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Midweek Sector Update: Bullish Signs For Crude But Pain Not Over Yet

Midweek Sector Update: Bullish Signs For Crude But Pain Not Over Yet

The latest data from the U.S. Energy Information Administration predicts that shale output will decline by 57,000 barrels per day in May. It will be led by losses of 23,000 bpd in the Bakken, a decline of 33,000 bpd in the Eagle Ford, and 14,000 in the Niobrara. That will outweigh the small gains expected in the Permian and Utica, increases of 11,000 bpd and 2,000 bpd, respectively. The reduction in output follows last week’s news that rig counts fell by more than expected. Another 40 oil and gas rigs were taken offline for the week ending on April 2, a larger loss than in recent weeks. The total number of active oil and gas rigs fell below 1,000 for the first time in over four years.

The ongoing pain in America’s shale fields are a bullish sign for oil prices, which have posted substantial gains recently. Oil traders have been waiting for signs of a genuine decline in production, and we may finally be arriving at that point. There are a few caveats, however. Oil inventories are still climbing, now at their highest levels in over 80 years. Also, drillers have a backlog of wells that still need to be completed, as many operators are waiting for prices to recover before they finish them. That will bring a new rush of production online, which will temper any oil price gains. Still, WTI has moved firmly above $50 per barrel and Brent is close to the $60 mark. Related: Resource Dependence Could Prove Fatal For Canadian Economy

Nevertheless, much of the damage to corporate balance sheets from low oil prices has already been done. First quarter earnings reports are set to be released beginning this month, which will show figures from the first full quarter when oil prices were at their lows. The results from the previous quarter covered a period of time in which oil prices were still above $70 per barrel. Despite the planned reduction of $126 billion in industry-wide spending this year, more will be needed to correct balance sheets, according to a report from Wood Mackenzie. Dividend policies and share buyback plans are at risk if oil prices continue to trade at their current levels. Keeping such generous payouts to investors will require taking a heavier ax to capital spending programs, a difficult decision indeed. We will know a lot more in the coming weeks, but expect a lot of humbled executives discussing their unimpressive numbers at the end of April and beginning of May.

Violence has halted shipments of liquefied natural gas (LNG) from Yemen’s lone export terminal. Saudi Arabia continues to fight Houthi rebels in a brewing civil and regional war. The battle threatens to bog down Saudi Arabia and has heightened tensions with Iran. Now the fighting is affecting Yemen’s meager energy industry. Yemen LNG Company declared force majeure as violence has closed in on its export facility. The company is evacuating personnel and will not produce or export LNG for the time being. Total (NYSE:TOT) has a 40 percent stake in the project.

Despite the outage, which accounts for around 2 percent of global LNG capacity, supplies of LNG around the world are rather robust and the loss of Yemen’s production will hardly be noticed. LNG prices are at multiyear lows, particularly in the all-important Asian market. Moreover, additional liquefaction capacity is set to come online this year and next, compounding the supply overhang. In fact, BP (NYSE: BP) has said that it is having trouble finding buyers for a planned expansion of its LNG facility in Indonesia. If it cannot find a willing party to take on the remaining 1.3 million tons per year (mtpa), BP said it would be “difficult to proceed” with the project. Related: The Real History Of Fracking

In a sign that the European Union is building some momentum towards its goal of creating an “energy union,” Russia’s Gazprom fired back against one of the EU’s top goals. One of the elements of the energy union would be collectively negotiating a natural gas deal with Russia that would secure prices below the traditionally oil-indexed bilateral deals that Gazprom insisted upon in the past. The head of Gazprom subtly threatened the EU against working together to negotiate a common price for natural gas. Speaking at a conference, Gazprom’s CEO Alexei Miller said a “common price isn’t the lowest price.” The common price, he added ominously, “will most obviously be the highest price.” He couched the language in support for EU’s goals of creating a more integrated market, but his statement was clearly intended to scare individual country’s that currently benefit from lower Russian gas prices. Gazprom, like Russia’s broader foreign policy, is seeking to divide and conquer EU members.

Meanwhile the prospects for a shale revolution in Europe look increasingly dim. Germany is finalizing rules that would allow fracking, but are laden with enough environmental restrictions that few firms will find drilling attractive. The law, set to be approved by parliament, will put the burden of proof for any environmental damage on the industry. Drillers have to prove they did not cause any environmental damage when it occurs, effectively the opposite of what is practiced in the United States. That, combined with other restrictions, will amount to a near-moratorium on fracking in Germany. In recent months, Chevron (NYSE: CVX) and other oil majors have thrown in the towel on drilling in Poland, Lithuania, and Romania after poor exploration results. Other countries, including France, have a ban on fracking. Taken together, it is unlikely that shale will take off in Europe anytime soon. Related: Huge 100 Billion Barrel Oil Discovery Near London

As the five-year anniversary of the Deepwater Horizon disaster approaches, the Obama administration is rolling out yet more regulations stemming from the incident. The Department of Interior proposed new regulations on April 13, aimed at requiring higher standards for drilling and safety equipment. One of the problems that occurred on April 20, 2010 was the failure of the blowout preventer, a piece of equipment that sheers and seals off the wellhead at the seabed in order to avoid an explosion. The offshore oil industry has since improved the designs of blowout preventers, something that Interior acknowledged. But the regulations make the higher standards mandatory. “We worked to collect the best ideas on the prevention of well control incidents and blowouts to develop this proposed rule – including knowledge and skillsets from industry and equipment managers,” Assistant Secretary for Land and Minerals Management Janice Schneider said in a statement. “This rule proposes both prescriptive and performance-based
standards that are based on this extensive engagement and analysis.”

By Evan Kelly Of Oilprice.com

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