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Oil Continues To Plunge As Markets Turn Bearish

Flaring

Oil prices fell again on Friday, endorsed by a stronger dollar and persisting fears of both a crude and refined products glut.

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Friday, July 22, 2016

Oil is set to close out the week with a loss as worries over a glut of refined product inventories persist. The EIA did nothing to dispel those concerns this week, reporting another uptick in gasoline stocks, the fourth increase in five weeks. Those gains in inventories come even as June saw record gasoline demand in the U.S. as motorists failed to put a dent in the high levels of supply. Gasoline stocks ended June at their highest level since 1984 for the time of year. "The narrative of a balanced oil market (in the second half of 2016) has so far been an illusion," UBS oil analyst Giovanni Staunovo, told Reuters.

Exxon to takeover InterOil for LNG. After Oil Search backed away, it appears that ExxonMobil (NYSE: XOM) will move forward with a takeover of InterOil. The $3.6 billion in stock and cash for the company will be Exxon’s largest purchase in several years. That gives the oil supermajor a much larger stake in LNG exports from Papua New Guinea, which is really a play on the LNG trade to China, Japan and Korea in the decades to come. As Royal Dutch Shell (NYSE: RDS.A) becomes one of the largest LNG producers on the planet with its takeover of BG Group, Exxon appears to be upping the stakes in the region.

Oilfield service giants say worst is over. Halliburton (NYSE: HAL) reported dismal second quarter numbers this week, revealing a $3.2 billion loss. But the oilfield services company also said that the market is moving passed the bottom and is on an upswing. Schlumberger (NYSE: SLB) posted a $2.16 billion loss in the second quarter, and also announced that it eliminated another 16,000 positions in the first half of the year. At the same time, Schlumberger echoed Halliburton’s sentiment and is looking ahead to better days. "In the second quarter market conditions worsened further in most parts of our global operations," CEO Paul Kibsgaard said in the statement. "But in spite of the continuing headwinds, we now appear to have reached the bottom of the cycle." The declaration from the executives of the two largest oilfield services companies is a good signal that the oil markets are indeed on the mend.

ConocoPhillips announces another round of layoffs. The oil major ConocoPhillips (NYSE: COP) said that it would cut another 1,000 workers from its payroll, or about 6 percent of its workforce. Most of the positions would come from the U.S. and Canada. That comes on top of the 3,400 jobs the company has already cut, or about 18 percent of its employees.

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Refiners set for worst year in five. Refiners have pumped out high levels of gasoline, diesel and other products at a rapid pace, hoping to meet strong demand from consumers. However, refined product inventories have climbed as processing has outpaced demand. That has also resulted in a sharp fall in refining margins, a poor outcome for the downstream sector. As second quarter results start coming in, 2016 is shaping up to be one of the worst years since 2011. Low margins will likely force refiners to cut back on output. That will reduce demand for crude oil, an ominous sign for WTI and Brent as we head into autumn. The 10 largest independent refiners earned a collective $944 million in the first quarter, a 74 percent decline from a year earlier, according to Reuters.

Oil industry loses $2 trillion in value. The combined value of the world’s oil industry declined by $2 trillion over the past two years because of falling oil prices, according to Bloomberg. Second quarter results are starting to come in, and since they covered a period in which oil rose to $50 per barrel, they might reflect the best results from the industry since at least last summer. But with many forecasters expecting oil prices not to rebound to $50 again for quite some time, the second quarter results could be as good as it gets for oil companies this year. “The oil market has still to absorb higher supply from the return of disrupted production,” Giovanni Staunovo, an analyst at UBS Group, told Bloomberg. “Oil prices could fall to $40 again.” Another reason that the third quarter might not be as good as the second is that, as mentioned above, refining margins are also down, which will damage downstream earnings for refiners and integrated oil companies.

Obama administration to invest $4.5 billion in EV infrastructure. The U.S. Department of Energy released a plan to offer loan guarantees to build a coast-to-coast network of EV recharging stations, with the intention of accelerating the growth of the EV market. The initiative will involve federal, state, and local governments, working in partnership with major automakers including Ford (NYSE: F), General Motors (NYSE: GM), Nissan Motor (NYSE: OTCMKTS: NSANY), and Tesla (NASDAQ: TSLA). The plan hopes to build a network of fast-charging EV stations across the country by 2020. As Bloomberg notes, the automakers have ambitious plans for EVs. Ford will spend $4.5 billion on 13 new EV models by 2020, while GM will unveil its Bolt model this year, an affordable long-range EV.

U.S. energy use falls. The EIA reported that primary energy use in the U.S. dropped slightly in 2015 due to a decline in coal consumption, which exceeded the uptick consumption of other sources of energy. U.S. total energy consumption has declined 3.5 percent since 2007 as buildings and vehicles have become more efficient.

By Evan Kelly of Oilprice.com

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