by rail. Interestingly enough, the railcars used in both the Ontario and the West Virginia accidents were actually the newer reinforced models that regulators are seeking to make standard, as opposed to the thinly designed DOT-111 models implicated in a series of prior incidents. The railcars in use were the CPC 1232 designs, which are supposed to be stronger, with thicker walls and reinforced hulls that make leaks and explosions less likely. The U.S. Department of Transportation is expected to finalize a new railcar safety rule in May.
Another rule that is set to take effect on April 1 could have prevented the disaster. The train was carrying 70,000 barrels of Bakken-produced crude oil, which has been shown to be more volatile than other types of oil because of gases involved, such as ethane, propane, and other natural gas liquids. New rules are set to go into effect in six weeks will require producers to filter out some of the volatile components found in Bakken crude before shipping.
By. James Stafford of Oilprice.com