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Oil On Track To Balance Later This Year

Oil Rig Shale

When looking at this week’s key data for the oil and gas industry, we see a modest draw in U.S. crude stocks, and stagnating gasoline prices


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Friday, May 13, 2015

Oil prices held steady this week despite a rash of news that emerged. Canada lost more than 1 million barrels per day of oil production, but several oil sands companies are working with the Alberta government to bring at least some production back online as quick as possible. Oil prices took a breather though earlier in the week when it became apparent that the fires were held at a distance from most oil sands facilities. But, by Wednesday, prices ticked up again when the EIA reported a draw in crude oil stocks, combined with more losses in production. Related: EPA Launches New Methane Rules For Oil And Gas

EIA figures look bullish. Oil stocks fell by 4 million barrels last week, the first drawdown in more than a month. Weekly production figures dropped again, down another 23,000 barrels per day. U.S. oil production now stands at 8.8 million barrels per day (million b/d), down about 900,000 barrels per day from the April 2015 peak. The weekly declines have been extremely consistent, with drop offs only varying in degree. By all accounts, the losses will continue through the rest of the year.

Canada wildfires disrupt supplies. Cnooc’s Nexen Energy warned its shareholders and customers that it may not be able to fulfill contracts because of the outage at its facility. Nexen declared force majeure for its May production, joining at least three other companies. The supply disruptions are significant, amounting to well over 1 million b/d. But to reiterate, this disruption probably won’t last too long.

Nigeria supply outage. Although the volume of oil disrupted in Nigeria is smaller than in Canada, the problems facing oil producers in Nigeria are much more serious. The Forcados export terminal remains offline, blocking 250,000 barrels per day of exports. Several pipelines have been attacked by the militant group Niger Delta Avengers. The group attacked a platform operated by Chevron (NYSE: CVX), forcing supply offline. Royal Dutch Shell (NYSE: RDS.A) withdrew staff from some of its projects. Altogether, Nigeria has roughly 500,000 barrels per day offline, taking production down to more than twenty-year lows. Shell also declared force majeure on Tuesday for Bonny Light because of an explosion at a pipeline, shutting down the conduit. The outage could affect 200,000 barrels per day.

Separately, ExxonMobil (NYSE: XOM) said that mechanical difficulties at one of its drilling rigs damaged a pipeline that it operates in conjunction with the state-owned Nigerian National Petroleum Corp. (NNPC). The malfunction caused an oil spill and some supplies were interrupted. The problem adds to the long list of woes facing Nigeria, which is reeling from low oil prices and a floundering economy. Related: OPEC Is Dead, What’s Next?

Brazilian President impeached. Brazil’s Congress voted to move forward with impeachment proceedings, which means that President Dilma Rousseff is suspended from her post. The Vice President will take over while the proceedings take place, which could take about six months. The political turmoil in Brazil is adding to the economic troubles – Brazil is in its worst recession in more than 100 years. Petrobras reported a net loss of 1.25 billion reais ($360 million) in the first quarter, compared to a profit of 5.3 billion reais a year earlier. Oil and gas production fell 7 percent from year ago levels to just 2.44 million b/d. The company is facing a massive debt pile and an extremely challenging mission to sell off tens of billions of dollars in assets over the next several years. The change of government could lead to a rewrite of the oil laws, which could liberalize the regulations of the pre-salt, allowing for greater private sector investment.

Iran production up quicker than expected. Iran boosted oil production by 300,000 barrels per day in April, to 3.6 million b/d, its highest level of output in nearly five years. The IEA said in its monthly Oil Market Report that Iran has defied expectations, ramping up oil production much quicker than many expected.

Solid demand, falling supply, put markets on track to balance. The IEA also said in its report that the oil markets are on track to near balancing by the end of the year. The implied stock build – the volume of supply in excess of demand – will fall to just 0.2 million b/d by the latter half of 2016, down sharply from 1.3 million b/d in the first and second quarter. Oil demand grew at a 1.4 million b/d annualized rate in the first quarter, higher than the 1.2 million b/d the IEA had expected. But the Paris-based energy agency said a few headwinds could be on the horizon, as the IMF downgraded global growth for the year. As a result, the IEA’s 1.2 million b/d demand growth figure for 2016 remains unchanged. Related: Can Saudi Arabia Really Break Its Dependence On Oil?

Shell oil spill in the Gulf of Mexico. Shell spilled an estimated 2,100 barrels of oil into the Gulf of Mexico on May 12, leading to a sheen of oil near its Brutus production facility. Shell said it was investigating the cause of the spell but emphasized that it was not caused by a well blowout. Details are limited at the time of this writing, but Shell said in a statement that the spill had been isolated. “The likely cause of the sheen is a release of oil from subsea infrastructure and in response, we have isolated the leak and shut-in production," the company said in a statement. “No release is acceptable, and safety remains our highest priority as we respond to this incident.”

Three more bankruptcies. The U.S. shale industry saw three more bankruptcies this week – Chaparral Energy, Penn Energy (NYSE: PVA), and Linn Energy (NASDAQ: LINE). At least 130 North American oil and gas firms have fallen victim to bankruptcy since the beginning of 2015, according to Bloomberg, accounting for $44 billion in debt. Also, four firms owing around $8 billion in debt are coming close to bankruptcy – Breitburn Energy Partners and SandRidge Energy.

By Evan Kelly of Oilprice.com

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  • Bob on May 13 2016 said:
    Might be a good chance balance is coming quicker than expectations. There's also a chance the weekly EIA numbers are over estimating production. If you go back through 2015 and average out the weekly by month, it seems many if not most months averages were lower than the official monthly number they put out later.

    However looking at 2016 production amounts, the monthly average by week appeared higher. I might be way off but I'm guessing the EIA weekly models might have a bit of trend lag. Understating when production is rising and overstating when production is falling.

    So with lower US production, the disruptions mentioned, unplanned refining shutdowns alleviated, and if the US can get some crude\condensate exports moving, those reports of super high US inventory levels or even a world glut may not be around much longer.

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