Can Crude Continue To Rally Like This?

When looking at the key figures for the oil and gas industry this week, we see that oil prices hold their ground in the mid $40's while the U.S. rig count continues to plunge.

(Click to enlarge)

Chart of the Week

(Click to enlarge)

• The collapse of the rig count and depressed drilling activity has already knocked about 700,000 barrels per day of oil production offline.
• But the rig count could bottom out this year and begin climbing again. However, the EIA doesn’t expect oil production to rise in the short run even if the rig count rebounds. Oil production is expected to continue to fall through 2017 as too few new wells come online to replace rapidly falling shale output.
• Total U.S. oil production is expected to fall from 9.43 mb/d in 2015 to 8.04 mb/d in 2017, a figure that includes rising output from the Gulf of Mexico. Related: Saudi Arabia Releases Ambitious Plan To Diversify Economy

Market Movers

• The Canadian government is considering offering exemptions to its ban on oil tankers on the northern coast of British Columbia. If that occurs, it could offer Enbridge’s (NYSE: ENB) Northern Gateway pipeline another chance to move forward. Separately, Quebec suspended its request for an injunction against TransCanada’s (NYSE: TRP) Energy East pipeline after the company agreed to an environmental impact study.
• Halliburton (NYSE: HAL) delayed its earnings call a week, pushing it back to May 3. Analysts believe that the move suggests that its merger with Baker Hughes (NYSE: BHI) is “likely dead.”
• Pioneer Natural Resources (NYSE: PXD) reported a $267 million net loss for the first quarter, slightly beating estimates. Pioneer’s daily production also increased 3 percent quarter-on-quarter.

Tuesday April 26, 2016

Oil prices have bounced around a bit after last week but have held more or less in the range of $43 per barrel for WTI and $45 for Brent. The price gains over the past few weeks come as the fundamentals have improved. At the same time, if the rally runs out of steam, speculators could cash out, taking their profits by liquidating their long bets. That could spark a price correction, pushing oil prices back down a bit. Keep an eye on the upcoming data releases in our Friday newsletter for more direction.

BP announces 1st quarter results. BP (NYSE: BP) posted a profit of $532 million for the quarter, which beat analysts’ estimates of a $140 million loss. That result excludes charges related to the Deepwater Horizon disaster – $917 million in pre-tax charges, which when included, flips the quarterly number to a $485 million loss. BP posted its second consecutive loss, and even when excluding the Deepwater Horizon charge, its profit was down about $2 billion from a year ago. Net debt increased to $30 billion. Still, investors are heartened by the better-than-expected result, and BP’s share price surged 4 percent on the news. Crucially, the company said that it has lowered its breakeven oil price to about $50-$55 per barrel, down from a previous target of $60. The first quarter results are being closely watched as they reflect the worst of the oil price downturn. Related: China Stockpiling Oil At Highest Rate In Over A Decade

Middle East lost $390 billion in 2015. The IMF released a report that found that the major oil exporting countries in the Middle East missed out on $390 billion in lost oil revenue in 2015 because of low prices, a figure that will rise to $500 billion this year. The massive hole in the budgets for Middle Eastern governments means that growth will be slow as austerity bites. GDP growth for the Gulf Cooperation Council – which consists of Saudi Arabia, Kuwait, Qatar, Bahrain, Oman, and the UAE – will fall to 1.8 percent this year, down from 3.3 percent in 2015. The IMF called for lowering energy subsidies and reducing the footprint of the state in the economies of the GCC countries. An estimated 10 million young people will enter the workforce in the GCC countries before the end of the decade, but the countries are only on track to create 7 million jobs, leaving 3 million unemployed.

Saudi Arabia unveils plans to diversify economy. The Saudi government released a blueprint to diversify the economy over the next decade and a half. The plan calls for raising non-oil revenue through a combination of taxes and investments, plus trimming energy subsidies and slashing spending. The plan also calls for the partial IPO of state-owned Saudi Aramco, spinning off assets that the government says could be worth $2 trillion. Over the long-term, the Saudis hope to reduce dependence on oil to fund their government.

China bans new coal plants in some areas. The Chinese government announced a ban on new coal-fired power plants in regions that already have a surplus of electricity capacity. The move is intended to address China’s problem of excess capacity that often goes unused, and at the same time crack down on air pollution. The decision could further drag down international coal markets, pushing down prices and putting coal producers in a deeper bind. China is the largest consumer of coal in the world but in a shocking turn of events, it has managed to decrease its coal consumption in the past two years.

EPA revises methane emissions data upwards. The Obama administration is looking to regulate methane emissions from the oil and gas industry, and the EPA released new data showing that methane emissions could have been much higher than previously thought. The move will bolster the administration’s argument for regulation. Related: Oil Crash Creates Glut Of Petroleum Engineers – More Layoffs Coming

Constitution Pipeline blocked. A natural gas pipeline that would connect Pennsylvania shale gas to the northeast U.S. was blocked by the state of New York. The Constitution Pipeline – proposed by Cabot Oil & Gas (NYSE: COG), Williams Partners (NYSE: WPZ), and Piedmont Natural Gas Company (NYSE: PNY) – was controversial, but would have provided cheap natural gas to New England. The developers have vowed to fight back against the state’s decision, arguing that it was politically motivated. Reuters reports that the delays of this pipeline, along with others, could push up natural gas prices in the northeast because large volumes of natural gas in the Marcellus shale could be trapped. With the inability to send gas out of the region, production could decline. "The continual string of regulatory road bumps plaguing pipeline projects slated to burrow through the Empire State add another layer of bullishness to 2017 gas sentiment," Raymond James analysts said. But with such high levels of natural gas sitting in storage, inventories will need have to come down a bit. Price increases could be localized to the northeast.

Libya’s eastern government set to export oil. Libya has been torn apart by instability and rivaling political factions, and one of the largest flashpoints is the fight for the control of the country’s oil. By law Libya’s oil exports have been under the purview of the national oil company, based in Tripoli in the west. However, the eastern government is poised to export oil for the first time with a newly setup oil company of its own, a move that could exacerbate political tension, derail the reconciliation process while also providing the eastern government with a cash infusion. The East has tried to export oil for some time, but has struggled to find willing buyers due to the potential legal fallout for the purchasers.

By Evan Kelly of Oilprice.com

More Top Reads From Oilprice.com:

• ExxonMobil Loses AAA Credit Rating For First Time Since 1930
• Chesapeake Has Bought Itself Time But Can It Survive?
• Oil Up As Quarterly Earnings Season Kicks Off