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Midweek Sector Update: No Let Up In Pressure On Oil Prices

The U.S. government gave Royal Dutch Shell (NYSE: RDS.A) the final go-ahead for it to drill in the Arctic. For several weeks, although Shell had received approval from American regulators, they were not allowed to drill into oil-bearing zones in the Chukchi Sea until its oil spill response equipment was on site. Shell had a few setbacks this summer on its campaign to drill for Arctic oil for the first time since 2012. Its icebreaker was damaged and had to seek repairs in Portland, Oregon. It was also held up for a few days in port because of Greenpeace protestors. But with it back in the far north, Shell is ready to go.

Oil prices once again dipped to new six-year lows on August 17, with WTI falling below $42 per barrel and Brent trading below $49. Low oil prices continue to inflict damage on oil producers around the world. Canada’s stock market is continuing its downward trajectory. The ruble, is nearing a six-year low and Russia’s GDP is expected to contract by 3.6 percent this year. Saudi Arabia isn’t doing quite as bad, but its economy is expected to grow at an annual rate of 2.8 percent this year, down from the 3.5 percent pace exhibited in 2014. Riyadh has also had to step up spending and borrowing to compensate for lower oil revenues.

The markets started the week with a few more bearish pieces of news. North Dakota reported a slight uptick in oil production for the month of June, undermining hopes that a deeper pullback in production would slow the slide in oil prices. Also, Japan reported that its economy actually contracted in the second quarter. As one of the world’s largest crude oil consumers and importers, Japan’s figures induced a slight sell off for oil. Finally, the U.S. dollar has appreciated a bit in recent days, making commodities more expensive for other currency holders. For oil prices, there is little relief in sight for the near term. Related: An Oil Price Spike Could Be Nearer Than You Think

The bigger picture is murky as well. China’s stock exchanges plummeted by another 6 percent on August 18, highlighting the very real fact that the economic and financial turmoil in China is far from over. The devaluation of the yuan continues to roil the country, and it is rippling across the world. Countries that heavily depend on exports to China –many Latin American countries, for example – are seeing their currencies start to slide. Colombia has seen its peso fall by 21 percent this year against the dollar, Chile’s peso has fallen by 12 percent, and the Mexican peso has dropped by 10 percent. All export raw materials and commodities to China.

We have heard much about the long list of oil projects that are being shelved by the oil majors, but low prices are also killing off new projects for state-owned firms as well. Russia’s Rosneft admitted that it would regroup and focus on boosting oil production at existing projects. “We decided . . . to amend our business plan in the direction of increasing production at existing fields,” Rosneft’s Igor Sechin said on August 14. Rosneft’s campaign to develop oil in the Arctic has slowed, although in part due to western sanctions that have hindered ExxonMobil’s (NYSE: XOM) involvement. Related: Germany Struggles With Too Much Renewable Energy

But there are apparently further delays afoot, although Rosneft has been quiet about such plans. The FT reports that sources close to the company said that “[r]adical changes in the environment have made Rosneft revise the whole scenario of projects.” For now, the company outwardly has ambitious production targets (6 million barrels per day by 2020), but it appears the Russian energy giant is going to retrench to a certain extent and focus on its existing portfolio.

In the UK, where the British government has been pushing hard to promote the country’s shale gas industry, the central government has unveiled a new attempt to stimulate development. After a local council blocked a much-anticipated drilling campaign by Cuadrilla Resources, environmental groups and local opposition rejoiced. However, Prime Minister David Cameron’s government has moved to undermine local authority with a new policy that will require a swift up or down decision by local communities, or else decision-making will revert to the Secretary of State for Communities and Local Government. The move is intended to jump start shale drilling approvals across the country and could be a boon to the industry. However, the local opposition that doomed Cuadrilla’s campaign has not gone away and could still stifle development. Related: Oil Markets Coming To Grips With Prices Remaining “Lower for Longer”

The U.S. government appears to be loosening the ban on crude oil exports – Reuters reported on August 14 that the Commerce Department would approve oil swaps with Mexico. The approval would send light oil from the U.S. to Mexico in exchange for heavy oil from Mexico to the U.S. While the move does not technically lead to net exports (since Mexican oil will be imported in corresponding volumes), the move will better match flows, with the light oil needed for Mexican refineries and heavier varieties appropriate for Gulf Coast processing. The move pokes more holes in an export ban that seems destined for full-scale removal. Legislation is working its way through the U.S. Congress, and the latest move suggests the White House may not put up a fight if an export ban repeal makes its way to the President’s desk.

Finally, the U.S. EPA is set to release new rules that will limit methane emissions at oil and gas wells, a first-of-a-kind set of regulations. The regulations are seeking to cut methane emissions by 40 to 45 percent from 2012 levels within a decade. The Obama administration had hinted earlier this year that this proposal was coming soon, so the industry is likely not surprised (although that doesn’t mean they are happy about it). Oil and gas companies will be required to capture methane at drilling sites to avoid unintended releases of methane, and they will also be required to monitor their supply chains and plug holes where need be.

By Evan Kelly Of Oilprice.com

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