Oil prices are rallying as speculators close out short bets, but as Libya continues to bring production back online, it is unclear how solid these gains are.
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Friday, June 30, 2017
Oil prices posted strong gains this week, largely from speculators closing out short bets. Hedge fund and other money managers had built up a record volume of bearish bets on crude over the past month, and it appears that a liquidation of them has driven crude prices higher. The big question is whether or not that gains will continue. Dennis Gartman of The Gartman Letter told CNBC that the latest rally is a “dead cat bounce” that won’t last. But others are hoping that the recent selloff went too far and that the gains are here to stay.
EIA figures show drop off in production. The weekly EIA data provided a huge boost to the morale of oil bulls this week, showing a massive drop in U.S. oil production by 100,000 bpd. To be sure, the release is one data point, and should be taken with a grain of salt. But if the EIA posts successive production declines in the weeks ahead, it would go a long way to easing the fear among oil traders. The production decline allowed traders to look past the lack of an inventory drawdown – oil prices moved up on the news.
Goldman slashes oil price forecast by $7.50 per barrel. This week, Goldman Sachs lowered its three-month estimate for WTI prices from $55 per barrel to $47.50, citing higher production from Libya and Nigeria, as well as the ramp up in U.S. shale drilling. Nonetheless, the investment bank says that the oil market is still moving towards balance, even if slowly. Inventories are falling, demand is rising, and OPEC could do more to cut – and Goldman says it should. Related: Will Central Banks Derail The Shale Boom?
Asian demand to pick up. Reuters reports that low prices are likely to lead to higher crude purchases from Asia. Oil has piled up in the Atlantic Basin, leading to fears of too much supply, but lower prices will spark greater demand. It is a small sign that things might not be as bad as they seem.
Libyan production approaches 1 million barrels per day. Libya’s output has broken a new multi-year high, rising above 950,000 bpd, according to Reuters. That’s up from 935,000 bpd last week. A Libyan source told Reuters that production is fluctuating and coming “close to” 1 million barrels per day. Rising Libyan output is undermining the effectiveness of the OPEC deal.
Keystone XL no longer needed. The Wall Street Journal reports that TransCanada (NYSE: TRP) is having trouble finding customers for the capacity in its proposed Keystone XL pipeline. TransCanada has already spent $3 billion on materials, land rights and legal fees, with little to show for it. The support from the Trump administration may not matter if it can’t ink deals with customers. The 830,000 barrel-per-day pipeline would cost $8 billion and TransCanada says it wants to secure sales for 90 percent of the pipeline’s capacity before it moves forward. But refiners along the Gulf Coast are not as desperate for high-cost Canadian crude anymore, particularly since the U.S. is awash in oil. Still, TransCanada says it is still confident it can find buyers.
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BHP Billiton admits $20 billion shale bet was a mistake. BHP’s (NYSE: BHP) chairman said that the $20 billion that the company spent on U.S. shale in 2011 was a bad move. "In terms of shale, if you had to turn the clock back, and if you knew what we knew today, you wouldn’t do it," BHP’s Jacques Nasser said. "The timing was way off." The mining giant has been under pressure to review its oil and gas holdings, which critics say has bled the company of around $40 billion in shareholder value. “We acknowledge that the acquisitions that took us into this business were poorly timed, that we paid too high a price, and that early on the very rapid pace of development was not optimal,” BHP’s CEO Andrew Mackenzie said on a call last month. “It was too quick. And we’ve learned that lesson.”
Imbalance between heavy and light oil markets. OPEC produces a heavier and sourer form of oil while the U.S., Libya and Nigeria produce lighter and sweeter varieties. This difference is leading to tighter supply conditions in the medium sour market while a glut persists in the light sweet market, according to S&P Global Platts. The disparity presents a dilemma for OPEC. Deeper cuts will tighten the medium sour market further, but it would have a diminished effect on global oil prices, which are more closely linked to light oil. Also, global refiners are switching to lighter forms of oil to take advantage of abundant supply, meaning that OPEC risks losing more customers if it makes deeper cuts. Related: Only $60 Oil Can Save The Aramco IPO
North Sea drilling activity is “depressed.” According to Wood Group, a UK-based oilfield services company, work in the North Sea is drying up with little hope for a rebound. The company reported a “significant” drop off in projects as the North Sea is a high-cost area for oil production and “the prospects for any improvement in that are very limited.”
BP writes off $750 million in Angola assets. BP (NYSE: BP) said on Thursday that it will write off $750 million worth of assets in Angola as part of its second quarter figures due to poor exploration results. BP said it would give up its 50 percent stake in a gas discovery.
ISIS on verge of defeat in Mosul. Iraqi and U.S. officials said that ISIS is being driven out of Mosul and is nearly defeated in the whole of Iraq. Security forces recently took control of a mosque where ISIS initially proclaimed a caliphate back in 2014. “We are seeing the end of the fake Daesh state,” Iraqi Prime Minister Haider al-Abadi said on Twitter, referring to ISIS. “The liberation of Mosul proves that. We will not relent.” The news is positive for Iraq’s stability in the durability of its oil production levels.
By Tom Kool for Oilprice.com
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Can't blame the EIA though. They are being tricked by privately stored oil built up over the last few years being dumped into the market after the contango narrowed and prices went up. They just guess if it's coming consistently enough that it's real new production.