Oil Prices Bounce On OPEC Hopes

Oil prices rebounded strongly on Friday on comments from Russian President Vladimir Putin. A rising U.S. rig count couldn't keep oil from rallying.

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Friday, September 2, 2016

Oil prices had a bad week, falling on persistent concerns about a glut in crude oil and gasoline. Crude stocks climbed once again, news that sent oil prices tumbling midweek. On the other hand, U.S. oil production continues to fall, dipping by another 60,000 barrels per day last week. Also, the EIA confirmed monthly figures for June at 8.7 million barrels per day, which was just shy of a 200,000 barrel-per-day decrease from May. The rig count may be up, but the slide in U.S. oil production has not visibly come to a halt yet. Still, while supply and demand continue to adjust in fits and starts, the slowness of the process repeatedly catches the markets by surprise and frustrate oil bulls.

OPEC deal looks more likely. Although crude prices performed poorly, the OPEC production freeze deal received a strong boost this week, with several comments from crucial sources in favor of a deal. Iraqi Prime Minister Haider al-Abadi voiced his support for the deal. Saudi Arabia’s foreign minister said at a conference in Tokyo that his country should support a deal if other OPEC members agree to one. And by September 2, the freeze deal had received the support of Russian President Vladimir Putin, who said that Russia would participate if they could all agree. Taken together, OPEC and Russia produce half of the world’s oil. The barrage of comments from OPEC and Russian officials suggest that all parties are warming to the idea of a freeze. They had come close to that agreement in April in Doha, but Saudi Arabia pulled out at the last second, a move interpreted as a decision by the young Deputy Crown Prince’s unwillingness to do anything to aid Iran. This time around, sentiment appears to be changing, increasing the odds that OPEC and Russia agree to something on paper in Algeria later this month.

BP reaches second deal with China’s CNPC over shale gas. BP (NYSE: BP) is raising its bet on China’s shale gas revolution, inking another exploration deal with the state-owned CNPC. China is thought to have the largest shale gas deposits in the world but has been so far unable to tap them in a significant way. BP’s fellow oil majors, Royal Dutch Shell (NYSE: RDS.A) and ConocoPhillips (NYSE: COP), have pulled out of previous deals to explore for shale gas in China after being frustrated with their results. Although the financial details were not disclosed, CNPC will maintain operational control, but the deal covers an additional block that sits adjacent to existing partnership. Despite having 68 percent more technically recoverable shale gas reserves than the U.S., China’s geology is said to be much more complex and expensive to unlock. On top of that, water scarcity and a lack of infrastructure also bedevil exploration companies. But while BP’s competitors have thrown in the towel, the British oil giant is doubling down.

ExxonMobil playing long game on LNG. The market for LNG is oversupplied and arguably in worse shape than that for crude oil. LNG prices have crashed as a wave of new LNG export terminals have come online. Prices are expected to remain depressed through the rest of the decade and companies are cancelling projects on the drawing board. But not ExxonMobil (NYSE: XOM), which sees robust demand for LNG over the long-term. Exxon spent between $2.3 and $3.6 billion for InterOil’s natural gas assets in Papua New Guinea in July, which can be viewed as a long-term bet on LNG. Bloomberg reports that Exxon is also in talks to purchase gas assets in Mozambique. Both moves seek to capitalize on growing demand for LNG in Asia over the coming decades.

Enbridge Energy Partners cancels major pipeline project. Enbridge Energy Partners (NYSE: EEP) scrapped its plans for the Sandpiper pipeline, a 616-mile oil conduit that would have run from North Dakota to Wisconsin, carrying Bakken crude. The Canadian company said that because of the collapse in oil prices, the pipeline is no longer needed. It could still return to the project if and when oil prices rebound and North Dakota needs the takeaway capacity, but Enbridge does not foresee that happening within its current five-year plan. Related: The Biggest Wildcard For Oil Prices Right Now

SandRidge Energy files for bankruptcy. The Oklahoma oil and gas driller SandRidge Energy filed for bankruptcy protection earlier this week, another victim of low oil prices. A week earlier Linn Energy also sought bankruptcy protection.

Natural gas prices fall on inventory build. Natural gas stockpiles grew by 51 billion cubic feet last week, surprising consensus estimates. Natural gas prices fell by more than 3 percent on the news. The larger-than-expected increase in storage levels suggest that either demand is weaker than expected or that gas drillers are producing more gas than expected.

Russia hoping to raise $11 billion on Rosneft sale. Russia plans on selling off minority stakes in its state-owned oil company Rosneft, looking to raise $11 billion for its struggling economy. The sale will consist of a 19.5 percent stake in the company, but could be complicated by international sanctions. The Russian government will still hold 50 percent plus one share of the company, retaining control. In related news, Japan is set to announce a major energy investment in Russia, which would include a nearly $10 billion investment in Rosneft. Japan will also consider joint surveys of oil and gas fields in Eastern Siberia and Russia’s Far East.

By Evan Kelly of Oilprice.com

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