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Markets Buy The OPEC Cuts, But Fear U.S. Supply

Oil infrastructure

Oil prices remain flat as markets see the tremendous rig count rise in the U.S. as a strong cap on a noteworthy oil price recovery.

(Click to enlarge)

Chart of the Week

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• U.S. CO2 emissions from the transportation sector over a 12-month period now exceed electric power sector emissions for the first time since the 1970s.

• This is largely due to falling coal consumption for electricity. Between October 2015 and September 2016, for example, coal and natural gas had nearly equal shares of electricity generation (31 and 34 percent, respectively), but coal’s share of CO2 emissions topped 61 percent while natural gas only contributed 31 percent of emissions for the electricity sector.

• As coal plants shut down, with replacements coming from a combination of solar, wind, gas and efficiency, power sector emissions are falling.

Market Movers

BP (NYSE: BP) announced that its Thunder Horse South expansion project in the Gulf of Mexico has been completed 11 months ahead of schedule, saving $150 million. The project will add 50,000 bpd of production.

Halliburton’s (NYSE: HAL) share price fell after it reported fourth quarter earnings with revenue dropping by 20 percent. The oilfield services company warned of weakness outside of North America.

Sanchez Energy (NYSE: SN) says that its 2016 production exceeded even the high end of its guidance for the year at 53,350 barrels of oil equivalent per day (boe/d). That compares to the 48k-52k boe/d that the company predicted. Sanchez’s stock was up 2.5 percent on the news.

Tuesday January 24, 2017

Oil prices started off the week flat as news about an acceleration in U.S. oil drilling offset bullish news that OPEC is complying with the promised cuts.

Rig count soars. The U.S. rig count skyrocketed last week by 35 (29 oil rigs and 6 gas rigs), the largest weekly gain in years. The news was bearish for crude oil prices as it is a sign that shale drilling continues to accelerate.

Iraq says it is complying with OPEC cuts. Iraq agreed to cut 210,000 bpd from its production levels as part of the OPEC deal, but one factor that made the commitment tricky was that much of its production comes from private international oil companies (IOCs). On Monday, Iraq’s oil minister said that the IOCs are complying with the cuts. "We are in collaboration with IOCs to cut from their part," Jabar al-Luaibi told Reuters on the sidelines of a conference. "We are in agreement with most IOCs, not all of them, that they will be in line with us. This is going well." He added that oil prices are rising because of the deal. "It is heading toward $60 now. We hope it will get to the level of $60 and $60-$65 will be reachable."

Saudi Arabia says OPEC has already cut 1.5 mb/d. Saudi energy minister Khalid al-Falih said that OPEC and non-OPEC countries have already complied with 1.5 mb/d in cuts, an extraordinary development if true, but the claim is so far unverified. The statement is very bullish for oil prices, but the sharp increase in the U.S. rig count prevented any substantial price gain to start off the week.

Gazprom considers $6 billion asset sales. The Russian gas giant is considering asset sales, along with freezing dividends and higher levels of borrowing in order to meet its – arguably overstretched – spending levels on new pipelines, Bloomberg reports. Related: Saudis Warn Computer Virus That Hit Aramco In 2012 Has Returned

Russia edges out Saudi Arabia for Chinese market. Russia surpassed Saudi Arabia to become China’s largest oil supplier, offering more flexible contracts than the fixed, long-term offerings from Saudi Arabia. Russia will likely hold onto that spot as it has export expansions in the works. Meanwhile, Saudi Arabia is cutting back as part of the OPEC deal, so will struggle to grow market share in China.

Halliburton sees upturn, but shareholders disappointed. Halliburton (NYSE: HAL) is capitalizing on rising drilling activity in North America, but not as much as the company’s shareholders would like. The rig count rose by 19 percent in the fourth quarter, but Halliburton’s revenue only expanded by 9 percent as it finds tough competition in the oilfield services space. "We expected them to grow a little bit more with the rig count," Rob Desai, an analyst at Edward Jones, told Bloomberg. "Now that things are recovering, they are fighting more for market share." Meanwhile, Halliburton warned that although drilling activity is picking up in North America, “the international downward cycle is still playing out.”


Trump administration hints at revival of Dakota Access. Although there has been no action yet, when asked about the Dakota Access Pipeline, White House spokesman Sean Spicer said that he was “not gonna get in front of the president’s executive actions,” adding that President Trump is “very, very keen on making sure that we maximize our use of natural resources to America’s benefit.” Meanwhile, the WSJ reports that Energy Transfer Partners (NYSE: ETP) has hired private security firms to confront protestors. Once the Trump administration greenlights the project, the standoff with protestors will likely heat up again.

Oil bonds face “sharp repricing” from clean energy threat. The Bank of England argues that oil and gas bonds will suffer a “sharp repricing” as demand goes into decline as the world continues to transition to cleaner energy. The bank says that 60 percent of publicly-held oil and gas debt matures after this decade, with $636 billion maturing after 2021. At that point, the penetration of alternatives to oil and gas is unknown, and could potentially cut into demand, undermining the value of fossil fuel debt. “Financial valuations can move sharply even if the transition to sustainable energy were smooth,” BOE researchers wrote in a blog post. “exposures are sufficiently large to warrant attention from both investors and policymakers.” Related: Why Oil Won’t Rally Above $60 In The Near Term

Canadian drilling to rise. After two years of sharp spending cuts, Canada’s oil industry is set to step up investment in 2017. Bloomberg reports that companies such as MEG Energy Corp. (TSE: MEG), Canadian Natural Resources (NYSE: CNQ), Cenovus Energy (NYSE: CVE), Encana Corp. (NYSE: ECA), and Seven Generations Energy Ltd. (TSE: VII) all have plans to increase spending this year.

Offshore wind hits cost milestone. The cost of offshore wind farms in the UK have dropped below £100 per megawatt-hour, according to Dong Energy, the world’s largest wind developer. That milestone was not supposed to be achieved until 2020, but it has been reached four years ahead of schedule. Offshore wind farms are close to price parity with gas and coal-fired electricity in the UK. Investment in global offshore wind rose to $30 billion in 2016, up 40 percent from the previous year.

Former ExxonMobil CEO clears Senate hurdle. Rex Tillerson received the approval of the Senate Foreign Relations Committee, which was expected to be his largest obstacle standing in his way of becoming the next U.S. Secretary of State.

Equatorial Guinea applies for OPEC membership. Equatorial Guinea was one of the non-OPEC members that joined OPEC in agreeing to cut output in November, and now the small African nation wants to join OPEC as a full member. Equatorial Guinea produces 300,000 bpd of oil and agreed to slash output by 12,000 bpd. The application for membership comes a month after Indonesia quit the group.

By Evan Kelly of Oilprice.com

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