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Evan Kelly

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Oil Prices Buoyed As Global Supply Outages Accumulate

In this week's key data from the oil and gas industry, we see that U.S. oil output continues to plunge while U.S. gasoline prices are rising fast.

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Friday, May 6, 2015

This week the oil markets experienced something that used to be common but has become a rarity since the collapse of oil prices almost two years ago: major unexpected supply disruptions. It is not that there have been no disruptions since mid-2014, just that they have not mattered in a world awash in oil. But as the supply and demand curves continue to converge, geopolitical upheaval is moving the needle on oil prices again. Related: Beleaguered Chesapeake to Sell Off More Assets to Reduce $9B Debt

The largest disruption, of course, came from Canada, where forest fires have torched large swathes of boreal forest near major oil sands operations (more on that below). Oil prices initially surged on the news in the middle of the week, but fell back following EIA numbers showing an uptick in storage levels. The markets also seemed to digest the fact that Canada’s outage will be temporary, and the world still has problems with oversupply.

Wildfires continue in Alberta. Forest fires spread in Alberta, and apocalyptic images spread around the globe, showing blazing fires and black haze engulfing much of Fort McMurray and the surrounding area. An estimated 80,000 people were forcibly evacuated from the city. Several oil sands companies said that they had reduced or shut down oil production in the region. Morgan Stanley estimates that about 400,000 to 550,000 barrels of production has been temporarily affected. Reuters pegs the outage at 640,000 barrels per day, while another estimate says 1 mb/d has been disrupted. The outages probably will not last too long as they have more to do with evacuated personnel than they do with damage to facilities. Nevertheless, the disruptions helped to push up crude prices this week.

Militants attack Chevron platform. Nigerian militants attacked a platform operated by Chevron (NYSE: CVX) in the Niger Delta. "Its Okan offshore facility in the Western Niger Delta region was breached by unknown persons," said Chevron in the statement. "The facility is currently shut-in and we are assessing the situation, and have deployed resources to respond to a resulting spill."

Outages around the world start to accumulate. In addition to the huge, if temporary, losses from Canada, supplies seem to be falling in multiple places around the globe. U.S. oil production is down 800,000 barrels per day from its April 2015 peak. Venezuela lost 188,000 barrels per day in the first quarter due to aging oilfields and an economic crisis. Latin America on the whole lost 441,000 barrels per day in the first quarter. Related: Oil Prices Lifted By Global Supply Outages

Libya is also facing a potential disruption. The country is already producing less than a quarter of what it used to produce in the Qaddafi era, but rival governments are fighting over control of the country’s oil. The Eastern government is attempting to block exports from the Hariga port, which could knock off another 150,000 barrels per day. Iraq is another country where supply outages have hit temporarily. A dramatic cut in upstream investment, however, could lead to longer-term decline. In short, supply disruptions are accelerating the ongoing trend in the oil markets, as supply falls and demand rises. Some of it will be temporary, but it is bullish for prices all the same.

Some highlights from this week’s earnings reports.

Royal Dutch Shell (NYSE: RDS.A) reported an 83 percent decline in quarterly profit, year-on-year.

Occidental Petroleum (NYSE: OXY) reported a small profit of $78 million, but that included a $203 million tax benefit. Excluding that, Occidental would have posted a loss. OXY’s production climbed 11 percent from a year earlier to 590,000 barrels per day, but that is down 1.2 percent from the fourth quarter.

Apache (NYSE: APA) saw its stock surge by 6.7 percent after reporting a smaller than expected loss for the quarter – a net loss of $489 million.

Continental Resources (NYSE: CLR) saw its share price skyrocket by 12 percent after reporting a net loss of $198 million. Production rose 3 percent quarter-on-quarter, and the company beat revenue estimates.

Transocean (NYSE: RIG) also beat expectations, reporting net income of $254 million. The stock jumped by 3.5 percent. But its rig utilization rate continues to fall as upstream companies reduce drilling.

Chesapeake Energy (NYSE: CHK) reported a loss of $964 million, in line with estimates. Its stock was up 6 percent on the news, boosted by a deal it sealed with Newfield Exploration to sell $470 million in assets.

Weatherfield (NYSE: WFT) saw its share price plunge by 20 percent after its quarterly results disappointed, its worst-ever trading day. The company lost $239 million in the first quarter. Related: Germany About To Make Big Changes To Its Renewables Policy

Devon Energy (NYSE: DVN) was up 2.4 percent after reporting a smaller than expected loss of $3.1 billion.

Repsol (BME: REP), the Spanish oil giant, reported a current cost of supplies (net profit) of $1.24 billion for the quarter, up 6 percent from a year earlier.

TransCanada receives permit for gas pipeline. TransCanada (NYSE: TRP) received the last two necessary permits to construct a natural gas pipeline that would connect Alberta gas to Canada’s Pacific Coast, a conduit that would allow gas to be exported abroad. The pipeline network is expected to cost $13 billion, but the company is expected to make a final investment decision by the end of the year. Canada’s proposed LNG export terminals face substantial questions about their economic viability, however, as LNG markets are in a state of oversupply.

EV market heating up. The electric vehicle sector continues to move quickly, and a series of interesting announcements came out this week. GM and Lyft announced that they would be testing self-driving electric cars on public roads within a year. The details are not finalized, but the move will offer a bit of demand for GM’s upcoming release of its mass market EV, the Bolt. Separately, the state of California is looking at allowing the major utility, Pacific Gas & Electric, to build 7,500 EV charging stations using the proceeds from an electricity rate increase on the utility’s ratepayers. A rate increase could raise $160 million for the effort and substantially expand the number of charging stations, but private EV charging station developers say the move will crowd out private investment.

By Evan Kelly of Oilprice.com

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