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Oil Markets Are Balanced But Bracing For Brexit

Brexit

This week’s key data from the oil and gas industry shows that fears of a Brexit continue to weigh on oil, as the dollar strengthens due to market uncertainty. We also see the rig count continue to climb, although still at a relatively slow rate.

(Click to enlarge)

(Click to enlarge)

Chart of the Week

• The Bakken in North Dakota saw natural gas production explode over the past decade, and because of inadequate pipeline and processing infrastructure, natural gas flaring also surged.

• But since the collapse of oil prices two years ago, flaring has fallen substantially, both in percentage terms and on an absolute basis.

• As of March 2016, the industry flared 10 percent of the natural gas produced in the U.S., down by about one third from early 2014 levels. Much of that has to do with the sharp decline in drilling.

• But state regulators are also requiring the industry to steadily reduce flaring, with targets set to tighten from a maximum of 23 percent of production allowed in the first quarter of 2016, down to 9 percent by 2020.

Market Movers

• Largest airlines missed their chance to lock in cheapest jet fuel prices in 12 years, according to Bloomberg. Delta (NYSE: DAL), United Continental (NYSE: UAL), American (NASDAQ: AAL), and Southwest Airlines (NYSE: LUV) declined to secure contracts earlier this year when fuel was at its cheapest. Since January, jet fuel prices have jumped more than 80 percent.

Suncor Energy (NYSE: SU) reportedly told employees that the wildfires that spread in and around Fort McMurray will cost the company $1 billion. Suncor is Canada’s largest oil producer and was forced to shut down a sizable portion of its production for weeks and is only now working to bring output back to pre-fire levels.

BP (NYSE: BP) and Russia’s state-owned Rosneft (OTC: RNFTF) announced a decision to create a joint venture to explore for oil in eastern and western Siberia. BP will put in $300 million to the JV, which it will hold a 49 percent stake in to Rosneft’s 51 percent. The JV will explore in the West Siberian and Yenisey-Khatanga basins.

Tuesday June 21, 2016

Brexit week. Oil prices retreated in mid-June as the rising likelihood of a Brexit raised concerns about the economic fallout in Europe. The prospect of a Brexit also strengthened the dollar as major currency traders moved out of the sterling and euro into the safe haven of the U.S. dollar, depressing oil prices. But since the tragic murder of a British MP at the hands of an apparent Brexit fanatic, the markets are betting that the “Remain” camp could prevail. Oil prices and global equity markets jumped at the end of last week, with WTI and Brent up by more than 4 percent on Friday. Related: Oil Rallies With Risk-On Rebound

Iran boosts oil exports, but further gains much more difficult. Iran has shocked analysts’ expectations on its rapid resurgence in oil production and exports this year following the removal of international sanctions. Production has climbed by 25 percent from roughly 2.8 million barrels per day to 3.5 million barrels per day. Iranian officials have targeted 4 million barrels per day of output before the year is out. Antoine Halff, a senior fellow at the Center on Global Energy Policy at Columbia University, told Bloomberg that although Iran has surprised global oil markets up until now, further production increases will be much more difficult to achieve and exceeding “pre-sanctions levels would require investment and technology and that’s a much longer-term proposition.” Iran wants to attract $100 billion in investment from international oil companies but the extent to which it can achieve that goal depends on the stability of its new oil contract model as well as assuring oil companies that they won’t be vulnerable to reprisals from western governments for doing business in Iran. Either way, in the near-term, Iran could have trouble keeping up its impressive streak of production gains.

Iraqi forces retake Falluja. In a sign of progress in war-torn Iraq, security forces retook the city of Falluja in recent days, which had been under ISIS control for two years. The city, located a few dozen miles from Baghdad, had been an ISIS stronghold. The progress in rolling back ISIS bodes well for Iraq’s security situation, although thousands of refugees have fled the city, presenting a potential humanitarian disaster. However, the largest threat to the country’s ongoing success at ramping up oil production, at this point, is financial distress. The inability of the central government in Baghdad to finance larger investments in Iraq’s southern oil fields could lead to stagnation beginning this year.

Pioneer Natural Resources to issue new stock for acquisition. Pioneer Natural Resources (NYSE: PXD) announced last week its decision to purchase 28,000 net acres in the Midland Basin for $435 million from Devon Energy (NYSE: DVN). The acreage currently produces about 1,000 barrels of oil equivalent per day. To finance the transaction Pioneer said that it would issue 5.25 million common shares. The move caused the company’s share price to fall more than 5 percent. Related: How The Brexit Vote Will Impact Oil Prices

China renegotiating Venezuela’s debt. China continues to offer some leniency to Venezuela on its massive pile of debt, over fears of an unraveling of the South American country. China has loaned Venezuela over $65 billion since 2005, but has since extended repayment schedules because of Venezuela’s increasingly precarious financial position. China is also negotiating with the opposition in Venezuela, hedging its bets in case the government of Venezuelan President Nicolas Maduro falls – China hopes any successor government of Maduro will honor the debt owed to China. Some sort of debt restructuring could be unavoidable, however, given that Venezuela is unable to pay. Venezuela’s economy is in freefall and the situation continues to spiral downwards.

Hedge Funds cut long positions in oil. Money managers have cut around 10 percent of their net long positions in crude futures, a sign that the latest rally may be in stoppage time already. Net long positions reached near record levels in May. According to Reuters, this latest one-week cut in net long positions is the biggest one since July 2014. Although it seems that from a fundamental perspective, oil’s risks appear balanced out, market uncertainty and oversupply concerns have resulted in a bout of profit taking, leading to further downward pressure on oil prices.

Russia again China’s top crude supplier. For the third consecutive month, Russia has beaten Saudi Arabia as China’s top crude supplier. According to data from the Chinese customs, Russia exported 1.24 million barrels per day, while Saudi Arabia exported just below 1 million barrels per day. Especially Russia’s low-sulphur ESPO grade blend did well. Reuters describes the smaller cargo size and geographical proximity as positive characteristics for the blend as Chinese teapot refiners are well equipped to work with this particular crude blend and cargo size. The so called Chinese teapot refiners have significantly boosted Chinese demand in the first 5 months of this year, contributing to the bullish sentiment that led to higher oil prices.

By Evan Kelly of Oilprice.com

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