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Tom Kool

Tom Kool

Tom majored in International Business at Amsterdam’s Higher School of Economics, he is now working as news editor for Oilprice.com.

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Has Oil Become Overbought?

Oil

Strong demand and falling inventories have pushed oil prices to their highest level in years, but this could be a double-edged sword as OPEC members grow tempted to cheat.

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- The decline in natural gas storage levels for the week ending on January 5 reached 359 billion cubic feet (bcf), a record high. That broke the previous weekly record of 288 bcf set four years ago during the “Polar Vortex.”

- The enormous decline was due mostly to huge consumption levels as the eastern half of the country dealt with a cold snap. But the deep freeze also curtailed gas production, which meant a much lower-than-usual injection of gas into storage.

- Gas inventories are now at 2,767 bcf, and storage levels are on track to end the withdrawal season (March) at 1,310 bcf, or significantly lower than the five-year average.

Market Movers

BP (NYSE: BP) saw its stock fall more than 1.4 percent in premarket trading on Tuesday after it announced that it would take a $1.7 billion charge in the fourth quarter related to the 2010 Deepwater Horizon disaster.

• The Federal Energy Regulatory Commission denied a request from Williams Cos. (WMB, WPZ) to revive the Constitution pipeline that would have carried shale gas to New York. The state of New York rejected a water quality permit that essentially blocked the pipeline.

Royal Dutch Shell (NYSE: RDS.A) approved its first major offshore development in the North Sea in more than six years. The project would redevelop the Penguins field northeast of the Shetland Islands with ExxonMobil (NYSE: XOM), with a price tag north of $1 billion. Peak output is estimated at 45,000 bpd.

Tuesday January 16, 2018

Oil prices trimmed their gains at the start of trading on Tuesday, although the losses were relatively minor. Benchmark prices are holding up amid strong demand, falling inventories and bullish sentiment. Related: Can We Afford Renewable Energy?

Lukoil says Russia should exit OPEC deal if oil stays at $70. The head of Russian oil company Lukoil said that Russia should withdraw from the OPEC/non-OPEC production cuts if oil prices stay at $70 per barrel for six months. Russia’s participation is crucial to the cohesion of the group, and the comments are the first in what will likely be a lot more rumors about the compliance to the production cuts, particularly if oil prices remain elevated. 

Investment banks see increasing odds of OPEC deal falling apart. A group of investment banks, including Citigroup, Societe Generale, and JPMorgan Chase predict that compliance with the OPEC cuts will falter this year. The banks estimate that inventories will clear and by mid-year OPEC may find it difficult to maintain compliance. “There could be an agreement over the summer on ramping production back up,” Ed Morse, head of commodities research at Citigroup, told Bloomberg. The predictions come as ministers from OPEC countries have sought to reassure the markets that the deal will remain intact.

Energy Transfer Partners hits stumbling blocks on two pipelines. Energy Transfer Partners (NYSE: ETP) has run into trouble with two key projects. The Rover pipeline, which would carry Marcellus shale gas through Ohio, Michigan and into Canada, has been beset with environmental challenges. Last April, the ETP spilled 2 million gallons of clay and water, and more recently it spilled 148,000 gallons of drilling fluid. Ohio regulators are seeking to block the company from further horizontal drilling to advance the $4.2 billion project. Separately, environmental groups have sued the U.S. Army Corps of Engineers to block the construction of ETP’s Bayou Bridge Pipeline in Louisiana.

Shale gas drillers super-sizing their wells. Top shale gas drillers in the Marcellus are super-sizing their wellpads. In the past, a wellpad would be used to drill a handful of wells. But some gas drillers are building much larger wellpads, and using them to drill upwards of 30 or 40 wells. These “superpads” can produce a lot more gas in a smaller footprint. It also means that gas drillers can drill a group of wells in one moment, then come back later and drill more wells from the same pad. EQT (NYSE: EQT), the largest gas producer in the U.S., is reportedly one of the leaders of this new practice, which can see $250 million invested in a single supersized wellpad.

Shell sells off Iraqi oil field. Royal Dutch Shell (NYSE: RDS.A) said on Monday that it would sell its stake in the West Qurna 1 field in southern Iraq to Itochu (OTCMKTS: ITOCHY) for an undisclosed sum. Shell is expected to sell off its stake in the Majnoon field in Iraq later this year. The asset disposals mark a significant retreat from the Middle East for the Anglo-Dutch oil major. As recently as 2003, the WSJ notes, Shell produced 450,000 bpd. By the time it exits these Iraqi assets, Shell will have production of 220,000 bpd, mostly in Oman. Notably, Shell is holding onto its Middle East natural gas assets, which stretch across Qatar, Oman, Egypt and Iraq.

California regulators push energy storage to edge out peaker plants. California regulators just approved a requirement for PG&E, the state’s largest utility, to use batteries or other non-fossil fuel resources to meet peak electricity demand. Typically, utilities rely on natural gas-fired “peaker” plants, which are fired up during peak demand. But large volumes of solar power and the declining cost of energy storage is making it possible for clean energy to meet peak demand. “These gas plants typically sit idle for much of the year, whereas a battery could be used for a range of other services, such as helping integrate renewables,” said Logan Goldie-Scot, an energy storage analyst for Bloomberg New Energy Finance.

Ford to double spending on EVs to $11 billion. Ford (NYSE: F) announced on Sunday that it would more than double its investment in EVs, pledging $11 billion through 2022 for the effort. Within the next five years, Ford says it will unveil 16 fully electric vehicles, with the first ones scheduled for 2020. Related: Asian Oil Buyers Could Benefit From Fresh Sanctions On Iran

Technical trading suggests oil is overbought. Bloomberg reports that there are some signs that oil prices are overstretched. The 14-day Relative Strength Index indicates that oil has been in overbought territory since last week. Also, WTI and Brent are approaching the 50 percent Fibonacci retracement from a drop in 2014, a technical line of resistance. That comes as hedge funds and other money managers have staked out the most bullish positioning in over a decade. “We are becoming increasingly cautious about oil trending higher, especially when you look at the technical levels, prices are already in overbought territory,” Barnabas Gan, an economist at Oversea-Chinese Banking Corp. in Singapore, told Bloomberg. “There’s a good probability that U.S. production will grow again, simply because of the fact that oil prices are so strong.”

Gasoline prices hit highest level since 2015. Aside from a brief period after Hurricane Harvey last year, national gasoline prices in the U.S. have climbed to their highest average in more than two years. The national average was $2.52 per gallon for the week ending on January 8.

By Tom Kool for Oilprice.com 

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