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Oil prices inched up on Friday as a result of a positive U.S. jobs report after rallying 14 percent in two days.


(Click to enlarge)

(Click to enlarge)

Friday, December 2, 2016

The two-and-a-half-year oil bust could be coming to an end, thanks to OPEC. The oil cartel pulled off a surprise agreement, snatching victory from the jaws of defeat. The deal calls for collective cuts from 13 members (Indonesia suspended its membership), reducing output by 1.2 million barrels per day to 32.5 mb/d. Also, non-OPEC countries will cut output by 600,000 barrels per day, including 300,000 bpd from Russia. The deal will take effect in January.

Oil prices surge. WTI and Brent shot up on the news, rising by more than 14 percent since Tuesday. On Friday, investors took a breather, pocketing some profits. WTI and Brent hovered at $51 and $53 per barrel, respectively, during early trading hours. Brent crude is on track for its biggest weekly increase since 2009. Oil analysts around the globe see further price gains in the next few months.

OPEC deal almost didn’t happen. Bloomberg reports that the negotiations came down to the wire. With a gulf still between several OPEC members, the breakthrough came from a 2 a.m. phone call on the eve of the final meeting from Russian energy minister Alexander Novak to Saudi energy minister Khalid al-Falih. Novak told his Saudi counterpart that Russia was not only willing to freeze but to actually cut output, a surprise concession that jolted the talks back to life. Al-Falih then went to his colleagues in OPEC and demanded concrete reductions. With Russia on board, others were willing to play ball.

Saudis need higher oil prices. The WSJ reports on Saudi Arabia’s motivation for departing from its strategy over the past two years and deciding to pursue a production cut. Saudi Arabia needs oil prices to average $70 per barrel for its budget to breakeven. With prices much lower, Riyadh is running large budget deficits and burning through cash reserves. Meanwhile, the oil kingdom is trying to diversify its economy to develop non-oil sources of revenue. But in the interim, it needs oil revenues to make the necessary investments. Related: Winners And Losers Of The OPEC Deal

Banks are also happy with OPEC. Another constituency pleased with higher oil prices is the banking sector, which will benefit from improved prospects of loan repayment to energy companies. Banks have had to set aside cash reserves to cover from expected defaults on their loans. Earlier this year, 15 of the largest U.S. banks stockpiled $6 billion in cash to cover energy losses, however, as the WSJ reports, defaults have not been as bad as expected. Higher oil prices will likely mean that most banks will emerge in decent shape from the two year oil bust.

BP greenlights deepwater project. The timing might have been mere coincidence, but a day after OPEC agreed to cut production, which saw oil prices shoot up more than 8 percent, BP (NYSE: BP) gave the go-ahead to a major deepwater drilling project in the Gulf of Mexico. The Mad Dog phase 2 is a $9 billion project could add 140,000 barrels per day in output to the project that is already producing 80,000 barrels per day. It could begin operations in 2021. Mad Dog Phase 2 is one of a handful of major final investment decisions from the oil industry during the past year. BP says that it has more than halved the price tag for the project from an original estimate of $20 billion. The greenlight is a sign that the oil majors could begin to cautiously return to some high-profile drilling projects, especially now that oil prices are on the upswing.

Canada approves two major oil pipelines. Canadian Prime Minister Justin Trudeau tried to split the difference between industry demands and environmental opposition, approving two major oil pipelines this week while rejecting another. He gave the OK to the Trans Mountain Expansion Project, a Kinder Morgan (NYSE: KMI) pipeline that will run from Alberta to the Pacific Coast and triple the system’s capacity from 300,000 barrels per day up to 890,000 barrels per day. Also, he approved Enbridge’s (NYSE: ENB) Line 3 replacement, a more than 1,000 mile replacement for an existing line that runs from Alberta to Wisconsin in the U.S. Together, the pipelines could add almost 1 million barrels per day of pipeline capacity when completed. Trudeau also rejected the Northern Gateway Pipeline, which would run through sensitive rainforest in British Columbia. The multiple decisions could put years of conflict to rest, throwing an enormous lifeline to Alberta oil sands producers. But environmentalists were not mollified, and vowed to oppose construction of the Trans Mountain expansion. The controversy surrounding long distance oil pipelines is long from over.

U.S. renewables 15 percent of electricity in 2016. New data from the EIA shows that renewable energy accounted for 15 percent of total U.S. electricity generation in the first three quarters of this year, up substantially from just 13 percent last year. Solar in particular rose from less than 1 percent in 2015 to 1.4 percent this year – still a small share, but growing quickly. Renewables have been capturing the majority of new generation capacity added in the U.S. for the better part of two years; it remains to be seen if that continues in the Trump administration.

ExxonMobil’s Tillerson to U.S. State Department? Rumors should always be taken with a grain of salt, especially in the theatrical atmosphere that President-elect Donald Trump has created around his transition, but news reports surfaced that Trump is considering ExxonMobil’s CEO Rex Tillerson for U.S. Secretary of State. The search for Sec. of State has been one of the most lengthy and circuitous efforts of all of Trump’s selections, with a long list of candidates in the running. Exxon declined to comment on the news.

By Evan Kelly of Oilprice.com

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