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Evan Kelly

Evan Kelly

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Oil Down As Glut Fears Return

Oil prices fell on Friday as the IEA downgraded its projections for oil demand, dashing hopes that oil markets would rebalance this year.

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Oil prices posted another down week after the IEA dashed hopes that the global supply and demand picture would come into balance this year. The Paris-based energy agency said demand is much slower than it previously expected, and supplies are also surprising on the upside, mostly due to record OPEC production. The end result? The supply surplus might not be worked through until the middle of next year. Oil prices plunged on the news earlier this week and have struggled to regain ground.

Goldman pessimistic on oil prices. Jeff Currie, the head of commodities research at Goldman Sachs, sees low oil prices sticking around for a while. Not only that, but Currie says the risk to oil is on the downside, not the upside. He sees a dearth of bullish catalysts, and unexpectedly high output from Saudi Arabia, Iran and Russia adding to global supplies. He predicts oil will trade within a narrow range of $45 to $50 per barrel. “It really looks similar to the period of the early 1990s, when we were at $20 oil,” he said. “Is $45 to $50 the new $20? I am not ready to say we are in this new equilibrium environment, but it sure does feel like we’re moving in that direction.” The negative sentiment echoes the latest monthly report from the IEA, which surprised the markets with its downbeat assessment, predicting a rise in crude oil inventories through much of next year.

Libyan and Nigerian supply raise fears of deeper surplus. After several oil ports were briefly taken over by a rival general in Libya’s east, the government lifted a block on sales from three ports, which could see exports rise by 300,000 barrels per day relatively quickly. That would take output up to 600,000 barrels per day, and Libyan officials are targeting further increases to 950,000 barrels per day by the end of the year, or about triple current levels. Libya has repeatedly failed to follow through on such promises, but the prospect of a return of some Libyan supply is weighing on oil prices. Also, violence in the Niger Delta is finally calming a bit. ExxonMobil (NYSE: XOM) said that it would resume shipments of its Qua Iboe crude, the largest Nigerian grade. Royal Dutch Shell (NYSE: RDS.A) is also expected to bring an additional 200,000 barrels per day back in Nigeria. Related: Despite Criticism, Prime Minister May Gives Go-Ahead To Hinkley Point

Bottom for offshore rig market within sight. Offshore rig owners have been slammed by the collapse in oil prices as drilling activity has screeched to a halt. However, Transocean (NYSE: RIG) says that the bottom for the market could arrive by the middle of next year, with rig utilization rates stabilizing at some point in 2017. The third-largest offshore rig operator also said that rental rates have probably already stabilized, although at levels ($200,000 daily) less than one-third of 2013 levels ($650,000 daily).

Colonial pipeline down, but should restart on weekend. The Colonial Pipeline, the largest refined product pipeline in the United States, suffered a leak this week, spilling about 6,000 barrels of gasoline in Alabama. Its owner shut down the main gasoline and distillates line last Friday, although the distillates line has since been restarted. The gasoline line should start back up over the weekend. The outage led to surging refining margins, owing to the supply disruption. The incident could also temporarily push up gasoline prices in the U.S. Southeast.

Nord Stream 2 moving forward. The pipes being used to build the Nord Stream 2 expansion should be delivered in December or January, the head of Pipe Innovation Technologies said at the Reuters Russia Investment Summit this week. The pipeline, which would double the volume of Russian gas to Germany via the Baltic Sea, is highly controversial in Europe. Many EU countries, particularly in Central and Eastern Europe, are opposed to the expansion because it would increase EU dependence on Russian gas. The prospects for the pipeline have been up in the air but the confirmation about the delivery of pipes suggests the project is moving forward. Related: Why The Bankruptcy Wave In Oil & Gas Isn’t Over Yet

PDVSA looking at $7 billion debt swap. Venezuela’s state-owned PDVSA is looking to defer hefty debt payments that come due this year and next, hoping for some breathing room. Bloomberg reports that the oil company is hoping to swap $7 billion in debt, asking unsecured bond owners to take notes with payments spread out over the next few years. The specifics have not been disclosed, but the effort is an attempt to avoid default, and an economist with Capital Economics in London told Bloomberg that Venezuela could buy itself 12-months if it succeeds with the swap.

UK government greenlights controversial nuke plant. EDF’s $24 billion Hinkley Point nuclear power plant got the go ahead from the British government this week, a highly controversial project that will be Europe’s largest energy project. The approval came after a tightening up of security over fears of Chinese involvement in the project. The announcement is a win for EDF, but analysts are not sure it is a good idea for the UK. “In light of a changing energy landscape, the falling cost of renewables, and lower financing costs, we are not convinced that this would be the right decision for the U.K. consumer,” Martin Young, an analyst at RBC Capital Markets, said in a research note on Thursday. The two reactors are expected to take ten years to build.

By Evan Kelly of Oilprice.com

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