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Have We Seen The Bottom In Oil Prices?

Have We Seen The Bottom In Oil Prices?

Just days ahead of the Doha meeting, oil is surging to 5 month highs as the U.S. rig count continues to fall.

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• Despite being synonymous with coal, West Virginia’s coal output pales in comparison to that of Wyoming. In 2014, West Virginia produced 70 million short tons of coal, a fraction of the nearly 400 million short tons that Wyoming mined.

• West Virginia’s best coal deposits have been mined out, and production costs are much higher compared to Wyoming.

• Overall coal production in the U.S. is declining, however. In the fourth quarter of 2015, U.S. coal production fell by 12.6 percent compared to the previous quarter. Utilities are shuttering more and more coal plants in favor of natural gas and renewables.

• Texas is the top consumer of coal, burning through 102 million tons in 2014. Much of the rest of U.S. coal is shipped to power plants in the Midwest.

Market Movers

Noble Energy (NYSE: NBL) is reportedly in talks with institutional investors from Israel to sell part of its stake in the Tamar natural gas field in the Eastern Mediterranean for as much as $1 billion. Noble is required to reduce its stake in the field from 36 to 25 percent as part of its agreement with the Israeli government. Noble is looking to develop the massive Leviathan field nearby and the Israeli government required the company to reduce its stake in Tamar over concerns that Noble controlled too much of the country’s gas fields. Separately, in March the Supreme Court blocked the government’s 10-year guarantee of no regulatory changes, a decision that could delay development of the Leviathan. Related: Oil Up As Bullish Sentiment Returns To Markets

Chesapeake Energy (NYSE: CHK) saw its borrowing base left unchanged at $4 billion, although the company had to put up more assets up as collateral under its agreement with creditors. Chesapeake’s share price surged by nearly 20 percent on Monday following the news.

LyondellBasell Industries (NYSE: LYB) reported a huge fire at its Houston refinery on Friday, which forced the company to cut production by 25 percent. It could take a month to repair the damaged coker. The fire came one day after a major fire at ExxonMobil’s (NYSE: XOM) Baytown refinery near Houston. The fire at Exxon’s plant was less serious and was extinguished without interruption.

Tuesday April 12, 2016

Oil prices have regained ground over the past week, with more and more data points emerging to back up the flurry of bullish bets that the markets saw since February. The outcome of the Doha meeting on April 17 will be a pivotal moment for the short-term trajectory of oil prices. By mid-week, oil is in positive territory, trading up on shrinking shale production, a weak dollar, and anticipation of the Doha meeting. WTI is back above $40 per barrel and Brent traded above $43 per barrel on Tuesday.

Can Doha produce a result? Heading into the meeting, there are not high hopes for a significant result, with most participants at or near a peak in production. At the same time, several key members are not exactly sitting idle. Kuwait Oil Company could soon offer offshore drilling contracts to drill in the Persian Gulf, according to Bloomberg. Kuwait is hoping to boost output from 3 million barrels per day to 3.165 mb/d by late 2016 or at some point in 2017. Also, the rig count in Saudi Arabia, Kuwait, and the UAE is at its highest level in decades. Saudi Arabia’s Shaybah field could add 250,000 barrels per day in production by June. This raises questions about how all the parties involved in the Doha meeting will reach an agreement on a freeze. Related: How The Oil Crisis Has Impacted Military Spending

Oil traders see the bottom for crude prices. After nearly two years of a down market, oil traders are growing confident that we have passed the low point. “The down market is behind us,” Torbjorn Tornqvist, CEO of Gunvor Group Ltd., said on Tuesday at the FT Global Commodities Summit in Lausanne. “It is the beginning of the end of that for sure.” Although there will be a lot of volatility for quite a while, Tornqvist said that “from here on, the trend is up.” The CEO of Trafigura Jeremy Weir echoed that sentiment at the commodities summit. “I believe we’ve seen the bottom unless there is some sort of catastrophic situation political or otherwise,” he said. Glencore’s (LON: GLEN) top executive was a little more cautious, arguing that a rebound would not be quick because of the large stockpiles of oil that need to be worked through.

