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Midweek Sector Update: Oil Traders Finally Get Some Bullish News To Work With

Midweek Sector Update: Oil Traders Finally Get Some Bullish News To Work With

Crude prices are off to a good start this week, jumping by more than 2 percent on October 5 following several pieces of bullish news. First, Baker Hughes reported a sharp contraction in the rig count last Friday, with oil rigs falling by 26, the largest decline in months. Oil and gas rigs are now down by more than 1,100 since October 2014. The decline in the number of rigs is likely a belated effect of the sudden downturn in oil prices in August and September. But the removal of rigs suggests that the contraction in U.S. oil production – by far the more important metric – could pick up pace in the coming months.

But another, more immediate, effect on the oil markets came from news reports that hinted that Russia may be a bit more willing to coordinate with OPEC on production cuts than previously thought. Russian officials said that they were prepared to meet and discuss with both OPEC and non-OPEC countries about the status of the oil markets. While meetings may take place between Saudi and Russian officials, actual coordination over production cuts are still highly unlikely. Russia can ill-afford a reduction in output. Indeed, fresh data from the Russian government points to Russia going the opposite direction. In September, Russian oil production hit 10.74 million barrels per day, a new post-Soviet high. As a result, oil traders may be bidding up the price of crude because of news that Russia is willing to look at production cuts, but speculators are likely overreacting. Still, even if the sentiment is unfounded, the news had the effect of pushing up prices. Related: Goldman Sachs, And 35 Other Companies, Target 100% Renewables

One more piece of bullish news is supporting crude prices this week. Demand continues to rise in the U.S. for refined products as motorists hit the roads. In fact, U.S. drivers are turning back towards the heavy, fuel inefficient SUVs as gasoline prices have tanked over the past year. The average fuel economy of the nation’s fleet actually dropped over the past year, hitting 25.2 miles per gallon in September 2015, a decline of 0.6 miles per gallon from a year earlier. Sales of trucks are surging, up 11 percent for the period of January to September, compared to the same period in 2014.

Also, gasoline prices jumped as Midwest refinery outages are cutting into supplies. Refinery maintenance season usually takes place at the end of summer, so the temporary idling of downstream units is restricting capacity for the time being.

The bullish news overcame a few notable weaknesses in the oil markets. Most notably, Saudi Arabia cut its prices for oil exported to Asia as it continues to pursue a strategy of capturing market share at the expense of rival producers around the world. Related: BP Spells Out What’s Wrong With Big Oil In One Chart

On Monday, BP (NYSE: BP) announced that it will pay $20 billion in fines to settle all outstanding claims against the company for its role in the Deepwater Horizon disaster in 2010. The settlement will be the largest of its kind in U.S. history. That brings the total pre-tax sum for all oil spill related charges to $53.8 billion. The staggering total has bled BP, making it a shadow of its former self. However, the company can finally put the disaster behind it, and its stock price rose by 3 percent on the news as the markets see brighter days ahead for the British oil giant.

Suncor Energy (NYSE: SU), a Canadian oil producer, announced an unsolicited bid for Canadian Oil Sands Limited (TSE: COS). The all-stock deal could cost CAD$4.3 billion, and Suncor is offering a 43 percent premium to COS shareholders. COS is a significant shareholder in the Syncrude project, which produces synthetic crude oil from oil sands. The facility, located in Fort McMurray, produces 350,000 barrels per day of synthetic crude. However, COS has been badly damaged from the downturn in oil prices, and the company has had to slash its dividend significantly. COS’ share price was up more than 55 percent after the announcement, while Suncor’s stock was down 2 percent. However, Reuters reported that COS is prepared to reject the bid.

Kurdistan recently succeeded in ramping up oil exports, defying the Iraqi government. The semi-autonomous region of Iraq has been at odds with the central government in Baghdad over a shortage of funds. Under a fragile agreement reached in December 2014, Kurdistan would export oil under the auspices of the Iraqi state in return for a share of national revenue. But for much of this year, the Iraqi government has failed to transfer the funds, causing Kurdistan to go out on its own and export oil unilaterally through Turkey. The Kurdish Regional Government (KRG) announced that oil exports in September jumped by 27 percent to around 600,000 barrels per day. The KRG says that it plans on boosting exports to 900,000 barrels per day before the end of the year. Related: This Month Could Make Or Break The Oil Markets

Royal Dutch Shell (NYSE: RDS.A) started up the third phase of its Bonga offshore project off the coast of Nigeria this week. The Bonga facility is already producing, and it was the first deepwater project in Nigerian waters when it began producing in 2005. The expansion will add 50,000 barrels of oil equivalent when it hits peak production.

A Louisiana-based company announced plans on October 2 for a major LNG export facility on the Gulf Coast. G2 LNG LLC says that it plans on building an $11 billion export terminal in Cameron Parish, which could end up being one of the state’s largest capital investments in history. G2 LNG is still awaiting federal permits that would allow it to export LNG to countries that don’t have a free trade agreement with the U.S. The company is looking to export LNG to countries in Asia, Europe and the Caribbean.

S&P released new grades for 14 European oil and gas companies, which are mostly negative. Downgrades from the credit rating agency were delivered to Tullow Oil (LON: TLW) and EnQuest (LON: ENQ). Larger oil companies were also hit with negative outlooks, including BP (NYSE: BP), Repsol (BME: REP), and Statoil (NYSE: STO). Without a substantial rebound in oil prices, negative cash flow and debt are darkening the prospects for oil companies across the board.

By Evan Kelly of Oilprice.com

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  • K Yamaguchi on October 06 2015 said:
    I always wonder why those commenting on the price of oil make statements like "Russia can ill afford to cut production", when a coordinated agreement to cut production by OPEC and Russia by a mere 5% would likely result in at least a 50% increase in prices, and thus at least a 40% increase in revenue.

    If OPEC is willing, Russia can ill afford to not agree to a production cut - assuming all of those agreeing are willing to honor that production cut. In the Macho world of those nations that control their country's production it is interesting to watch how much pain they have inflicted upon themselves to prove they are tougher than the others.

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