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Markets Remain Bullish On Oil Despite Growing Risks

Oil rig

OPEC reportedly achieved a 91 percent compliance rate this week, with speculators reacting by amassing yet more bullish bets. The downside risk continues to grow in the short term however.

(Click to enlarge)

(Click to enlarge)

Chart of the Week

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• The U.S. solar industry employs more than 260,000 people, up 25 percent from 2015 alone.
• An estimated 2 percent of all new jobs created in 2016 in the U.S. came from the solar industry.
• The solar industry employs more than three times the amount of people as the coal industry, despite the political power of the latter.
• Solar installations are expected to rise by 29 percent this year from 2016.

Market Movers

BP (NYSE: BP) disappointed shareholders with its fourth quarter figures, reporting earnings of $400 million, lower than consensus estimates. The British oil giant posted a $1 billion loss for 2016.
Occidental Petroleum (NYSE: OXY) saw its share price jump by nearly 3 percent when it reported that it replaced 190 percent of its 2016 production. Its replacement ratio for the Permian Basin alone was 290 percent.
Cabot Oil & Gas (NYSE: COG) surged by more than 10 percent after JP Morgan and Susquehanna upgraded the company’s shares. The move came after FERC approved the Atlantic Sunrise pipeline, owned by Williams Cos., which will carry Cabot’s gas.

Tuesday February 7, 2017

The U.S. dollar weighed on oil prices to start off the week; WTI and Brent were down by more than 1 percent. On the bright side, a new survey from S&P Global Platts estimates that OPEC has achieved a 91 percent compliance rate with the November 30 agreement, far higher than many oil watchers had expected. The figures are a strong signal that OPEC is doing its best to live up to the details of the agreement.

Dakota Access decision near. Bloomberg reports that the U.S. Army Corps of Engineers is likely days away from issuing the easement to Energy Transfer Partners (NYSE: ETP) to complete the Dakota Access Pipeline. The $3.8 billion pipeline has been at a standstill for months even though it is close to completion. ETP has said that the pipeline will likely come online in the second quarter, however, the Standing Rock Sioux Tribe and environmental groups have vowed more lawsuits if the easement is granted.

BP reports poor Q4 numbers. BP (NYSE: BP) reported a $400 million profit for the fourth quarter, lower than analysts had expected. The oil major also posted a $1 billion loss for the full-year. Deteriorating refining margins were part of the problem, and most of the fourth quarter financials for just about all of the oil majors disappointed the markets. Worse for BP was the fact that the company now says its books can balance if oil trades at $60 per barrel. That is up from the $50 to $55 per barrel that company executives said it needed last year. Meanwhile, Statoil (NYSE: STO) also reported poor figures, booking a surprise fourth quarter loss. The Norwegian company took a $2.3 billion impairment charge.

Trump to crash oil and gas prices. The deregulatory bonanza underway in Washington could cause oil and gas prices to crash in 2018, according to Bank of America Merrill Lynch. That is because supplies could rise quickly, leading to another state of oversupply. “The industry has high hopes for less red tape, a more pragmatic approach to regulation and lower costs of having to comply with climate change rules,” BofA analysts said. The big uncertainty is over the pledge to implement a border-adjustment tax, which would have far-reaching implications for the oil and gas industry. Related: Putin’s Tough Choice: China Or The West

Shale industry rebounding, offshore still languishing. While rig counts are rising in the shale patch, the offshore sector will need higher oil prices before a revival in drilling can occur. Offshore drillers such as Diamond Offshore Drilling (NYSE: DO) and Atwood Oceanics (NYSE: ATW) have seen their share prices drop by 15 percent over the past month as new drilling activity passes them by. “From an operator perspective, they still have choices as to how they deploy their capital. And, of course, I think, we all understand that right now competing with the unconventional place is quite difficult from a deepwater perspective,” Diamond Offshore’s CEO Marc Edwards said, according to Blomberg. “In the short run, if oil stays in a range bound, let’s say $50 to $55, I think you’ll see our clients’ capital still have a propensity to be to deployed to unconventional light-tight oil onshore.”

Iran to boost output despite U.S. warnings. The Trump administration is stepping up tensions with Iran, introducing new sanctions and deploying bellicose rhetoric. But Iran says that oil production will continue to rise, targeting 4 million barrels per day by March. Iranian officials also said that the actions from the Trump administration would make it impossible for American companies to participate in Iran’s upcoming oil auctions. Iran says that it has not barred American companies from investment, but instead blamed U.S. law as the obstacle. For now, the 2015 nuclear deal remains intact, but the past two weeks have raised serious threats to the agreement. Political risk firm Eurasia Group puts the odds of the deal’s survival at just 60 percent.

Contango flips to backwardation. The backwardation in the futures market continues to strengthen, an indication that near-term supply/demand conditions are tightening. The oil futures market has been in a state of contango – in which near-term futures are traded at a discount to futures further out – because of the supply glut problems. Backwardation is a sign that the supply overhang is narrowing.

Speculators amass record bullish bet on oil. Hedge funds and other money managers continue to rack up bullish bets on crude oil. The positioning is an indication of positive sentiment, but it also continues to grow the downside risk to oil in the short run. If sentiment shifts and money managers start to sell of long positions, there could be a short-term reversal in prices. Related: Saudis To Raise $10 Billion Ahead Of Aramco IPO

U.S. shipping record volumes of oil to Asia. Reuters reports that U.S. oil exports to Asia are set to hit a record high in the coming weeks, with some 700,000 to 900,000 bpd slated for February. That would be an all-time high for the U.S., and it would help ease the inventory surplus in the U.S. and provide a lift to domestic producers. However, it could add to supply problems in Asia.

Eagle Ford shale producers weary of Trump’s border wall talk. The Eagle Ford in South Texas extends into Mexico and the business community on both sides of the border are not excited about a potential border wall, and even less so about a border tax. Texas shale producers are looking to export gas to Mexico, something that would be complicated by a border tax due to reciprocal action. Likewise, companies looking to invest in Mexican energy are also concerned about heightened tensions between the two neighbors. The oil and gas industry wants an open business environment in both countries, something that the Trump administration is threatening. E&E News reports that companies are growing increasingly concerned about President Trump’s actions.

By Evan Kelly of Oilprice.com

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