Oil prices posted modest gains this week boosted by ‘good’ OPEC compliance, but a real catalyst for prices to move higher or lower still lacks
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Friday, February 3, 2017
Oil prices posted some modest gains this week, despite some small up and down movements. OPEC compliance continues to look good, but oil inventories are also rising in the U.S., raising fears of ongoing supply problems. Oil volatility has declined in recent weeks, but it is far from clear which direction it will move in over the next several weeks and months.
OPEC has high compliance rate. Oil markets were buoyed this week by further evidence that OPEC is more or less complying with the production cuts that it promised a few months ago. A Reuters survey put the cuts so far at 1 million barrels per day. Bloomberg mostly agrees, estimating that the cartel cut output by 840,000 bpd so far. In other words, by all accounts, OPEC has achieved a roughly 80 percent compliance rate with its promised cuts. Given the strong skepticism surrounding the deal, the news is bullish for oil. “Compliance is great -- it’s been really fantastic,” Saudi Energy minister Khalid Al-Falih said recently. “Based on everything I know, I think it’s been one of the best agreements we’ve had for a long time.”
U.S.-Iran tensions heating up. The Trump administration is moving to impose new sanctions on Iranian entities after Iran tested a ballistic missile. The move comes after the administration said that they were “putting Iran on notice,” a vaguely worded threat that has undone years of improving relations. Iran has said that new sanctions would breach the 2015 nuclear accord; the U.S. insists they do not. The latest flare up in tensions upends a two-year détente between the U.S. and Iran and put the two countries back on a path of confrontation. Iran has succeeded in ramping up oil production after international sanctions were lifted a year ago, but the sudden resurgence in tensions could push up prices if things escalate. The geopolitical battle with Iran had enormous influence a few years ago, and this could be one of the major black swan events of 2017. Related: Are Dakota Access And Keystone XL Really That ‘Dangerous’?
Big oil reports poor numbers thus far. Earnings reports from ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and Royal Dutch Shell (NYSE: RDS.A) have been highly disappointing, each company coming in sharply lower than consensus estimates. Shell just reported full-year earnings for 2016 that were the worst in over a decade. At the same time, oil executives struck an optimistic tone, arguing that the worst is over. Shell, for example, was cash flow positive in the past two quarters, allowing it to cover dividends and pay down debt. With oil prices now solidly above $50 per barrel, the oil majors are confident 2017 will be better. BP (NYSE: BP) and Total (NYSE: TOT) report their fourth quarter earnings next week.
Republicans back off privatization effort for federal lands. Republican lawmaker Jason Chaffetz (R-UT) had been pushing a bill that would have sold off millions of acres of federal land in the western U.S. for private development. The move presaged a broader effort at privatizing public lands for oil and gas drilling and other private sector uses. But the bill received enormous pushback, not just from environmental groups but also from conservatives. Rep. Chaffetz shelved the idea amid the furor, a sign that the privatization effort may not succeed.
Gasoline glut in U.S. In a sign that the glut is not over, gasoline tankers are being rerouted to Europe, as inventories pile up in the U.S. The excessively high levels of gasoline storage have “depressed both trans-Atlantic shipping rates and refiners’ profits from making fuel,” Bloomberg reports. “Current East Coast inventories would be enough to supply the region for almost a month, an all-time high,” Bloomberg says. Related: Saudis Raise March Crude Prices For All Customers
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IEA: oil prices probably not going to $65. "I think 63, 65 (dollars a barrel for Brent) I think you might be a little bit ambitious there because the OPEC producers have got this basic issue, they don't want the price to go too low clearly, because their economies wouldn't stand it," Neil Atkinson, head of the oil industry and markets division, at the IEA told CNBC. "But if the price goes too high then that's going to attract a lot of investment in other parts of the world, principally the U.S. shale producers.”
Saudi Aramco audit results “very reassuring.” Saudi Aramco is preparing for a 2018 IPO of a small slice of the company, which will require independent audits of its oil reserves and assets. Saudi energy minister Khalid al-Falih said that the early results of the audit are “very reassuring.” Saudi Aramco has been very secretive for years over the precise nature of its oil reserves. Many have speculated that Aramco’s official estimates of roughly 260 billion barrels of oil reserves were too optimistic, particularly because that figure has not moved in several decades. However, al-Falih says that the results so far are “in the positive side” and higher than what the company’s official figures have been. Whether or not his statements are accurate remain to be seen, but an oil reserve estimate higher than the company’s official position would be extremely positive for Aramco and would help dispel speculation about peak oil supply.
Dakota Access to get easement. The Army Corps of Engineers has been instructed to grant Energy Transfer Partners (NYSE: ETP) the final easement needed to complete construction of the Dakota Access Pipeline. Protestors have vowed to continue to attempt to prevent the pipeline from reaching completion.
By Evan Kelly of Oilprice.com
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