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Oil Prices Rally Amid Rising Rig Count

Rig

Oil prices have rallied back into the mid $50’s on a bout of bullish data, but a rising rig count and elevated production in the Gulf of Mexico could cap oil prices in the near term.

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Friday, April 14, 2017

Oil posted some solid gains this week on outages in Libya, further confidence in an OPEC extension, and the first sizable drawdown in U.S. crude stocks this year. The IEA added its voice to the growing chorus of analysts seeing light at the end of the tunnel.

IEA: oil market very close to balance. The IEA said in its latest report that the oil market is probably already balanced, although more data is needed. Oil inventories are falling in many parts of the world and have started to decline in the OECD as well. In the coming months, the agency says, more substantial inventory declines will arrive and demonstrate that the oil market is no longer oversupplied. At the same time, the IEA downgraded its oil demand growth estimate for this year from 1.4 mb/d to 1.3 mb/d.

Goldman: $50 long-term. Goldman Sachs maintains its projection that oil prices will remain stable for years to come due to improvements in drilling technology that can add marginal barrels whenever they are needed, keeping a lid on prices. The investment bank says that shale will also limit volatility, with crude likely to trade within a 10 to 20 percent band. Goldman has a five-year estimate on WTI at $54 per barrel. "We believe we are going back to an environment similar to pre-2003, a period characterized by stable long-term oil prices and low oil-dollar correlation," the bank’s research note said.

Banks doing better on energy loans. JPMorgan Chase, Wells Fargo and Citigroup said this week that their portfolio of energy loans has turned out much better than expected, allowing them to put to work a combined $370 million that they had set aside to cover for losses on those loans. The result will likely be more lending, which will allow more shale companies to drill more wells. Ultimately, this could boost production. Early evidence suggests banks are already stepping up their lending. So-called leveraged loans, which are loans to already indebted companies, shot up by 86 percent in the first quarter compared to a year earlier.

Rig count at highest level in nearly 2 years. The U.S. rig count jumped again this week, the 13th consecutive week of increases. Standing at 683, the rig count is now at its highest level since April 2015. Related: U.S. Oil Rig Count Hits 2 Year High

Drilling permits surge, but not all shale wells completed. Texas issued more than 1,300 drilling permits in March, twice as many as the same month in 2015. Rigs are rising and companies are rushing back to the shale patch, and to the Permian Basin in particular. But at the same time, well completions were lower than they were last year. The result will be a rise in production but also an increase in the number of drilled but uncompleted wells (DUCs), which will leave a level of production sitting on the sidelines.

ConocoPhillips to sell natural gas assets for $3 billion. ConocoPhillips (NYSE: COP) announces plans to sell 1.3 million acres in Colorado and New Mexico in the gas-rich San Juan Basin for $2.7 billion in cash plus contingent payments of $7 million per month depending on natural gas prices, a total sum that would ultimately be capped at $300 million.

U.S. Gulf of Mexico production rising. Oil production in the Gulf of Mexico hit a record high 1.6 million barrels per day in 2016, according to new data from the EIA. Output hit a fresh high of 1.7 mb/d in January. The gains came after eight offshore projects reached completion in 2016. More gains are slated for this year and next as an additional seven new projects come online. The EIA expects the Gulf of Mexico to produce 1.7 mb/d this year and 1.9 mb/d in 2018.

PDVSA avoids default. Cash-strapped Venezuelan oil company PDVSA met a $2.23 billion bond payment that was due on Wednesday. The company had nearly $2.5 billion payments this month and the bond markets grew concerned about a possible default. The state and the oil company are in dire straits and the investors put the probability of a default within the next 12 months at over 50 percent. Related: Iran Ramps Up Oil Output As OPEC Production Falls

Saudi Arabia raises $9 billion in sale of Islamic Bonds. In its first international sale of Islamic Bonds, or sukuk, Saudi Arabia sold five- and ten-year tranches of bonds, raising $9 billion. The proceeds will be used to plug budget holes stemming from low oil prices. After a nearly $100 billion budget deficit in 2015, austerity measures helped close the gap to $79 billion in 2016 and potentially $53 billion this year.

Pipeline construction flurry to boost Marcellus and Utica gas production. The Marcellus and Utica Shales in Pennsylvania and Ohio account for around a quarter of U.S. natural gas production, but producers in the region have run into pipeline constraints, holding back further production gains. Several major gas pipelines will be completed in the near future, and the EIA argues that the new capacity could allow natural gas production to grow by a staggering 50 percent. That will fuel more gas in the electric power sector and also lead to more gas exports.

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  • david on April 14 2017 said:
    Great article. But we really have to move past the nominal rig count each week.

    We know the decline curve and the US is positioned well for a possible rebound in prices.

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