OPEC Pushes Up Oil, But Will The Gains Continue?

Oil prices broke the $50 mark in trading on Friday, suggesting that the OPEC deal extension rumors are still influencing markets.

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The rally stemming from the announcement of Saudi Arabia and Russia on a nine-month extension seemed to have run its course by mid-week, but oil moved higher again on Friday. WTI rose above $50 for the first time in nearly a month.

Trump turmoil. Political crisis in the U.S. and Brazil took their toll on equity and commodity markets this week, as uncertainty spread throughout the financial system. As a result of the growing scandal in Washington, Wall Street has lost confidence in the prospect of large-scale tax cuts that the Trump administration promised, leading to a sharp drop in equities. Stocks posted their worst trading day of the year so far on Wednesday, which dragged down oil prices a bit.

OPEC set to meet. OPEC's official meeting will take place in a week, and most analysts expect an extension of at least six months, and more likely nine months due to the support from Saudi Arabia and Russia. However, there is quite a bit of dispute over whether or not the extension will be sufficient. Some see the extension as enough to drain inventories back to average levels, while others expect rising U.S. shale output to swamp the deal. In any event, to a large degree the OPEC extension is already priced into the market, and any "pop" in prices will probably be modest. As the end of the initial phase of the OPEC cuts draws near, that data suggests that OPEC members achieved a high level of compliance but the non-OPEC members that promised to reduce their output lagged in their commitments. Related: Oil Prices Rise As OPEC Discusses Deeper Output Cuts

Global inventories rising again? Reuters reports that some less "visible" storage areas are starting to see an uptick in inventory levels, a worrying sign that suggests the oil market is still oversupplied. For example, the more expensive region of Amsterdam-Rotterdam-Antwerp (ARA) is seeing a rise in crude storage because refiners are "clogged" with oil, an industry source said. And because it is a more expensive region, it should be one of the last places to see rising levels of storage and the first to see drawdowns. South Africa and Singapore have also seen increases lately.

U.S. Treasury Department looking at Rosneft-PDVSA deal. Last November, Russia's Rosneft gave a $1.5 billion loan to the struggling Venezuelan state-owned company PDVSA, which is rapidly running out of cash. As part of the terms of the deal, PDVSA is thought to have put up a 49.9 percent stake in its subsidiary Citgo, which has retail gasoline stations in the U.S. as well as three refineries. American politicians are fearful that Russia will gain control of those assets and are pressing the Treasury Department to look at the deal. Secretary of Treasury Steven Mnuchin said this week that his agency was investigating.

Halliburton says it will hike prices, a sign that drilling costs will rise. The world's second largest oilfield services company, Halliburton (NYSE: HAL), said that it expects to increase its prices by 10 to 20 percent this year as drilling activity picks up. Oil producers have benefitted over the past few years from severely reduced prices for fracking, completion, and other services, but the likes of Halliburton are no longer content to take it on the chin. Rising prices for oilfield services could push up drilling costs for the oil industry. Related: Rise In Rig Count Threatens To Undermine Recent Oil Price Spike

Iranian elections held Friday. Iranians head to the polls today in a presidential vote that could have wide-ranging consequences. Incumbent President Hassan Rouhani has achieved an opening up of Iran and signed the historic nuclear accord with the P5+1 nations in 2015, which helped lead to a removal of sanctions. However, with Iranians disappointed with the underperforming economy, Rouhani is facing a tough battle from a hardline conservative cleric Ebrahim Raisi. Raisi could undermine the nuclear accord, which raises the risk of new confrontation with the West and perhaps additional sanctions. Ultimately, that will deter new investment in Iran's oil sector and could limit the country's ability to ramp up production from today's levels. "We reiterate our call that Iran remains one of the most underappreciated political risks in the oil market." RBC Capital Markets wrote in a note.

Brazil and Canada to add over 400,000 bpd this year. U.S. shale could spoil the OPEC deal, but output is growing elsewhere. Canada is expected to add 200,000 bpd this year from projects that were planned years ago. Brazil is also expected to add more than 200,000 bpd, again, from offshore projects that were initiated before the oil market downturn. The increase in supply could weigh on prices and complicate OPEC's efforts to balance the market.

Canada's "Permian of the North." The Montney Shale in Alberta is emerging as a major source of shale gas, after years of rapidly growing investment and drilling. The number of wells drilled between January and April jumped 80 percent from a year earlier, according to Bloomberg. The nickname "Permian of the North" is starting to stick because of the similar stacked shale formations, which allow drillers to drill through multiple layers. Shale gas production in the Montney is expected to grow from 4.9 billion cubic feet today to 7 billion cubic feet by 2019.

By Tom Kool for Oilprice.com

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