Credit ratings for Big Oil cut. Moody’s Investors Service cut the credit ratings of Chevron (NYSE: CVX), Royal Dutch Shell (NYSE: RDS.A) and Total (NYSE: TOT), while keeping BP’s (NYSE: BP) rating steady. Chevron and Shell’s rating dropped from Aa1 to Aa2, while Total fell two notches from Aa1 to Aa3. Moody’s cited high debt levels, negative free cash flow, and persistently low oil prices as causes of concern. The oil majors have all cut spending significantly, but free cash flows are negative given low oil prices, major spending obligations, and dividend promises. Shell in particular is spending at much higher levels than its competitors, leading to pressure from shareholders to shift to a more cautious strategy. Moody’s says the companies will likely be cash flow negative this year and next, unless oil prices rise much more aggressively. Another way the oil majors could improve cash flow is if they succeed in unloading tens of billions of dollars in assets. Shell, for example, wants to sell $30 billion in assets between 2016 and 2018. On April 12 Shell’s CEO hinted that it could sell off some North Sea projects.

U.S. banks hit by energy. Major U.S. banks are set to report earnings this week, and many are facing regulatory pressure from the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency to reduce their exposure to risky energy companies. Most banks insist that energy is a small part of their portfolio, but the FT reports that the banks’ trading and investment banking units could report their worst quarter since the financial crisis in 2009, although much of that is likely due to turmoil in global financial markets. Still, credit re-determinations are wrapping up, and many analysts expect cuts of 15 to 20 percent on average to the credit line for oil and gas companies. Related: Crude Charging Higher Ahead Of Big Week

Energy reform in Congress increasingly unlikely. The U.S. Congress has not passed a major energy reform bill since 2007, nearly a decade ago. Over the past year, however, there were high hopes for a new energy package, albeit one with only modest ambitions. Led by the top Republican on the Senate Energy and Commerce Committee, Senator Lisa Murkowski (R-AK), the energy package that attracted some bipartisan support mainly by avoiding controversial issues such as offshore drilling, renewable energy tax credits and climate change. Instead it focused on modernizing the electrical grid, improving cyber security and accelerating permitting for LNG export terminals. But the pared-down energy bill has not excited many constituencies, providing it little momentum to overcome the controversial issues that have cropped up, including federal funding for the Flint water crisis. According to The Hill, hopes are fading that the Congress will pass anything before the election.

Large-scale coal and nuclear retirements possible. Moody’s warned that rock-bottom natural gas prices could force a lot of coal and nuclear power plants in unregulated markets offline by the end of 2017. "In the current commodity price environment, most unregulated coal and nuclear plants are generating little or negative cash flows," Moody's said. "We believe that if the current gas price environment of $2/MMBtu to $3/MMBtu does not improve in the next 12-18 months, there could be more large-scale coal and nuclear plant closures, especially in regions without a forward capacity market, such as Texas and the Midwest." Natural gas is often the marginal source of supply, so low gas prices hurt the earnings of all power generators, even if they use other fuel source. Natural gas is currently trading just below $2/MMBtu, a bad omen for coal and nuclear operators.

Impeachment of Brazilian president takes step forward. A committee in Brazil’s Chamber of Deputies voted to move forward with impeachment proceedings. The full lower house will vote this weekend on whether or not to press forward. If that vote succeeds, the bill will head to the Senate.

IMF lowers GDP forecast. Calling economic growth “increasingly disappointing,” the IMF downgraded its assessment for global GDP for 2016 from 3.4 to 3.2 percent. That marks the second time GDP projections have been cut this year by the Fund. The IMF’s managing director Christine Lagarde has called the current phase of growth “the new mediocre.”

Fitch downgrades Saudi credit. Fitch joined other ratings agencies in downgrading Saudi Arabia’s sovereign credit, lowering it one notch to AA-. The Fitch rating corresponds to the same level as Moody’s, but S&P rates Saudi credit three notches lower at A-.

By Evan Kelly of Oilprice.com

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  • Bob Greiss on April 13 2016 said:
    This is the same thing that you have been saying for years now. First tell us why you keep getting it wrong, then perhaps we will read something else that you write, someday.

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