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Oil Markets On Edge Ahead Of Pivotal U.S. Election

Trump - Clinton

We begin with a quick look at some of the critical figures and data in the energy markets this week, which show that oil prices have steadied on the eve of the election, while natural gas prices plunge.

(Click to enlarge)

(Click to enlarge)

Chart of the Week

• In 2015, U.S. oil production averaged 9.42 million barrels per day, the highest annual average since 1972.

• Production rose the most in Texas, not surprising given the drilling rush in the Permian Basin. Texas produced 3.46 mb/d in 2015. But several projects came online in the Gulf of Mexico, making it the runner up for the largest output gains.

• U.S. output was down to about 8.7 mb/d as of August 2016.

Market Movers

• The Russian government signed a decree to sell 19.5 percent stake in Rosneft. Rosneft itself will purchase the interest, which will give the government much needed resources to plug a budget deficit. Rosneft has plans to privatize some of those shares, with plans to sell them off in 1Q2017.

Eni (NYSE: E) plans to keep capex low through 2017, after posting a worse-than-expected loss for the third quarter. The Italian oil company thinks that it can break even at $50 per barrel.

Total (NYSE: TOT) and CNPC are expected to sign a $6 billion deal with Iran to develop a phase of the South Pars offshore natural gas field. The deal will be the first of its kind under the overhauled Iranian oil and gas contracts.

Tuesday November 8, 2016

Oil prices gained ground on Monday following a bit of positive news from OPEC about the potential for a late-November deal (more on that below). But oil gave up some of those gains on Tuesday and hovered around the $45 per barrel range. Related: The Toilet Paper Crisis: Angola’s Oil Firm Can’t Supply The Basics

Election uncertainty. The financial markets rallied a bit on Monday due to the improved chances of a victory for Democratic Candidate Hillary Clinton in the U.S. Presidential election. But for oil and gas, there is a lot of uncertainty no matter who wins the White House. As E&E News reports, there are an array of industry issues under litigation or in regulatory purgatory, such as the Interior Department’s fracking rule, public lands leasing for drilling, the Clean Power Plan, the Dakota Access Pipeline, Arctic drilling, Atlantic drilling, and more. While Trump is viewed as more friendly on these issues, he also does not appear to have a desire to prioritize any of it, and his anti-trade rhetoric has rattled some in the oil and gas industry. The bottom line is that either candidate is going to be unpopular, dealt a weak mandate, and will preside over a deeply divided country. That could make legislative efforts difficult, which means that the real action will be on the regulatory side of things and at the relevant federal agencies, such as the EPA, Interior Department, and Energy Department.

OPEC agrees on data. Overcoming one of the sticking points holding up a deal to cut production, OPEC says that its members have agreed to use “secondary sources” data for calculating production levels. The news is a small but positive sign that the cartel is inching closer to a deal. On the other hand, Saudi Arabia reportedly threatened Iran with a price war if Iran did not agree to freeze production. Reuters reported that Saudi Arabia threatened to ramp up production to between 11 mb/d and 12 mb/d, a move that would crash prices once again, perhaps even below the previous low reached earlier this year at $27 per barrel. That might be enough to scare Iran into agreeing to freeze or cut production, in which case, oil prices could rise at the end of the month back to the $50s.

OPEC sees low prices persisting. OPEC released its annual World Oil Outlook on Tuesday, and one thing that jumped out was the group’s prediction that OPEC’s basket price (ORB) will not hit $60 per barrel until the end of the decade. Beginning with an average price of $40 per barrel this year, OPEC sees its basket price gaining $5 per barrel each year over the medium-term, topping $60 per barrel in nominal terms by 2020. The price forecast for 2020 is $20 per barrel lower than last year’s prediction. On the bullish side of things, cheap prices will lead to higher demand than originally expected. OPEC revised up its oil demand figures, expecting demand to hit 99.2 million barrels per day by 2021, 1 mb/d higher than last year’s estimate. But overall, the report was somewhat bearish. OPEC said that it originally thought that the past two years of low oil prices would stoke economic growth in consuming countries. But because that outlook has not played out, the rebound in prices is taking much longer than expected.

Earthquake hits Cushing, OK oil hub. A magnitude 5.0 earthquake rocked Cushing, Oklahoma, the home of a key oil hub in the United States. Cushing is home to the WTI benchmark, a network of oil pipelines, and large crude storage facilities. The earthquake forced the temporary shutdown of pipelines in the area, but no damage or injuries were reported and operations resumed. Earthquakes are on the rise in the state, with a large degree of blame for the seismic activity put on oil and gas disposal wells. Related: Terrible Timing: Canada’s Carbon Tax Troubles

Alberta could finally get a pipeline. The government of Canadian Prime Minister Justin Trudeau approved a marine protection plan this week, which many view as a precursor to the approval of a major oil pipeline to the Pacific Coast. While a few pipelines are on the drawing board, the one that is expected to get the greenlight is Kinder Morgan’s (NYSE: KMI) Trans Mountain pipeline expansion, which would triple the volume of oil through the pipeline, carrying more Alberta oil to the Pacific Coast. The Trudeau government is expected to decide before Dec. 19.

Frac sand costs rise. Reuters reports that frac sand miners are raising their prices as drilling activity is picking up pace. More demand for frac sand – both because of more drilling but also because companies are deploying more sand per well to boost output – is putting a squeeze on sand supply, allowing miners to hike prices. The move is a sign that drilling activity is rebounding. But the flip side of that equations is that some of the cost savings achieved over the past two years could be fleeting, as the cost of services rises again.

Gasoline consumption spikes. Cheap gasoline led to a new monthly record for demand at 9.7 million barrels per day in June 2016, breaking the previous record of 9.6 mb/d set in July 2007. Improvements in fuel efficiency over the past few years were not enough to prevent the new all-time high, but the rise in fuel consumption was less than the increase in actual driving, so improved fuel efficiency did offset some of the increase.

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