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Oil Prices Set To Rise On Back Of OPEC Deal Extension

Kuwait Oil

Oil prices climbed back up on Monday after Russia and Saudi Arabian oil ministers agreed on an extension of the current output cut deal 

(Click to enlarge)

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Chart of the Week

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• Refined product exports from the Central Atlantic have been unusually high so far in 2017.

• Exports from the region hit a record high in February at 103,000 bpd.

• Shipments of refined product were elevated because of competitive pricing compared to the global market, a reflection of the glut of gasoline and diesel in the U.S.

Market Movers

Total (NYSE: TOT) expanded its exploration off the coast of Mauritania with a deal this week. The West Coast of Africa is emerging as a major natural gas exploration region with a string of recent discoveries in neighboring Senegal.

Eni (NYSE: E) started up a gas project in Indonesia this week, a project that consists of 10 subsea wells in deepwater.

Chevron (NYSE: CVX) shut its first Gorgon LNG export plant for a month for repairs. This is not the first outage at the $54 billion export facility in Australia.

Tuesday May 16, 2017

The big news of the week is obviously the joint announcement between Saudi Arabia and Russia in support of extending the existing production cuts through the first quarter of 2018. Not only was such a definitive statement not expected before the official May 25 meeting, but neither was the nine-month extension (as opposed to just six months). The news caused oil prices to jump and significantly reduced the chances of another pricing downturn in the weeks and months ahead.

Oil prices could rise further. A series of investment banks see further price gains coming soon. BNP Paribas expects prices to rise back to levels seen earlier this year – mid- to upper-$50s for Brent. Goldman Sachs reiterated its call for Brent to rise to $57 per barrel in the third quarter. After hedge funds and other money managers liquidated their bullish positions over the past month, there is room for oil on the upside. Moreover, with OPEC nearly locked in for 9 more months of restrained output, the downside risk has been substantially reduced. Related: Goldman’s Two Conditions For A Successful OPEC Deal

IEA: oil markets already nearly balanced. The IEA reiterated its assessment that the oil market is on its way towards balance. In its latest Oil Market Report, the agency said that global stocks were building at a surprisingly low rate of 0.1 million barrels per day even though stocks rose by much more in OECD countries. But stocks are already drawing down, reflecting a supply deficit. The IEA estimates that the world is seeing a deficit in the second quarter by about 0.7 mb/d. Still, that might not be enough to bring inventories back within the five-year average by the end of 2017, the IEA says, implying that more work will be needed.

Shale response? The big question is how the OPEC extension affects the trajectory of U.S. shale production. Output was already surging, but another round of price gains could lead to a stronger response from shale drillers, particularly if prices rise sufficiently for drillers to lock in hedges for future production, clearing the way for more drilling. It is too early to say with any certainty how much additional U.S. production will result from the OPEC deal, but surely some executives are celebrating this week’s news.

EIA: Shale to grow by 122,000 bpd in June. In its latest Drilling Productivity Report, the EIA projects shale growth of 122,000 bpd next month compared to May. The gains will come from the Permian (+71,000 bpd), the Eagle Ford (+36,000 bpd), plus smaller contributions elsewhere.

Frac sand producers bouncing back with speed. Frac sand miners are seeing robust demand for their product as drillers step up their operations. Hi-Crush Partners (NYSE: HCLP) said it is nearing full capacity and is ramping up hiring.

Libya output edges up again. Libya could play spoiler to the OPEC deal this year, and in a further sign that it is getting back on the right track, the latest data shows that Libyan production is at 814,000 bpd. The National Oil Company is aiming to boost output to 1.2 mb/d this year.

India’s oil demand up, finally. After three consecutive months of falling oil demand, India finally reported an uptick for the month of April, with consumption rising by 3.3 percent. Along with China, India is widely seen as the largest source of oil demand growth going forward, so its demand figures are critical to overall global demand.

EV revolution to see surge in demand for copper, cobalt, nickel and other commodities. The chief of Glencore (LON: GLEN) sees much higher demand for commodities as electric vehicles capture an ever-growing share of the transportation sector. “The electric vehicle revolution is happening and its impact is likely to be felt faster than expected,” Glencore CEO Ivan Glasenberg said at a conference on Tuesday. That offers a lot of opportunity for mining giants like Glencore.

China says it will import more U.S. oil and gas. “The U.S. has very rich oil and gas resources, and as China pursues a diversification of its crude supply the U.S. will of course be one of the sources.” Wang Yilin, chairman of CNPC, said on Bloomberg TV. “We will consider exploring cooperation in areas such as jointly developing liquefied natural gas facilities and gas transport.” Related: OPEC Expects U.S. Driving Season To Save Oil Prices

Nigerian oil workers’ strike spreads. Nigerian oil workers staged a strike that has extended to oil majors Chevron (NYSE: CVX), Shell (NYSE: RDS.A) and a subsidiary of Eni (NYSE: E). The strike stems from the firing of workers of the union by ExxonMobil (NYSE: XOM). The strike is only scheduled for three days.

Iran elections on Friday. Iranian voters will head to the polls on Friday, where they will choose between incumbent President Hassan Rouhani and his hardline opponent, Ibrahim Raisi. If Raisi wins, the nuclear deal between Iran and the West could be in jeopardy, as could the détente with the U.S. reached in 2015.

Risk to Venezuela grows. Protests have crippled Venezuela for over a month, and the economy continues to deteriorate. There are growing signs that the economic calamity could accelerate the supply disruptions from Venezuela. According to Reuters, three of Venezuela’s four refineries are operating at record low levels, due to malfunction and the lack of parts to fix them. The Paraguana Refinery, for example, is only producing 409,000 bpd, or just 43 percent of its capacity. The outages have led to gasoline shortages and forced Venezuela to step up imports.

By Tom Kool for Oilprice.com

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  • John Scior on May 16 2017 said:
    I see the only real item supporting higher oil prices is the failure of the Venezuelan state. The OPEC deal, in my opinion is merely a way to try to talk prices up. If widespread cheating is not going on, then in the very least as prices go up, the fracking gets bigger and DUCs start to come back online. I hate to make predictions because there are so many things to influences prices, however I see WTI at a year end 40-43 per barrel price range given expectations regarding FED actions and the continued output of supply from OPEC and Russia.
  • Josh Gregner on May 17 2017 said:
    You write "Oil prices could rise further. A series of investment banks see further price gains coming soon. BNP Paribas expects prices to rise back to levels seen earlier this year – mid- to upper-$50s for Brent. Goldman Sachs reiterated its call for Brent to rise to $57 per barrel in the third quarter."

    At this time I'm much more skeptic: All I see is a market keeping the prices barely at the $50 mark with the full expectation that the OPEC deal extension is coming. In other words oil would trade quite a bit lower if OPEC was not artificially restraining its outputs. Conversely this implies that oil demand is by far not as strong as we would want it to be and that there is a high risk of a perma-glut in oil for the years to come.

    So OPEC can either lose money on lost market share at low oil prices or lose money on even lower oil prices going forward. Which is better?!?

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