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Evan Kelly

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Driving Season Could Jolt Oil To $60

We begin by taking a quick look at some of the critical figures and data in the energy markets this week, which show that, despite Canada bringing oil back on line after the wildfires, the markets remain confident that oil will continue moving upwards as driving season nears.

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Chart of the Week


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• The Memorial weekend is normally a time when Americans hit the roads for some vacation. This past holiday saw retail gasoline prices average $2.30 nationwide, 47 cents per gallon lower than last year.

• Memorial Day 2016 saw the lowest gasoline prices since the aftermath of the financial crisis in 2009.
• The West Coast has the highest gasoline prices at $2.66 per gallon, in part due to the major disruption at ExxonMobil’s Torrance refinery in Southern California. Also, the Californian market is somewhat separated from the rest of the country’s retail fuel market.
• The Gulf Coast, near much of the nation’s refinery capacity, has the cheapest fuel prices, averaging $2.03 per gallon.

Market Movers

Noble Energy (NYSE: NBL) and Delek Group (OTCMKTS: DGRLY) signed an agreement to send natural gas from the Leviathan field in the Eastern Mediterranean to an Israeli power plant. The deal comes as the regulatory barriers to developing the massive gas field are clearing away.
Suncor Energy (NYSE: SU) announced that it has restarted some operations in the Fort McMurray area, following several weeks of outages related to the wildfires. That will bring several hundred thousand barrels per day back online.
• Pipeline operators lowered rates after wildfires disrupted Canadian supply, which cut into demand for pipeline space. Tallgrass Energy Partners (NYSE: TEP), Legacy Reserves (NYSE: LGCY), and Suncor Energy (NYSE: SU), and Red Butte Pipe Line Co. lowered pipeline tariffs.

Tuesday May 31, 2016

Oil prices were hit with some bearish news to start off the week, as Canada is set to bring much of the more than 1 million barrels per day of oil production that was disrupted from wildfires back online. But optimism is rising in the oil markets.

Is $60 around the corner? Even with that crude coming back online, there is a growing bullishness pervading the markets as of late, as forecasters raise their price projections and speculators gamble on steadily higher prices. Bloomberg reports that speculators shorting crude oil have been squeezed out of the market, and short bets have fallen to their lowest levels in almost a year. The shift in trades reflects more and more confidence that oil will not fall back down, at least not to the depths seen earlier this year. Also, several banks, including Standard Chartered Plc and SEB Bank have come out and said that oil will hit $60 before the end of the year. UAE’s economic minister, Sultan Bin Saeed Al Mansoori, said on Monday that he could see oil hitting that threshold by summertime. A survey conducted by The Wall Street Journal found that the array of investment banks polled raised their price targets for Brent crude in 2016 by $2 on average in May compared to the previous month’s forecasts. Related: When Will Solar Overtake Oil?

Not everyone is so bullish, however. Some analysts attribute the recent price gains simply to the supply disruptions in Canada and Nigeria, outages that were always going to be temporary (at least in the case of Canada). "The output disruptions are a key factor supporting prices at the minute. We don't think prices will go much further from here," Thomas Pugh of Capital Economics told Reuters. "In fact, we think prices are vulnerable to a downturn in the short term if some of the disrupted supply returns, or there is evidence that higher prices are stimulating more production." Even with the upward revisions, many are still cautious – the average projections polled by the WSJ expect oil to trade at only $48 per barrel in the fourth quarter.

New drilling possible. The rig count fell again last week, but with oil prices hovering around $50, market watchers are looking for clues to see if shale drillers will get back to work. Pioneer Natural Resources (NYSE: PXD) recently said that it is considering redeploying rigs if it grows confident that prices will stay above $50. But the WSJ reports that the oil majors could be more cautious, having been burned by megaprojects that cost tens of billions of dollars in recent years. “We’re not going to try and get into a boom and bust,” BP’s CFO, Brian Gilvary, said in April. “We wouldn’t be looking to significantly ramp [activity] up” even if oil prices rose to $60. The oil majors do operate in U.S. shale basins, but also source much of their oil and gas from large-scale long-lived projects. That means they won’t move as nimbly as smaller shale drillers as oil prices rebound.

OPEC meeting set to begin. OPEC officials are arriving in Vienna for the start of their semi-annual meeting. After the inability to set a production target in December 2015, plus the collapse of the Doha production freeze deal in April, few expect any result to emerge from the discussions this week. Moreover, the sharp gains in oil prices over the past few months has reduced the urgency to act. Although many OPEC members are still hurting terribly from oil prices that remain at less than half of their 2014 peak, prices are trending in the right direction. OPEC’s strongest member, Saudi Arabia, was highly unlikely to change strategies even when crude was $30 or $40 – now that it has moved up to $50, Riyadh is likely perfectly happy to stay the course and let the market sort out the winners and losers. Moreover, Saudi Arabia’s economic overhaul has made domestic economic and political objectives a much higher priority than cooperation with OPEC.

Forget oil prices, invest in majors. UBS offers some advice to energy investors. Don’t try to bet on oil prices, instead just pick up stocks in the oil majors. They will rise along with oil prices, they are also not as vulnerable to price swings, and they pay a dividend. Related: Flower Power Takes On A New Meaning With Pollen Batteries

Nigeria’s supply outages continue; President to let currency float. Nigeria has been hit hard by the downturn in oil prices but its problems have been compounded by the fact that militants have successfully carried out a series of attacks against pipelines and platforms, cutting off roughly half of the country’s oil production. The woes have plunged the country into an economic calamity. The government has tried to defend its fixed exchange rate, but after burning through the country’s cash reserves, the President has thrown in the towel. On Monday, Nigerian President Muhammadu Buhari gave the green light to allow flexibility in the exchange rate. If a looser monetary policy proceeds, it will likely lead to a devaluation, or at least a depreciation. That will raise inflation and the cost of imports, but ease pressure on the central bank’s reserves. Meanwhile, the Niger Delta Avengers have promised to step up attacks against oil infrastructure until its demands for full sovereignty are met, issuing a May 31 deadline for oil companies to withdraw from the region.

ISIS on the back foot. Iraqi forces began an assault to retake Falluja from ISIS this week, a symbolic prize because it was the first city that the militant group took over in 2014. Also, in Libya, ISIS has lost control of two towns as security forces that protect oil ports have dislodged ISIS fighters with minimal losses. Libya is still producing sharply below its potential – a few hundred thousand barrels per day compared to a pre-war capacity of 1.6 mb/d. Iraq, for now, has seen its production levels hold up. In fact, Iraq raised its export target for June.

By Evan Kelly of Oilprice.com

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