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Oil Markets Optimistic As Oil Turns Lower

Oil storage

Oil rallied into the new year, supported by output cuts from Oman, Kuwait and Venezuela, but fell during the day on Tuesday as a result of a strengthening U.S. dollar.

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Chart of the Week

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• Commodity prices have had a rough few years, posting losses for much of the last few years. However, for many commodities, 2016 may have marked the beginning of another upturn.

• Spot prices for metals in the S&P Goldman Sachs Commodity Index (GSCI) rose 22 percent in 2016. Precious metals increased by 8 percent and agricultural prices climbed by 5 percent.

• But energy prices increased by more than any other commodity, rising by 48 percent last year.

• Commodity investors are hopeful that the gains portend another bull run for the sector, setting up 2017 to be a positive year.

Market Movers

Marathon Petroleum (NYSE: MPC) announced plans to accelerate its asset sales this year, with $1.4 billion of EBITDA to be put into a Master Limited Partnership, MPLX (NYSE: MPLX).

SM Energy (NYSE: SM) has agreed to sell off some Eagle Ford assets to investment firm KKR (NYSE: KRR) for $800 million. The move is consistent with the company’s strategy of divesting assets in order to concentrate efforts in the Permian Basin.

• BP (NYSE: BP) has declined to engage in the first round of agreements to develop oil in Iran, even as Royal Dutch Shell (NYSE: RDS.A) and Total (NYSE: TOT) move ahead. BP has the longest history in Iran out of any other major, but has passed on reentering the country at this time, citing more attractive opportunities elsewhere.

Tuesday January 3, 2017

Oil prices have started off the year on a positive note, surging by several dollars per barrel in the first trading days of 2017. WTI was up to $55 per barrel and Brent was edging closer to the $60-threshold, topping $58 per barrel on Tuesday morning, but the rally couldn't last long and oil prices reversed on Tuesday afternoon as result of a dollar breakout. The OPEC deal is now in effect, but it will take a few weeks to assess the progress of the oil cartel in cutting output. But the markets are feeling highly optimistic at the start of the year, a marked difference at this point in 2016.

Full agenda for new Republican Congress. The new session of Congress takes effect today, and with Republicans in full control of both chambers and an ally soon to take the White House, their agenda is chalk full with Republican priorities. While higher-profile controversies will dominate the headlines, such as the repeal of Obamacare, some energy items could move forward quickly and with less fanfare. Nominations to the key agencies will come early on, but other issues are slated to see action as well: a withdrawal from Paris Climate accord; scrapping a suite of Obama-era environmental regulations; and the approval of the Keystone XL and Dakota Access Pipelines, among other items. The next few months will see a flurry of activity from Washington, so investors need to keep an eye on the policy arena as a shakeup is coming.

Shell plans to shrink. After spending more than $50 billion to acquire BG Group last year, Royal Dutch Shell says that it will take a breather in 2017 and try to trim its size. The BG purchase was a very large wager on LNG export potential in Australia and East Africa, investments that will take years to come to fruition. It was also a play on offshore oil drilling in Brazil. But the price tag was hefty, and Shell’s total debt has mushroomed to $78 billion, much more than its competitors. As a result, Shell is now in a bind, and while company executives would argue that its growth prospects look good, they also feel the need to cut its debt pile, unload unwanted assets, and reassure investors that its dividend is not at risk. It should be much quieter year this year for the Anglo-Dutch oil major.

Top 2016 energy stocks were those that issued new shares during the downturn. Issuing new equity can be a risky move. Diluting shareholder value tends not to be received well and it also can be a sign of a company in need of cash. However, companies that issued new shares during the oil bust beat out much of the sector with higher returns for shareholders. The WSJ reports that more than 70 North American oil and gas companies issued about $57 billion in new equity in 2015 and 2016, and while some companies ultimately went bankrupt, the ones that survived offered the juiciest returns. Companies who sold shares over the past two years gained $13 billion in value in 2016, the WSJ reports.

Mexico sees gasoline protests. The Mexican government has moved to liberalize gasoline prices, which has led to painful increases at the pump for motorists. That has sparked protests at the beginning of 2017, with gas stations and fuel facilities seeing disruptions. The lifting of price controls was part of Mexico’s historic 2013 energy reform, ending Pemex’s monopoly on the sector. Related: An Open Letter To The U.S. Energy Secretary Nominee

Gazprom looks to Russian shale. Russian oil and gas companies have struggled with the most advanced technologies and drilling techniques, often relying on international firms to bring in technical expertise and capital. But joint ventures and with western companies were cancelled after the U.S. and Europe slapped sanctions on Russia in 2014 following the annexation of Crimea. That put a lot of Russian oil and gas potential on hold. However, the FT reports that Gazprom is looking to tap Siberian shale by itself. Gazprom is considered to be the Russian company with the most advanced drilling expertise, and it is looking to drill in the Bazhenov formation in Siberia, which could hold an estimated 75 billion barrels, making it the single largest deposit of shale oil in the world. To be sure, however, the drilling hopes are a long-term proposition – Gazprom hopes to produce just 40,000 bpd from the Bazhenov by 2023, but then ramp up that output by tenfold by 2030. With conventional fields in decline, the stakes are huge for Russia – and the global oil market.

Solar to be cheapest form of power within a decade. Bloomberg reports that solar power continues to get cheaper, and could be the cheapest source of electricity within a decade, and not just in the United States. Already, Chile and the UAE have broken records for the cheapest solar power on record at 3 cents per kilowatt-hour. Saudi Arabia, Jordan and Mexico have auctions this year, which raises the prospect of more record-shattering low cost agreements. “These are game-changing numbers, and it’s becoming normal in more and more markets," Adnan Amin, International Renewable Energy Agency ’s director general, an Abu Dhabi-based intergovernmental group, told Bloomberg. "Every time you double capacity, you reduce the price by 20 percent.”

Rising oil prices mean rising gasoline prices. Gasoline prices are already creeping up in the U.S. as crude has gained steam, but further gains could be coming as the country shifts into higher seasonal demand in warmer months. Some analysts see a 20 percent increase in gasoline prices in the spring. "There will be a spike and everyone will be talking about it and it will probably be between Easter and Memorial Day," Tom Kloza, global head of energy analysis at Oil Price Information Service, told CNBC. That would put national prices at roughly $2.75 to $2.85 per gallon, he said, up from the $2.31 per gallon national average this past week.

By Evan Kelly of Oilprice.com

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