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Bout Of Bearish News Sees Oil Fall To Three Month Low

Oil Rig WInter

A toxic combination of an increasing gasoline glut an increasing rig count and a strong dollar continue to up downward pressure on oil prices. 

(Click to enlarge)

(Click to enlarge)

Chart of the Week

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• India has replaced China as the world’s largest source of oil demand growth. It still has a long way to reach China on an absolute basis, but growth will increasingly come from the sub-continent.

• Because of its rapidly rising import dependence, India is also following in China’s footsteps in its decision to build out its strategic petroleum reserves (SPR). India’s first phase of SPR construction includes three facilities with a combined capacity of 39.1 million barrels, or about 13 days’ worth of supply based on 2015 data.

• India hopes to add another 91 million barrels by 2020. India’s objective is to eventually have 90 days’ worth of supply, which is what IEA member states, including the U.S., have in their stockpiles.

Market Movers

Royal Dutch Shell (NYSE: RDS.A) says that it will slash its deepwater Gulf of Mexico workforce by more than 25 percent, eliminating 200 out of its 770 jobs in the region. Shell hopes to cut 2,200 jobs by the end of the year as part of its plan following its merger with BG Group.

• The head of Libya’s National Oil Corporation objected to a deal between the government and guards at key oil export ports. His opposition tosses a fragile deal into doubt, which could delay the return of disrupted oil exports from Libya.

Transocean (NYSE: RIG) saw its share price sink more than 5 percent on Friday after it revealed that it had stacked another six rigs, bringing its total number of stacked rigs to 28.

Tuesday July 26, 2016

Oil prices have taken another turn for the worse, with both WTI and Brent moving down below $45 per barrel at the start of the week. Fears of oversupply of both crude oil and refined products continue to act as a drag on oil, and prices have dropped to their lowest level in months. For the second year in a row, a multi-month rally in oil prices has come to an end in the month of July.

Oil dips on higher rig count and stronger dollar. In addition to the glut of crude oil and refined products in storage, the rising U.S. rig count is adding to the growing concerns about a resurgence in U.S. oil production. The rig count has climbed for four weeks in a row. The dollar added strength in the past few days, which put more pressure on crude to start off the week. Looking out over the next several months, demand could slow as summer ends (more on that below).

Another phase of short selling. Oil seems to be entering another downturn, the depths of which are uncertain. The speculative positions of hedge funds and money managers have turned decidedly pessimistic, with the liquidation of long positions and the increase in shorts. And as Reuters notes, speculators have pushed the market into its fourth phase of a buildup in short positions since the downturn began two years ago. The speculative movements often provide clues into where the market is heading, as the liquidation of longs and the increase of shorts foretells a decline in oil prices. For now, speculators are pessimistic. On the other hand, the speculative movements have opened up an opportunity for traders to buy the dip – so pessimism today does not mean that negativity will continue. Related: Forget The Glut – This Is Why Oil Prices Will Rise

BP suffers another loss. BP (NYSE: BP) reported its third straight quarterly loss on Tuesday, revealing a replace cost loss (a metric similar to net income) of $2.25 billion, which is smaller than the $6.27 billion it lost in the second quarter of 2015. The Deepwater Horizon disaster in 2010 continues to haunt the British oil giant – BP’s second quarter figures include a $5.2 billion pretax charge, which brought its final estimated tally from the incident to $61.6 billion. Excluding those charges, BP’s underlying earnings stood at $720 million, about 45 percent lower than the $1.31 billion the company earned in the second quarter of 2015. BP’s share price dropped by 2.4 percent in early trading.


ExxonMobil force majeure on Nigerian production. ExxonMobil (NYSE: XOM) declared force majeure on its Qua Iboe production because of damage to its 300,000 barrel-per-day pipeline. The Niger Delta Avengers have claimed credit for the outage, but the oil major denied that its pipeline had been hit with any attack, instead citing a “system anomaly” as a reason for the outage. But a company security official told the Associated Press that the damage was too extensive to be a system anomaly. Either way, the disrupted supply could be offline for weeks. The outages in Nigeria continue to plague the oil majors operating in country, but the disruptions are supporting oil prices.

Refiners switch to winter blends. Some refiners are switching to winter fuel blends ahead of schedule, which could be bad news for oil prices. With a glut of refined products sitting in storage, some refiners are taking the opportunity to conduct maintenance and switch away from the legally required summer fuel blends (which are cleaner but more expensive) earlier than usual. Summer demand has not been able to cut into large inventories, and the glut has pushed down margins. Typically, refiners begin switching to winter fuel blends in August, but Reuters says some are already doing so. If refining runs drop significantly it could lessen the demand pull on crude oil.

Oil by rail declining. The practice of shipping oil by rail became commonplace a few years ago, as the surge in oil production, particularly from the Bakken, came at a time when pipeline capacity could not keep up. As recently as 2014 more than 1 million barrels per day flowed on U.S. railways, or more than 10 percent of production. But that volume plunged to just 430,000 barrels per day as of April. Low oil prices have cut into upstream production, but at the same time new pipelines have come online to ease the congestion. New regulations have also made oil-by-rail less competitive, as it is more costly than pipeline shipments. The decline of rail as a means of transportation for oil could be permanent. Meanwhile, in Canada, older rail cars that have been implicated in a string of derailments and explosions in recent years, will be phased out ahead of schedule.

North Sea oil strike begins. A 400 worker strike in the North Sea began on Tuesday, a 24-hour event that will affect at least eight Royal Dutch Shell (NYSE: RDS.A) platforms. The strike is the first to hit the UK oil industry in 28 years. Workers are protesting a planned 30 percent pay cut and are following up the stoppage with other strikes in the coming weeks.

Tesla doubles workforce at gigafactory. Tesla (NYSE: TSLA) is doubling the number of workers at its Nevada gigafactory in order to accelerate construction by several years. Tesla sees strong demand for its yet-to-be released Model 3, its affordable mass market electric car. By speeding up construction, Tesla hopes the gigafactory can begin producing lithium ion batteries en masse by the end of the year. That will allow the company to have the battery capacity ahead of its roll out of the Model 3 next year.

By Evan Kelly of Oilprice.com

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