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Oil Shows Weakness, But Don’t Expect A Plunge

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OPEC Seeks Help From U.S. Shale

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Oil Heavyweights Worry About Future Oil Supply


Oil prices are fighting against a strong dollar on Friday as the WTI front month futures rolled over to the December contract.

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Friday, October 21, 2016

The top oil officials and executives gathered in London this week for the Oil & Money conference, jointly hosted by the New York Times and Energy Intelligence. Several headlines came out of the conference. ExxonMobil’s CEO Rex Tillerson said that he does not see a supply shortage several years from now even though so many voices are warning about the shortfall in investment today. "I don’t necessarily have the view that we are setting ourselves up for some big collapse in supply within the next three, four, five years," Tillerson said.

That comes despite warnings from the IEA and even Saudi energy minister Khalid al-Falih. In fact, the diverging perspectives about future supply is turning out to be one of the hottest debates right now. OPEC’s Secretary-General Mohammed Barkindo said that the global oil industry will need around $10 trillion in investments through 2040 to meet oil demand, but the low levels of investment today because of low oil prices poses a “serious threat.” If investment continues to fall “then the global community—not only the industry—should really take this seriously and join hands in order to ensure the much needed security of supply going forward,” Barkindo said. Others at the conference echoed his worries about future supply shortages.

Oil drops on dollar strength and potential new supply. The European Central Bank kept its quantitative easing program intact, and Mario Draghi said that the ECB has not discussed altering the stimulus. The comments pushed up the dollar and putting downward pressure on oil prices as a result. Separately, the chief of Russia’s Rosneft, Igor Sechin, hinted at the fact that his company could boost production “significantly.” He said that Russia has the ability to add roughly 4 million barrels of oil per day at some point in the future if there is enough demand. Also, Nigeria slashed the price that it is selling its crude for by $1 in order to offload a glut of cargo. Altogether, these developments pushed down oil prices by more than 2 percent on Thursday.

Schlumberger, Halliburton posts small profit. Schlumberger (NYSE: SLB) saw its third quarter profits plunge to $176 million, down from $989 million a year earlier. Adjusted earnings per share still beat analysts’ estimates at $0.25 per share. Schlumberger said it is difficult to get a picture on what to expect next as many oil companies are still considering drilling plans but have not made final investment decisions on an array of projects. The oilfield services giant does expect to see increasing drilling activity in Russia and the Middle East but weakness in Latin America. The world’s second largest oilfield services firm, Halliburton (NYSE: HAL) surprised the markets on Wednesday, reporting a small profit of $6 million, up from a $54 million loss a year ago. The earnings of 1 cent per share beat estimates of a 6 cent-per-share loss. Related: ‘’Russia Could Add Another 4 Million Bpd To Daily Output’’

Permian land rush continues. Denver-based SM Energy (NYSE: SM) announced this week its decision to spend $1.6 billion on acreage in the Permian basin, a deal that works out to about $42,000 per acre. That comes after a deal announced last week, in which RSP Permian (NYSE: RSPP) agreed to pay $47,000 per acre in a deal worth $2.4 billion. The two deals illustrate the frenzy going on in the Permian right now, with E&P companies scrambling to gobble up the best acreage in the most attractive shale basin in the country. “The Permian is so hot right now,” said Ben Shattuck, an analyst with Wood Mackenzie, according to Fuel Fix. “These are high-water numbers.”

U.S. oil production declines begin to slow. The EIA predicts that the major shale basins in the U.S. will lose about 30,000 barrels of oil production per day in November compared to October. But that amount is the smallest monthly decline since May 2015, a sign that output could be nearing a bottom. While the Bakken and Eagle Ford are expected to lose 21,000 bpd and 35,000 bpd, respectively, the Permian is projected to add another 30,000 bpd.

Venezuela struggling to restructure debt. Venezuela’s PDVSA has $5.325 billion in debt payments falling due next year, and the state-owned firm, along with the Venezuelan government, are desperately short on cash and will have trouble meeting obligations. PDVSA has offered creditors revised terms but has so far failed to secure a deal to restructure its debt by extending maturity dates. The deadline for a swap is Friday. The company itself said that it would be “difficult” to make payments on existing debt. Bloomberg writes that refineries along the U.S. Gulf Coast could be impacted if PDVSA defaults, which would affect the reliability of crude deliveries to the U.S. Related: Oil Prices Cool Down Amid Tanking U.S. Crude Imports

Shell Sells $1 billion in Canadian assets. Continuing its multiyear divestment plan, Royal Dutch Shell (NYSE: RDS.A) reached a deal to sell $1 billion of non-core oil assets in Canada to Tourmaline Oil Corp. (TSE: TOU). The 206,000 net acres in Alberta and British Columbia are both developed and undeveloped, and produce a small 24,850 barrels of oil per day. The sale is part of Shell’s plan to sell off $30 billion worth of assets over a few years.

China’s oil production stabilizes; Asian market tightens. China has lost about 400,000 barrels per day in oil production since the end 2015, with sharp monthly declines for nearly a year. Production dipped below 3.9 million barrels per day in August but the latest data for September shows output slightly up, suggesting that the declines could be at an end. A separate analysis from Reuters finds that the oil and refined product markets in Asia are tightening as inventory levels are in decline. Refining margins in Singapore have climbed as the supply of refined products has contracted. This trend is important because it suggests the global oil market is moving towards balance.

By Evan Kelly of Oilprice.com

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  • Ronald Wagner on October 27 2016 said:
    Long term solution is to switch engines to natural gas.

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