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Oil Prices Rise Amid Falling U.S. Rig Count

Oil prices inched higher on…

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India’s Urban Explosion Boosts Oil Demand

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Oil Markets Disappointed By Production Freeze

Oil Markets Disappointed By Production Freeze

We will begin this week with a quick look at some of the critical figures and data in the energy markets, we will then introduce some key market movers and, finally, provide an analysis of the top news events in the global energy complex this week.

(Click to enlarge)

Chart of the Week

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• U.S. oil production is only inching downwards, despite the dramatic crash in prices.

• Part of the reason is because of the steadily increasing initial production rates (IPR), which the EIA measures in the first month’s worth of output. EIA data shows that the IPR of shale wells has steadily jumped every year over the past decade, including through 2015, even as prices collapsed.

• That allowed shale producers to keep production elevated, only falling slightly despite the precipitous fall in the active rig count.

• Nevertheless, overall output is falling with rig counts down over 65 percent since late 2014. Related: Oil Prices Gain As Rumors On OPEC Cut Continue To Circulate

Market Movers

• BP (NYSE: BP) agreed to expand its agreement with the state-owned oil company of Oman to explore for natural gas. BP agreed to add more acreage to the Khazzan $16 billion project, which it will develop in conjunction with Oman Oil Co. The two sides will decide on the final go-ahead by 2017. The project is expected to produce 1.5 billion cubic feet of natural gas per day, equivalent to 40 percent of Oman’s current production.

• Moody's Investors Service downgraded eight of the first 11 oil and gas companies that it reviewed since it announced in December that it would put 29 firms of for a possible downgrade. The list included Unit Corp. (NYSE: UNT), Range Resources Corp. (NYSE: RRC), Newfield Exploration Co. (NYSE: NFX), QEP Resources (NYSE: QEP), Energen Corp. (NYSE: EGN), SM Energy (NYSE: SM), WPX Energy (NYSE: WPX), and Whiting Petroleum (NYSE: WLL). Moody’s confirmed the ratings for Antero Resources Corp. (NYSE: AR), Concho Resources (NYSE: CXO), and Hilcorp Energy.

• A combined $12 billion in dividend payouts from the world’s largest oil and gas companies could get cut this year, according to an estimate from Markit. That will drop global dividend payouts by 9 percent to $147 billion.

Tuesday February 16, 2016

It is yet another week in which rumors of an OPEC cut swirled around the oil markets. The difference this time, however, is that the rumors are backed up by a bit more substance.

OPEC-Russia deal. OPEC confirmed on Monday that the energy ministers from Saudi Arabia, Russia, Qatar, and Venezuela met in Doha, news that sent oil prices up. On Tuesday, the group emerged with a deal: a freeze on January production levels, but not an outright cut. The deal would also be contingent on all OPEC members agreeing to the plan.

Despite the news, the deal falls short of what the oil markets had been hoping for. Moreover, it is also unclear whether or not all parties will sign on. On the one hand, a production freeze is unambitious – it merely freezes output at near record levels for most countries. Worse, even a weak deal faces hurdles to implementation. The biggest outstanding question is whether or not Iran would agree to limiting its production just as it finally shook off years of sanctions. Iran had previously announced plans to increase production by 500,000 to 1 million barrels per day (mb/d). It is hardly in its interest to cap production now.

Even if Iran adheres to the deal, the production freeze may not ease the glut. Judging by the reaction in the markets – oil prices staged a brief rally but the gains were quickly erased as reality set in – oil traders are disappointed with the outcome. Related: UAE Offers India Free Oil To Ease Storage Woes

Iran oil exports to Europe. Meanwhile, on Monday, Iran began shipping oil to Europe for the first time in years. Europe was a significant market for Iran before the harsher 2012 sanctions cut off the trade. Iran is looking to claw back some of its old market share that it lost in the intervening years to Saudi Arabia and Russia. Also, the WSJ reports that the CEO of GE Oil & Gas visited Iran recently, which appears to be the first executive from an American energy company to do so. There are still some remaining sanctions from the U.S. government on Iran, which has kept most American companies at bay.

Paragon Offshore bankruptcy. Paragon Offshore, an oilfield services company, became the latest to declare bankruptcy. Last Friday the firm said that it would restructure $2.7 billion of debt. Service companies have been among the hardest hit during the downturn as upstream companies scrapped nearly all of their drilling operations. Paragon had a fleet of 40 rigs, but with a shrinking number of explorers willing to contract them out, the company’s revenues plunged.

UK oil field excites. In the UK, a closely watched oilfield near Gatwick airport showed impressive oil flows. UK Oil & Gas Investments (LON: UKOG) reported that oil flowed “naturally” to the surface without needing to hydraulically fracture the well. At a rate of 463 barrels of oil per day, UKOG’s well made headlines. The company’s share prices briefly surged 77 percent on the news, and as of midday trading on Tuesday, its stock was up more than 60 percent from its opening price on Monday.

U.S. Supreme Court. The death of U.S. Supreme Court Justice Antonin Scalia could have a major impact on the survival of the EPA’s Clean Power Plan. The court only recently issued a stay on the regulations until it had a chance to rule on their legality. The unusual move suggested the court would not rule in the EPA’s favor, but the untimely death of Justice Scalia increases the chances that President Obama’s signature climate change rules will survive. Related: A Market Collapse Is On The Horizon

Japan’s negative interest rates. In Japan, the central bank’s negative interest rate policy took effect on Tuesday. The policy is intended to juice the economy and head off deflation, a problem that Japan has been dealing with for two decades. The Japanese central bank will charge banks 0.1 percent to hold deposits. Part of the Japanese government’s plan to improve the economy is to weaken the yen, which has provided a boost to exports. Negative interest rates should also increase lending and spending. But the policy is not without risks. Negative interest rates are hugely negative for Japanese banks, and the surprise announcement two weeks ago has undermined confidence in the health of the economy and contributed to a fall in the stock markets.

In recent years, Prime Minister Shinzo Abe has pushed aggressive monetary and fiscal stimulus, an approach dubbed “Abenomics.” So far, the results have not been decisive. Exports have improved, but the economy is still stagnant. GPD actually contracted by 1.4 percent in the fourth quarter, worse than expected. “It’s getting clearer that Abenomics is a paper tiger,” Seiya Nakajima, chief economist at Office Niwa, a consultancy, told The Guardian. Readers probably do not need to be reminded that as the world’s largest importer of LNG, and also a huge consumer of coal and oil, a weak Japanese economy has significant effects on energy markets.

EU energy security. The European Commission released a proposal on Tuesday that would call for more centralized authority over energy deals. The idea would be that bilateral natural gas deals between any EU member and a third party – no doubt Russia is the country that the Commission had in mind – would require the approval of the EU Commission. The proposal likely comes as a reaction to the controversial Nord Stream Pipeline expansion, a pipeline that carries Russian gas to Germany. Germany is the largest importer of Russian gas, and the pipeline expansion raised a lot of ire among more Russian-skeptic EU nations. The move sparked criticism because it flies in the face of the EU’s stated goals of energy diversification. The Commission’s proposal will likely be opposed by Germany.

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