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Bearish Signals Quickly Kill Off Oil Price Rally

Bearish Signals Quickly Kill Off Oil Price Rally

Oil prices retreated this week, retracing most of the gains achieved last week, putting crude nearly back where it started before the latest rally. WTI dropped to $46 per barrel on October 15 and Brent fell under $49. The EIA reported bearish weekly figures, which depressed crude markets. Refinery inputs dropped and crude inventories shot up by 7.6 million barrels, the most in six months. The jump in storage levels renewed fears of oversupply. As of mid-day trading on Friday, crude posted some gains, but was down overall for the week.

Saudi Arabia is making inroads in Europe for its oil exports, stealing some market share from a traditional market for Russia, according to a report from Reuters. The war for market share is raging as the two oil mammoths battle it out amid low oil prices. For years, Asia has been the battleground, as China’s rapid expansion in oil demand made it a prize for oil producers. Russia shifted its sights to Asia over the past few years, inking major supply agreements with China along with huge gas pipeline deals.

However, Reuters says that Saudi Arabia is now retaliating, targeting European refineries. ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A), Total (NYSE: TOT), and Eni (NYSE: ENI) have all reported purchasing more crude from Saudi Arabia to use in European refineries. “I'm buying less and less Russian crude for my refineries in Europe simply because Saudi barrels are looking more attractive. It is a no brainer for me as Saudi crude is just cheaper,” a Reuters source said. As Saudi Arabia and Russia fight for market share, it could raise tensions. The markets had been watching to see if the two countries would begin to negotiate coordinated production cuts. There was always an outside chance that such a development would occur, but now that Saudi Arabia is encroaching on Russian turf, coordination can probably be ruled out. The head of Russia’s state-owned oil company Rosneft, Igor Sechin, said that Saudi Arabia was selling oil to Poland at “dumping” prices. Related: Can China’s SPR Rescue Oil Markets?

We have closely followed the damage inflicted upon the oilfield service industry over the past year. It appears that the downturn is now affecting providers of frac sand, which is used in hydraulic fracturing operations. U.S. Silica (NYSE: SLCA) and Hi Crush Services (NYSE: HCLP), two major frack sand producers, are laying off workers at their plants in Wisconsin. With drillers idling operations, there is little need for sand.

Ten large oil and gas companies issued a public declaration in support of an international agreement on climate change. The companies, mostly European, acknowledged their industry’s role in carbon pollution, but supported a deal at the UN summit in December. The oil companies – BP, BG, Eni, Repsol, Saudi Aramco, Shell, Statoil, and Total – supported the globally recognized target of preventing more than 2 degrees Celsius rise in average temperatures. The declaration certainly made headlines, but the move also makes a bit of strategic sense. These companies are increasingly weighted towards natural gas production, and there is an enormous market opportunity for natural gas if the world takes action on climate change because coal-fired electric generation will likely get the axe first. In other words, the oil majors could see a growing market for gas in a carbon-constrained world. Still, the declaration stopped short of calling for specific goals. Related: VW’s Dieselgate Scandal Could Cost Up To $87 Billion In Total

Toyota announced a bold plan to transform its product line over the next few decades, with the goal of selling very few, if any, conventional gasoline vehicles by 2050. The Japanese automaker will manufacture cars that are hybrids or run on fuel cells. Toyota is targeting a 90 percent reduction in average emissions from its vehicles below 2010 levels. Strikingly, however, EVs do not play a huge role in its vision, as the company thinks the recharging time is prohibitive to wide scale adoption. Toyota thinks it will be able to sell 30,000 fuel cell vehicles by 2020, a ten-fold increase over its estimated 2017 sales figure. Toyota’s plan to radically move away from the gasoline engine has truly enormous ramifications for the oil and gas industry. 2050 is a long way off, but for the oil majors that are planning new projects that can last decades, there is a growing question mark regarding demand from the next generation of motorists.

Kurdistan completed a second payment to Gulf Keystone Petroleum (LON: GKP) this week, a move that raised the hopes of Iraqi oil producers about receiving back payments. Both Kurdistan and the Iraqi central government have been in arrears to international oil companies, threatening the country’s long-term oil development goals. The Kurdish Regional Government (KRG) and the government in Baghdad are at odds over questions of sovereignty and fiscal arrangements. Low oil prices are also ripping a huge hole in the budgets of both governments. That meant that the KRG could not pay the money owed to oil drillers such as Gulf Keystone and Genel Energy (LON: GENL). But this week’s payment of $15 million to Gulf Keystone boosted market confidence that the situation could be resolved. Gulf Keystone saw its share price jump 13 percent on the news, and Genel’s stock price was up around 10 percent. Related: Is The Oil And Gas Fire Sale About To Start?

BP and China’s CNPC will announce a strategic alliance in the next few days to jointly develop and produce oil in Iraq. The companies already work together on the giant Rumaila field, but they are planning on deepening their relationship following the visit of Chinese President Xi Jingping to London.

Spanish oil company Repsol (BME: REP) announced plans to sell off $7.1 billion worth of assets in order to protect its dividend. It also said that it would slash spending by 40 percent by 2020. Repsol’s dividend yield has swelled as its share price has fallen, raising questions about the sustainability of the payout. Repsol has the second highest yield out of any large European oil company.

The first shipment of LNG has left the large Gladstone project in Australia. The project, operated by Santos with joint venture partners Petronas, Total, and KOGAS, is one of several large LNG export terminals that will turn Australia into one of the largest gas exporters in the world in the next few years. At peak production, the terminal will have an export capacity of 7.8 million tonnes per year (mtpa).

By Evan Kelly of Oilprice.com

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