Oil prices skyrocketed yet again at the start of this week on news that non-OPEC countries agreed to cut production. Is this OPEC rally sustainable?
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• The EIA released its latest Short-Term Energy Outlook, which contained some bearish predictions for oil prices.
• The agency projects WTI to average $51 per barrel and Brent to average $52 per barrel over the course of 2017, figures that are only slightly up from the previous month. The small upward revision is surprising given that the latest estimate incorporates the OPEC deal.
• But the EIA remains unimpressed by the OPEC agreement. The agency kept its price projections relatively flat, citing the possibility of OPEC cheating, as well as a possible strong response of U.S. shale.
• It should be noted, however, that the EIA figures do not reflect the non-OPEC agreement this past weekend (more on that below).
• Eni (NYSE: E) is set to sell 30 percent of its giant Zohr gas field off the coast of Egypt to Rosneft for an estimated $1.575 billion. Zohr is the largest gas field ever found in the Mediterranean and the first gas flows could come online by the end of 2017.
• Kinder Morgan (NYSE: KMI) could sell $10 billion worth of Permian oil and gas assets. Potential buyers include Occidental Petroleum (NYSE: OXY), Windy Cove Energy, and Fleur de Lis Energy.
• TransCanada’s (NYSE: TRP) Keystone XL Pipeline is slated for revival if the Trump administration has anything to do with it. The President-elect said in an interview this past weekend that he would make a decision on Keystone XL “fairly quickly.”
Tuesday December 13, 2016
Oil prices skyrocketed yet again at the start of this week on news that non-OPEC countries agreed to cut production. Russia agreed to cut 300,000 barrels per day as expected, and a handful of other non-OPEC countries all chipped in an additional 258,000 bpd in reductions:
• Mexico -100,000 bpd
• Azerbaijan -35,000 bpd
• Oman -40,000 bpd
• Kazakhstan -20,000 bpd
• Malaysia -20,000 bpd
• And the remainder will come from Bahrain, Brunei, Equatorial Guinea, Sudan and South Sudan.
Oil prices jump. WTI and Brent surged more than 3 percent on Monday, taking prices up to $53 and $56 per barrel, respectively. Those prices are the highest in a year and a half.
Saudi Arabia could cut deeper. Saudi energy minister Khalid al-Falih said over the weekend that his country would be prepared to take production below its promised 10 million barrels per day in an effort to cut into global supplies and ensure that the deal works. "I can tell you with absolute certainty that effective Jan. 1 we’re going to cut and cut substantially to be below the level that we have committed to on Nov. 30," he told reporters after meeting with non-OPEC countries. The comments indicate a level of seriousness on behalf of Saudi Arabia not seen in more than two years – for Saudi Arabia to go beyond what it promised in Vienna is hugely positive for crude oil prices. It also suggests that despite fears over non-compliance and cheating, OPEC might actually deliver.
Hedge funds build up bullish position on oil. The liquidation of short bets following the OPEC deal continues. Reuters reports that hedge funds and other money managers have established the most bullish position on record, adding 94 million barrels of long positions and cutting WTI and Brent futures and options short positions by 134 million barrels. The net-long position stood at 728 million barrels, according to the most recent data, the most bullish on record. It is not a coincidence that this has occurred at a time when oil prices have rallied more than 20 percent. Related: Are Airlines The Real Losers Of The OPEC Deal?
IEA: supply deficit near. In the IEA’s latest Oil Market Report, it concludes that the OPEC/non-OPEC deal will tip the global supply balance into deficit as soon as the first half of 2017. The agency expects the deficit to widen to about 600,000 barrels per day. But the IEA cautioned that the deal might not be precisely implemented on time, due to contractual reasons. So the agency said that it would “allow time for it to be implemented before re-assessing our market outlook.”
Shale response? U.S. shale is expected to rebound in 2017 on higher oil prices. The question is how quickly and how forcefully production will rise, which could ultimately put downward pressure on oil once again. The combined OPEC/non-OPEC cuts of nearly 1.8 mb/d will tip the global supply balance into deficit pretty quickly, if fully implemented. That should see oil prices rise above $60 per barrel as inventories draw down. At $60 per barrel, the U.S. could add 500,000 bpd next year, according to Macquarie. For its part, OPEC is hopeful that $60 per barrel is not enough for a U.S. shale revival. “Sixty I think would be ideal,” Emmanuel Kachikwu, Nigeria’s oil minister, told Bloomberg TV. “Once you begin to trend past the mid-$60s, you’re going to have a surfeit of shale producers jump back into the market. Technology is improving with shale every day, and so the cost of production is continuing to drop.”
Billionaires pledge clean energy fund. Bill Gates and a handful of other prominent businessmen and investors announced the Breakthrough Energy Ventures Fund, which will invest in commercializing promising clean energy technologies. The fund will target technologies that have made it out of the laboratory but need help reaching the commercialization phase. Sectors of interest include electricity generation and storage, transportation, industrial processes, agriculture, and energy-system efficiency. Bill Gates will personally lend $1 billion to the fund, and other contributors include SAP cofounder Hasso Plattner, energy hedge fund manager John Arnold, as well as VC icons John Doerr and Vinod Khosla. The combined net worth of the companies, according to Quartz, is almost $170 billion.
Trump’s transition picks. On Tuesday Trump announced that he has chosen ExxonMobil (NYSE: XOM) CEO Rex Tillerson to head the State Department, a man whose company has major investments on the line in Russia. Tillerson’s selection has led to speculation that the U.S. would remove sanctions on Russia, which would allow Exxon to drill in the Russian Arctic again. Trump is also rumored to be considering Rep. Cathy McMorris Rodgers (R-WA) to head the Department of Interior, a selection that would likely lead to more drilling on public lands. As of now, a leading candidate for Department of Energy is former Texas Governor Rick Perry. The Energy Department, despite its name, has much less to do with fossil fuel production than many believe. Most of the agency’s mission is related to the stewardship of the nation’s stockpile of nuclear weapons and nuclear waste. The Interior Department will be much more crucial to the oil and gas industry.
By Evan Kelly of Oilprice.com
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