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Bullish Signs Emerge In Crude Markets

Fracking

Friday February 24, 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. Large-scale energy storage picking up pace

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- Battery costs have declined 40 percent since 2014 alone, and are expected to continue to get cheaper, especially with Tesla’s (NYSE: TSLA) gigafactory now online.
- Investment in new energy storage systems is expected to reach $2.5 billion this year. More investment creates a virtuous cycle: new projects come online, lenders get more comfortable, they lend and invest more money, creating more projects with longer time horizons and lower costs, including cheaper finance.
- “Having big money come in is the first step to widespread deployment,” Brad Meikle, an analyst for Craig-Hallum Capital Group LLC, told Bloomberg.
- Deployment is finally starting to accelerate. As Bloomberg notes, it took 30 years to reach 1 gigawatt of installed capacity; 2017 alone will see 1.7 GW of installed energy storage capacity. That will rise by almost 30-fold by the middle of the next decade.

2. Backwardation shows oil market tightening

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- The oil futures market is showing signs of tightness.
- One-year Brent futures are back in a state of backwardation – in which near-term futures trade at a premium to futures further out – for the first time since oil prices started to meltdown in 2014.
- The sharp narrowing of the contango since the OPEC deal suggests that oil traders are expecting much tighter supply/demand conditions in the short run.
- But it also could be a reflection of oil producers locking in their production a year out at what they might feel are stable prices, protecting themselves from a potential downslide.
- Still, the backwardation is a bullish sign for investors.

3. Shale breakeven prices are on the rise

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- Rystad Energy sees the breakeven price across the U.S. shale patch rising this year for the first time since 2012.
- Average breakeven prices will rise by $1.60 per barrel to $36.50 per barrel, although there are wide regional variations. Reuters published a series of charts on the breakeven prices for different shale basins, although all are seeing costs rise this year.
- Cost of production will rise in large part because oilfield services companies are starting to demand higher prices for their services and equipment, after being forced to shoulder much of the burden over the past three years.
- The cost for oil producers to obtain equipment and drilling services could rise by 10 to 20 percent, erasing some of the “cost savings” achieved during the downturn.

4. LNG to dominate U.S. gas trade

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- The U.S. imports a lot of natural gas from Canada, and has begun to export increasing volumes of natural gas through pipelines to Mexico. A handful of large gas pipelines are under construction, which should open up a larger volume of gas exports from Texas to northern Mexico.
- But by the 2020s, the gas trade will be overwhelming concentrated in LNG, as opposed to pipeline exports.
- The first LNG export terminal came online last year, and by 2018, the U.S. will be a net exporter of gas.
- Four more export terminals will come online by 2021, with an export capacity of 9.2 billion cubic feet per day.
- The large volume of exports will help natural gas producers in the U.S., opening up new markets for them. The EIA projects production to grow by an annual average rate of 3.6 percent through 2020, then slowing to a growth rate of 1 percent thereafter, as few, if any, additional export terminals come online beyond the four under construction.

5. Natural gas storage reverts back to average levels

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- The natural gas market has undergone some wild swings this winter, with storage levels dropping sharply in November and December. That quickly eliminated much of the glut that was left over from last year.
- However, the drawdowns in recent weeks have been more modest. As of February 17, working gas in storage stood at 2,356 Bcf, or about 261 Bcf lower than last year, but still 156 Bcf above the five-year average (the blue line in the chart is roughly in the middle of the grey zone).
- A bout of warmer weather this week that could stretch through next week is cutting into demand. Unseasonably mild temperatures have put a halt to the sharper drawdowns in inventories.
- As a result, the natural gas market has been slammed with a sudden sense of bearishness, crashing prices by more than 30 percent since the start of the year. At $2.60/MMBtu, prices are down substantially from the $3.80/MMBtu seen in December.
- With only a few more weeks until “injection season” begins, the market is currently as tight as it will get for quite a while, suggesting prices won’t be rebound soon.

6. Rig count showing strong gains

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- The oil rig count is up nearly 90 percent from its low point in May 2016. Aside from a few exceptions, the rig count has climbed almost every week since then – 9 months of strong gains.
- Reuters estimates that the shale industry is adding 10 to 15 rigs on average every week.
- U.S. oil production is up by more than 300,000 bpd since September, rising to 8.9 mb/d. Some of those gains came from long-planned offshore projects, but the major shale basins are already posting increases in output.
- Because there is a lag between gains in the rig count and subsequent increases in oil production showing up in the data – a lag of a few months – the sharp increases in rigs likely portend stronger jumps in U.S. oil production in the first half of 2017.
- The EIA projects U.S. output to rise by about 430,000 bpd this year. Goldman Sachs is much more optimistic, estimating output increases on the order of 800,000 bpd.

7. Exxon writes down Canadian oil reserves

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- ExxonMobil (NYSE: XOM) just announced a downward revision in its oil reserves, removing 3.5 billion barrels of reserves from its books. Exxon’s entire Kearl oil sands, a $16 billion project, was scrapped. ConocoPhillips (NYSE: COP) also removed 1.15 billion barrels of Canadian oil sands from its total reserves.
- Canada’s oil sands are some of the costliest to produce in the world, with many operations resembling complex expensive open-pit mining operations rather than conventional oil drilling.
- Worse, because of quality and transportation issues, Canadian heavy oil sells for lower prices than U.S. WTI.
- That has made Alberta an undesirable place for many international companies looking to cut costs.
- The value of the oil removed from Exxon and Conoco are worth a combined $183 billion. If oil prices do not substantially rise, these reserves will never be produced.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.




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