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Crude Rebounds Spectacularly On Weaker Dollar

Oil Rig

We begin by taking a quick look at some of the critical figures and data in the energy markets this week, which show that oil prices have rebounded as the dollar weakens while the rig count continues to climb

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Chart of the Week

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• In its latest Annual Energy Outlook Reference Case, the EIA projects that U.S. oil production – including natural gas liquids and biofuels – will growth from 14.8 million barrels per day (mb/d) in 2015 to 18.6 mb/d in 2040.

• Of course, these projections are always fraught with uncertainties, and are always off the mark. The EIA outlines several scenarios in which oil prices could average as low as $49 per barrel, or as high as $207 per barrel. Needless to say, the oil production figures that come out of these scenarios are heavily influenced by this wide range in price assumptions.

• Tight oil production (i.e. shale) falls to 4.2 mb/d in 2017, but steadily rises to 7.1 mb/d in 2040 in the EIA’s view.

Market Movers

• JP Morgan upgraded the outlook for ConocoPhillips (NYSE: COP) this week to Neutral from Underweight. Baker Hughes (NYSE: BHI) also saw its outlook upgraded by Jeffries from Underperform to Hold.

• RBC maintained the Sector Perform rating for Marathon Oil (NYSE: MRO) but increased its share price target from $14 to $16. RBC likes Marathon’s assets into the STACK-SCOOP play.

• Transocean (NYSE: RIG) held a bond auction, hoping to raise $1.5 billion. But the oilfield service company had to reduce the offering to just $1.25 billion and increase the yield to attract buyers. Transocean was the first junk bond-rated company to issue new bonds since the Brexit, and Bloomberg says the poor showing demonstrates hesitation in the bond markets to lend to junk companies.

Tuesday July 12, 2016

Oil prices showed weakness on Monday once again after a brutal few days last week. But WTI and Brent moved up in early trading hours on Tuesday. Several news items overnight pushed oil up on Tuesday, including a falling U.S. dollar, a ruling from an international court on the South China Sea (more below), news that an ExxonMobil well was attacked in the Niger Delta (something which Exxon denies), and reports that some oil exports were delayed from Iraq because of a pipeline leak. The markets are awaiting crude inventory estimates from API later today, which could move prices.

China loses major maritime dispute. An international tribunal in The Hague ruled that China’s claims over vast swaths of the South China Sea have no legal basis. Under its “nine-dash line” principle, China has laid claim to maritime territory that lies deep within the internationally-recognized exclusive economic zones of neighboring nations. The case was brought by the Philippines in 2013 and could have large ramifications for the South China Sea moving forward. Many regional analysts postulate that China wants to control the Sea because of its large natural gas deposits. China has rejected the jurisdiction of the international court and has said that it would not abide by its ruling. Oil analysts see the ruling as bullish for oil prices because tensions could rise in the region.

Distressed oil debt surges. Investors with a high tolerance for risk likely profited big time from debt purchased from beaten down E&P companies. Bloomberg reports that “[a]t least a dozen bonds from deeply troubled oil E&P companies more than doubled amid a rebound in crude prices that took hold just after some of them sought court protection from creditors.” Bloomberg Intelligence found that Ultra Petroleum Corp’s 2024 bonds came in first with a 1,400 percent return since February when oil prices bottomed out. Buying up distressed debt is a big gamble, but the payoff is also enormous. “If the worst-case scenario isn’t going to play out, maybe there’s some value in the debt,” Spencer Cutter of Bloomberg Intelligence said.

Iran wants to double oil exports. Iranian officials say that they are targeting a doubling of their oil exports from 2 to 4 million barrels per day. Iran is already producing 3.8 million barrels per day, but exports 2 mb/d. In order to ramp up oil production enough to generate 4 mb/d of exports, Iran needs to attract some $100 billion in investment. Many analysts believe that the sharp gains in output Iran has posted this year are likely at their limits until that investment comes pouring in. But a jockeying of power within Iran between hardliners and moderates are creating uncertainty around Iran’s new oil petroleum contract. The power struggle will likely deter investment.

Citigroup “especially bullish” on commodities in 2017. The investment bank says that oil and other commodities are poised for a bull run next year as demand continues to rise and companies cut back too much on the supply side. “Prices are expected to resume their ascension in 2017 as the market rebalances further and this should be bolstered by deepening cuts in non-OPEC oil production,” the bank said. It added that “the pendulum is clearly swinging from the bears to the bulls.”

Top Saudi oil official says oil prices must be higher than $50. Saudi energy minister Khalid al-Falih said that the global oil industry needs oil prices higher than $50 per barrel in order to sustain investment. "We need a price higher than $50 to achieve a balance in oil markets in the long term," he said. "And just as $50 is too low to sustain investment, prices in excess of $100 are too much. The optimum lies somewhere in between," he added. The minister went on to say that he sees the oil market continuing to balance as demand rises and supply falls in North America.

OPEC sees strong demand, but weak growth from Brexit. OPEC released its latest Oil Market Report, and revealed its projection for strong demand for its oil. In 2017, the market could demand more than OPEC produces, which should help to push up prices as storage levels fall. At the same time, OPEC sees the British exit from the EU has a drag on global growth. OPEC downgraded its estimate for global GDP growth from 3.1 percent to 3.0 percent.

Nigeria outages. Royal Dutch Shell (NYSE: RDS.A) said that its Trans Niger pipeline was halted in Nigeria because of a leak. The pipeline has a capacity of 180,000 barrels per day. The company is investigating the cause of the leak.

Shell delays Canada LNG decision again. Shell pushed off for a second time a final investment decision on a massive LNG export facility on Canada’s Pacific Coast. The $40 billion project is not necessarily cancelled, but a decision on whether or not to move forward will be pushed off indefinitely. The global LNG market is depressed amid excess supply and tepid demand. Prices have crashed, upending the profit projections for new LNG export projects.

Petrobras oil production rises to record high. Brazilian state-owned oil company Petrobras said that its oil production rose to a new high in June at 2.9 million barrels of oil equivalent per day, up 5.5 percent from a year earlier and up 2.35 percent from May. Output at the Brazilian firm is also up nearly 400,000 barrels per day from March levels.

By Evan Kelly of Oilprice.com:

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