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Evan Kelly

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Oil In Freefall Following A Bout Of Bearish News

Oil Rig

We begin with a quick look at some of the critical figures and data in the energy markets this week, with oil prices falling below $40 on the back of some bearish news from OPEC while the rig count continues to rise.

(Click to enlarge)

Chart of the Week

• Stripper wells – tiny wells that produce just a handful of barrels per day – have collectively made up about 11 to 15 percent of U.S oil production over the past decade.

• Natural gas stripper wells produce less than 90,000 cubic feet per day. The EIA estimates that there were about 456,000 stripper gas wells at the end of 2015.
• Although very small in terms of production, the hundreds of thousands of wells combine to make a large contribution to overall production.
• Even though oil and gas prices remain low, stripper wells can remain in production for years because the only costs are maintenance and electricity to run pumps.

Market Movers
Phillips 66 (NYSE: PSX) said that refiners will cut back on processing in the second half of the year because of smaller margins. "We've got a lot of inventory stacked up," CEO Greg Garland said. Refining margins are at their lowest levels in years, and Phillips 66 reported earnings that fell by 50 percent year-on-year for the second quarter.
• Oil dropped to bear market territory on Monday after oil prices fell, bringing losses to 20 percent since June. "This crude overhang is materializing just as a gasoline glut is pressuring refinery margins," Citigroup said.
Enbridge (NYSE: ENB) reported earnings of CAD$0.50 per share, which was in line with expectations. The Canadian pipeline company said that crude shipments through its pipelines dropped by an average of 255,000 barrels per day in May and June because of wildfires, or about a 10 percent loss of volume.

Tuesday August 2, 2016

July saw the worst monthly loss for oil prices so far in 2016 and crude started off August right where they left off in July: oil prices sank 4 percent on Monday. WTI and Brent sank on Monday, briefly dipping below $40 per barrel before closing just above that key psychological threshold. The price declines technically pushed oil into bear market territory.

Oil company share prices dive. The oil majors took a beating last week, reporting disappointing earnings for the second quarter as low oil prices combined with shrinking refining margins inflicted damage on everyone’s balance sheets. The energy industry saw share prices drop once again on Monday as WTI and Brent sold off amid fears of ongoing oversupply issues. Energy stocks in the S&P 500 dropped by 3.4 percent, the worst single-day performance since June. Iraq reported high oil exports rose to 3.2 million barrels per day in July from its southern port in Basra, up from 3.175 mb/d in June. That might help OPEC report its highest level of oil production on record, a fact that added momentum to the selloff. Saudi Arabia also slashed the price for its oil heading to Asia. And in the U.S., the glut persists – at a time when oil and refined product inventories are supposed to be rapidly falling because of soaring summer demand, they are holding steady, sparking fears of another downturn.

Speculators grow more pessimistic. Hedge funds and money managers increased their short bets on crude oil, and sold off their long positions. In fact, hedge funds increased their short bets for the week ending on July 26 by the most ever. “The flow is solidly bearish,” Tim Evans, an energy analyst at Citi Futures Perspective, told Bloomberg. “It reflects a recognition that the market is, at least for the time being, oversupplied.” John Kilduff, founding partner of Again Capital, says oil is going to $35. Related: ISIS Hits Largest Oil Field in Kirkuk, Kills Five

Shale drillers won’t return until $60. Bloomberg reports that despite the nascent rebound in the rig count, many top shale drillers won’t return to the shale patch in a big way until oil prices rise to $60 per barrel. That is a safer price zone than the $50 per barrel that many had signaled they would be willing to live with. Bloomberg cites Pioneer Natural Resources (NYSE: PXD) as a prominent example of a company that was previously waiting for $50 per barrel before deploying rigs, who has now said they actually are going to wait until oil rebounds to $60. Other companies targeting $60 per barrel include Anadarko Petroleum (NYSE: APC) and Hess Corp. (NYSE: HES). Many companies have been burned several times, including last summer when a rally to $60 per barrel was followed by eight months of falling oil prices. This time around, they are going to be more cautious instead of reflexively returning back to the oil patch to drill once oil rises to $50 or even $55 per barrel.

Nigeria to pay militants to stop attacks. Attacks on Nigeria’s oil infrastructure this year are the result of the government’s decision to end its amnesty program that dates back a half decade, in which the government paid militants a stipend to keep the peace. When those payments dried up, the attacks resumed. Now, with Nigeria’s oil production down by about 700,000 barrels per day to 1.4 million barrels per day, the Nigerian government seems to be conceding that it cannot stop the violence without letting the payoffs resume. Bloomberg reports that the payments will resume while the government tries to negotiate with several militant groups in the Niger Delta.


Iran expected to approve oil contract. Iran is set to approve a new oil contract design on Wednesday, an overhaul meant to attract billions of dollars in international investment. “We are awaiting government approval due to be out on Wednesday,” Oil Minister Bijan Namdar Zanganeh said at an energy conference in Tehran on Monday. “Our priorities will be jointly owned oil and gas fields, as well as those in which we are after improved oil recovery.” Iran has managed to boost oil production from 2.8 million barrels per day in January when sanctions were lifted up to about 3.5 mb/d today. The next steps are to bring in international firms with capital and technical expertise. But that required tweaking some contract terms. It remains to be seen whether or not the reforms will do the trick. Related: Oil Prices Fall Below $40 As OPEC Ramps Up Output

Kuwait hikes gasoline prices by 80 percent. A shortfall in revenue is forcing Kuwait to raise its gasoline prices, by 30 cents per liter in September, which amounts to a roughly 80 percent increase. Kuwait was one of the last Gulf State to increase fuel prices to counteract shrinking revenues.

Libya moving to bring back 600,000 barrels per day. Libya’s National Oil Corporation announced that it would try to resume oil exports from a handful of critical export terminals on its coast, supporting a fragile deal between the unity government and the guards that effectively operate the ports and have kept them shut for a year and a half. The NOC says that it hopes to ramp up production to 900,000 barrels per day by the end of the year from the 300,000 barrels per day currently. It is not at all clear that such a lofty goal can be achieved in that timeframe, but new Libyan production would add to the woes for global oil markets.

By Evan Kelly of Oilprice.com

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Leave a comment
  • Tsoi on August 02 2016 said:
    Got to love the fools who invest in oil these days....today it is up, then down, then up and then down. Stupid considering the future of oil is doomed. LOL....hope you all lose your arse on this bet...you deserve it.

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