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Evan Kelly

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Oil Market Knee-Jerk Reaction To Nuclear Deal Unjustified

A group of exhausted diplomats did the unthinkable. The P5+1 countries and Iran came to a massive and historic framework agreement over Iran’s nuclear program, paving the way for a final deal to be hashed out before the real deadline in June. Negotiations went past the self-imposed March 31 deadline and despite sinking optimism on April 1, all parties managed to overcome enough of their differences to hammer out the outlines of a deal. Iran’s ability to build a nuclear weapon will be hampered, and crucially for oil markets, Iran is within reach of receiving relief from western sanctions.

It is unclear how quickly Iran will be able to ratchet up its oil production, however, even if a deal is forged. Reviving some of its battered oil fields will require international investment. To be sure, Iran is an enormous prize for the oil majors, but there will likely be a lag between sanctions relief and actual investment. Iranian President Hassan Rouhani has courted foreign oil companies, but even if sanctions are removed, oil companies will think twice before they jump in. That’s because the U.S. insists on a mechanism of having sanctions “snap back” into place if Iran does not live up to its side of the deal. For oil companies thinking about pouring billions of dollars into a country, the possibility that sanctions will snap back presents enormous risk. After only recently having seen what happens when international sanctions are brought down like a hammer – ExxonMobil had to pullout of a major drilling project in Russia last year because of sanctions – the industry will take its time. Consequently, despite the historic agreement – a very important development indeed – the flood of Iranian oil will likely take quite a bit of time before it begins flowing. Related: Oil Rebound May Come Sooner Than Expected

Nevertheless, oil prices fell on the news with Brent down nearly 5 percent. The Iran effect on prices may be temporary however. More important for the medium term is the news that the U.S. finally saw the beginnings of a real cut back in oil production. The EIA reported this week that production fell by 36,000 barrels per day. It is too soon to say whether or not the record levels of oil production are reversing course in a sustained way, but with rig counts down by around 40 percent, it is unlikely that output will rise any further. The big question is when and how significantly U.S. shale production begins to fall. As supply adjusts downwards oil prices could finally rebound.

The rebound may not come in time for a series of distressed firms however. Bankruptcies among the weakest drillers are starting to rise. Dune Energy Inc, BPZ Resources Inc., Endeavour International Corporation, and Quicksilver Resources have all filed for bankruptcy protection. At least two others – American Eagle Energy Corp. and Samson Resources Corp., have also warned they are nearing bankruptcy. More are in the offing, as oil prices remain subdued and cash flow falls woefully short of what is needed to keep drillers afloat. The situation could grow worse this month as credit lines are starting to be slashed by banks. With a vital flow of funding severed, drillers who are currently treading water could go under. Related: Oil Prices To Fall Or Fly Depending On Iranian Nuclear Talks

A new report from the Natural Resources Defense Council finds that oil and gas companies committed 2.5 legal violations per day on average between 2009 and 2013 in several states. The study looked at West Virginia, Colorado, and Pennsylvania, where regulators issued over 4,600 citations over that time period. The violations related to the construction of wells, the disposal of wastewater, cracks and ruptures in pipelines, and more. The report offers a window into the frequency of drilling mishaps and spills, with most of the citations taking place in Pennsylvania.

TransCanada (NYSE: TRP) is delaying its completion date for an ambitious plan to bring Alberta oil sands to the east coast. The company is scrapping its plans to build an oil export terminal in Quebec after controversy over the project’s effects on Beluga whales. Still, TransCanada insists it is a small setback for the $12 billion campaign to transport heavy oil over 4,600 kilometers. The oil will be refined at east coast refineries and/or exported. It may be just a “hiccup,” as New Brunswick’s Energy Minister Donald Arseneault put it, but TransCanada says the project won’t be completed until 2020 at the earliest.

Royal Dutch Shell (NYSE: RDS.A) cleared an expected, although significant hurdle this week when the U.S. Department of Interior validated a 2008 lease sale for Shell’s acreage in the Chukchi Sea. The decision held up a review of Shell’s Arctic drilling campaign. Now, Interior can resume the regulatory analysis. Shell is still confident that it can obtain all the requisite permits before the 2015 drilling season begins this summer. Related: Who Benefits Most From Cheap Oil?

Meanwhile the state of California is rapidly running dry. The state took the extraordinary measure this week of mandating cuts in water consumption. Governor Jerry Brown ordered households to ration water with the goal of reducing water use by 25 percent over the next 9 months. However, despite the crack down at the residential level, the state exempted agriculture and oil and gas. In any event, snow pack is at 5 percent of historic levels, the lowest on record. That could lead to a dramatic reduction in electricity generated from hydropower in the state. Even worse, California is entering the dry season with no end in sight to the drought.

Petrobras, the state-owned Brazilian oil company, secured $3.5 billion in financing from China’s Development Bank this week in a desperate attempt to keep its operations funded. The rot that has spread throughout the Brazilian firm was only recently exposed. The most indebted oil firm in the world, Petrobras is now buckling under the weight of low prices and skyrocketing costs related to a vast corruption scandal. Petrobras has failed to disclose its financials since the third quarter of 2014, resulting in credit agencies dropping Petrobras’ rating down to junk. Now, cut off from international financial markets, Petrobras has turned to China for help. The funding highlights Petobras’ troubles, mirrored by Brazil’s broader economic weakness due to the worldwide commodity bust. Once held up as a major global oil player, Petrobras will likely grow more reliant on Chinese finance. For its part, China hopes to take larger stakes in Brazilian oil projects as Chinese oil companies like CNOOC and PetroChina try to build themselves up into world-class offshore companies in the way that Petrobras has previously done.

By Evan Kelly of Oilprice.com

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  • Crude on April 04 2015 said:
    Think there's plenty of investors in the region that might be interested like russia/china

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