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The North American oil rig count stopped falling, the first gain in several weeks. It is too early to tell if it is a trend, but the rig count could be looking for a bottom. OPEC production leader Iraq reported a slightly lower oil output last month, but continues to produce oil at over 4 million barrels per day.

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• Iraq reported slightly lower oil production due to bad weather, but its success at ramping up output continues. Iraq is OPEC’s second largest oil producer.
• The country has achieved five consecutive months of oil output above 4 million barrels per day.
• Iraq has managed to increase production by more than 0.5 mb/d since the beginning of the year, offsetting the declines in U.S. shale.
• Oil market balancing has been slow because, as Iraq shows, some countries are still boosting output even while downturn deepens.

Market Movers

• ExxonMobil (NYSE: XOM) announced plans to drill for oil off of the coast of Liberia. The Liberian President hailed the move as a sign that the nation was rebounding from the Ebola crisis. Liberia does not produce oil, but ExxonMobil will conduct exploratory drilling in 2016 or 2017, after having previously put the plans on hold because of the Ebola epidemic.
• Royal Dutch Shell (NYSE: RDS.A) says that it is moving a $1 billion oil production ship from Singapore to the U.S. Gulf of Mexico to position it to begin producing from its “Stones” project. The vessel will extract oil from the Lower Tertiary, an ultra-deep layer of rock that is less permeable than conventional offshore drilling. The frontier region could see investment dry up with low oil prices, as breakeven costs run as high as $60 to $80 per barrel. But Shell’s project was sanctioned several years ago when prices were much higher.
• Noble Energy (NYSE: NBL) has agreed to sell off two smaller natural gas fields in the Eastern Mediterranean in order to satisfy Israeli regulators. Noble sold off its 47 percent stake in the Karish and Tanin fields to its partner, Delek Group (TLV: DLEKG), a deal worth $67 million. Delek will then sell the stakes to other companies in order to reduce the control that Noble and Delek have over Israel’s offshore fields. Israeli press say that Eni (NYSE: ENI), Hess Corp. (NYSE: HES), and EOG Resources (NYSE: EOG) could be interested in buying. Related: Hedge Funds Increase Bearish Bets As Oil Nears $40

Tuesday November 17, 2015

Oil prices have bounced around in recent days (as usual), while WTI jumped more than 3 percent on November 16. Market analysts watched to see if oil prices would jump on the expectation of rising violence in the Middle East following the horrific attacks in Paris from last week. However, traders seem to be watching the ballooning levels of oil in storage as more important for oil prices, and rightly so. The world remains oversupplied. Meanwhile, Japan reported that its economy dipped into a recession. Even if its recession is mild and short-lived, the country is a major oil importer.

Instead of the expectation of instability, Monday’s uptick in oil prices likely has more to do with speculative moves by oil traders as oil closed in on the psychologically important $40 threshold. After all, the markets opened Monday morning with oil trading down, with WTI closing in on $40 per barrel. But, oil then bounced off those lows, likely because short traders closed out their positions. As a result, the rally could be short lived. As mentioned above, crude inventories are near record highs, both in the U.S. and around the world. That suggests Monday’s rally was not driven by the underlying fundamentals.

Many of the prominent shale basins in the U.S. continue to lose rigs, personnel, and production. The Bakken has been especially hard hit, with rigs at multiyear lows and production showing year-on-year declines. In fact, as of September, the number of oil wells drilled in North Dakota but not completed has topped 1,000 for the first time. The backlog of uncompleted wells, or “fracklog,” will complicate the fortunes of companies involved. Waiting to complete a well makes sense if oil prices rebound, but such a strategy also prevents production growth in the interim, which could impact share prices. Also, as oil prices do rebound, North Dakota could see an uptick in production as drillers move wells from the fracklog and into production. That could cap the potential gains for oil prices as a quick increase in production could follow any price gains. In the meantime, the swelling fracklog shows that the Bakken does not look favorable to drillers at the moment.

At the same time, companies are increasingly pivoting towards the Permian Basin in West Texas, already the country’s largest producing shale region. Production and rig counts have climbed in recent months as many other regions (the Eagle Ford and the Bakken, most notably) move in the opposite direction. And as Bloomberg recently noted, interest in the Permian continues to rise despite the ongoing sluggishness in the market. For example, Anadarko (NYSE: APC) issued a takeover bid of Apache (NYSE: APA), which can be seen as a play on Apache’s Permian assets. ExxonMobil also purchased 48,000 acres of Permian territory in August. The thing that makes the Permian more attractive than other areas is the multiple layers of pay zone. In other words, a given well can produce a lot more oil and gas than elsewhere, often providing financial returns as high as 40 percent, even with WTI as low as $40 per barrel. “It’s the last oil basin standing,” Will Giraud, chief commercial officer of Concho Resources (NYSE: CXO), put it to Bloomberg. Related: Could The Tide Be Turning Against North American Natural Gas?

The credit redetermination period that was expected to cut off a long list of struggling oil and gas producers ended up being a lot less damaging than many had thought. Lenders typically reevaluate their credit lines to drillers twice a year, and the October period was expected to be particularly harsh because of low oil prices. But Reuters reported that only about 4 percent of bank credit to oil and gas companies was cut over the past month, a much milder contraction than anticipated. Of the 37 companies surveyed by Reuters, only 15 saw their credit lines reduced, while 12 saw no change and 7 received an increase. Overall, about $1.4 billion in lending was cut in October, taking credit lines down to a combined $30.7 billion. On the one hand, banks are offering some leniency to companies that have cut costs and prudently hedged their oil sales at higher prices. But, the modest redetermination could prolong the slump as fewer drillers could be forced out of the market in the near-term.

Canadian Prime Minister Justin Trudeau is looking to ban oil tanker traffic off the North Coast of British Columbia, a move that could essentially kill off Enbridge’s (NYSE: ENB) Northern Gateway pipeline. The project would connect oil from Alberta to the Pacific Coast, allowing for a greater volume of exports. The pipeline has taken on more importance with the rejection of the Keystone XL pipeline, but still won’t be built until 2019 at the earliest. The move by Trudeau could further complicate that timeline. Alberta oil producers are having a tough time moving their product to market, and have identified an expansion of pipeline capacity as a top industry priority.

Mexico announced that it will join the International Energy Agency (IEA), another sign that the country’s historic energy reform has opened up its energy sector. The IEA is a Paris-based organization that seeks cooperation and stability in energy markets. It was setup in the aftermath of the Arab Oil Embargo in the 1970s, and member countries – mainly the U.S., Canada, Japan, Korea, Australia, and most of Western and Central Europe – coordinate their energy policies and share data. The mission of the organization is to ensure energy security against future supply disruptions. Mexico’s ascension into the IEA makes sense – it is the third-largest oil producer in the OECD and is a key player in oil markets.

By Evan Kelly of Oilprice.com

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