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Oil Price Rally Ends As Banks Slash Forecast

Oil

After a month-long rally oil prices appear to have stagnated this week, although a falling rig count gave prices a slight boost on Friday. 

Friday, August 4, 2017 

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Oil price forecasts cut again. An array of investment banks have slashed their expectations for oil prices yet again. A Wall Street Journal survey of 15 investment banks revealed the third consecutive month of declining expectations for oil prices. An average of those forecasts sees Brent averaging $53 per barrel this year, down $2 per barrel from the June survey. They also forecast Brent at $55 per barrel in 2018, also down $2 from June. “In the very near term, we are cautious about prices, especially in September and October, when the seasonality of crude and product demand turns bearish,” Michael Wittner, chief oil analyst at Société Générale, wrote in a report.

Oil prices stall on downbeat data. WTI stalled out this week on several pieces of bearish data. U.S. oil production ticked up to 9.43 mb/d in the most recent EIA release, the highest production level in two years. Also, OPEC’s production rose again in July to its highest point in 2017.

Nigerian government makes progress in peace talks in Niger Delta. The Nigerian government has agreed to legalize small refineries in the Niger Delta, a key demand of community leaders. The Niger Delta is rife with illegal refining, but the government has agreed to grant small modular refineries in an effort to forge a stronger peace with militants in the region. The progress in peace talks bodes well for the country in its effort to bring more oil production back online. Nigeria is targeting 2 million barrels per day this month, up sharply from earlier this year.

Famed hedge fund shuts down on oil losses. Andy Hall, a notable oil trader, has decided to shut down his hedge fund because of steep losses it has incurred on oil trades. Astenbeck Master Commodities Fund II lost 30 percent of its value through June. The hedge fund bet that oil prices would climb this year on the back of the OPEC cuts. But the rebound of production from U.S. shale, as well as the return of Libyan and Nigerian production, has prevented a rally from occurring. Bloomberg says at least 10 asset managers trading in the energy and natural resources space have shut down funds since 2012.

Related: How Will The EU Respond To Fresh US Sanctions On Russia?

China to become top oil importer this year. China will overtake the U.S. as the world’s largest oil importer this year, having imported more crude than the U.S. in the first six months of the year (8.55 mb/d vs. 8.12 mb/d) for the first time ever. Part of the reason is the expansion of China’s refining industry, which is drawing in more crude even when domestic demand can’t keep up. The result is a rise of refined product exports from China. "China is putting a lot of pressure on the traditional export hubs of Taiwan, Korea and Singapore to capture the market share within Southeast Asia and Australia," Joe Willis, senior research analyst at Wood Mackenzie, told Reuters.

Trump signs Russia sanctions bill. The U.S. President signed new sanctions on Russia, Iran and North Korea into law this week, but only begrudgingly. The veto-proof legislation from Congress forced his hand, and the new law will heighten tensions with Russia. It slaps new sanctions on the involvement of oil companies in Russian energy projects, with the Nord Stream 2 pipeline a key project that has come under scrutiny.

Key metals see surging prices because of electric car demand. Lithium is one of the hottest commodities in the world right now because of surging demand for batteries in electric vehicles (EVs) and for energy storage. But other metals are also on the rise, including copper, cobalt, nickel, and aluminum. Cobalt prices are up 70 percent this year, copper is up 14 percent and aluminum is up 13 percent. The gains are expected to increase in the years to come as EVs capture more market share.

Fears of Venezuela default spike. Venezuela is careening towards default later this year as billions of dollars of debt come due. Both the Venezuelan government and the state-owned oil company PDVSA have enormous debt obligations maturing soon, and there is little cash left with which to pay. Between now and the end of the year, the government and PDVSA owe $5 billion, but according to S&P Global Ratings, the government probably only has about $3 billion left in foreign exchange. A default is looking increasingly likely. Related: Qatar Dispute Back To Square One

Shale industry eating itself. The U.S. shale industry might be drilling too much, with wells placed too closely together. The result of excessive drilling in close proximity could be contributing to a decline of productivity, which would permanently hamper the recovery of oil from these wells. As a result, the decline rate from wells already online is accelerating, jumping to 350,000 bpd each month. The data should raise red flags for the industry, which might be doing permanent damage to its long-term prospects.

Oil companies hedging again. As WTI moved up to $50 per barrel, a wave of hedging has reportedly taken place. “We’ve witnessed a lot of producer interest as WTI moved towards $50 a barrel,” Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA, told Bloomberg. The flatness of the futures curve recently indicates a surge in hedging, which means oil producers are locking in sales of their production for 2018. The hedging suggests new supplies of shale production will come online with greater certainty, as the hedged oil will be insulated from price swings.

E&Y: Price spike in 2020 overblown. A new study from E&Y finds the oil and gas industry on sounder footing than at any point in the past few years. The reserve-replacement ratio, which measures the industry’s ability to replace oil reserves that have been produced, is back near 100 percent, after several years below that key threshold. As a result, fears that the market would see a supply crunch around 2020 are “overblown,” E&Y says. Oil companies are finding more oil with less spending.

By Tom Kool for Oilprice.com 

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