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Oil Prices Sink As Bearish Sentiment Takes Hold

Rig

Oil prices were hit hard on Tuesday by a bearish EIA report and continued uncertainty over a possible OPEC deal extension. Natural gas also saw losses as warm weather and rising shale output worsened the supply glut.

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Chart of the Week

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• In February, a historic event took place in the natural gas markets. For the week ending on February 24, natural gas storage levels rose – the first time it has done so in winter since data collection began.
• Net “injections” typically do not begin until April when temperatures rise and demand falls.
• The highly unusual increase in storage in the depths of winter caused natural gas prices to crash. The market is once again oversupplied after a winter of weak demand and much fewer “heating degree days” than average.

Market Movers

• Enbridge (NYSE: ENB) says that Canada’s oil market only needs two major pipelines, including the company’s Line 3 expansion that will run from Alberta to Wisconsin. However, Kinder Morgan’s (NYSE: KMI) Trans Mountain Expansion and TransCanada’s (NYSE: TRP) Keystone XL are also on the drawing board.
Gazprom (OTCPK: OGZPY) appears poised to compromise with EU anti-trust regulators, agreeing to reform its pricing practices that often involves long-term contracts linked to political relations with Russia.
• Rumors are surfacing about an ExxonMobil (NYSE: XOM) takeover of BP (NYSE: BP). If it occurred, it would likely be the largest takeover of all-time.

Tuesday March 14, 2017

Oil prices bounced around at their new lower levels to start off the week, with WTI moving around the $48-$49 per barrel range, and Brent at $51-$52. Fears of oversupply are now back at the forefront of the market’s concerns as the OPEC cuts fail to clear record high inventories and oil prices continue to fall. “Apart from the survey-based production figures, there is little to suggest as yet that this market tightening has already begun,” Commerzbank said this week. Stuart Ive of OM Financial echoed this concern: “Unless there are positive signs from non-OPEC producers on production cuts or there is a significant supply outage, the relentless pursuit of the U.S. shale production will cut into OPEC’s plans,” he told the WSJ.

EIA: U.S. shale production to surge in April. In its latest Drilling Productivity Report, the EIA predicts that shale output will jump by 109,000 bpd in April, a significant increase from March. The gains will be led by the Permian Basin (+79,000 bpd), with smaller contributions coming from the Eagle Ford (+28,000 bpd) and the Niobrara (+11,000 bpd). The gains will surely weigh on a market that is growing increasingly concerned about the swift comeback of U.S. shale.

Natural gas production to rise quickly, prices could fall. In the same DPR report, the EIA said that natural gas production will jump to 49.6 billion cubic feet per day in April, hitting a new record high. It would mark the fourth consecutive month of production increases. These figures will prevent any meaningful rebound in natural gas prices. A separate and more damning report from Tudor Pickering Holt & Co. projects a 25 percent increase in gas production from the Permian basin, largely due to a rise in output of associated gas from the wave of oil drilling. The increase in production could send natural gas prices below $2/MMBtu, Tudor Pickering says. Related: Will Trump Send Oil Prices Crashing?

Hedge funds slash bullish bets. Hedge funds and other money managers cut their net-long positions on WTI and Brent last week to a one-month low. Aside from a few exceptions, speculators have built up bullish bets on crude nearly every week since the OPEC deal was announced in late November. Now, with the market still oversupplied and U.S. inventories swelling, bearish sentiment is back. "This report is just the beginning," John Kilduff, a partner at Again Capital LLC, said in response to the horrific EIA report last week. "The volume and breadth of the decline this week show that there was massive liquidation. Next week’s report will be the blockbuster." If EIA data reveals another week of large crude oil inventory gains, WTI and Brent could fall further as investors bail out on their net-long positions.

Goldman Sachs urges “patience,” remains bullish on crude. After a sharp selloff in commodities last week – led by the 9 percent drop in crude oil – investment bank Goldman Sachs says “the market needs a little patience’s to wait for the fundamentals to materialize from the OPEC cuts.” Goldman reiterated its relatively bullish projection for crude oil prices. In fact, the bank says that at $48 per barrel, going long on crude oil at this price level is “our trop trade recommendation.”

Russia says oil price war still possible. Russia’s Rosneft said that the rapid rise in U.S. shale oil production could undermine OPEC’s commitment to its deal to cut output. As OPEC loses market share without the benefit of higher prices, the willingness to extend those cuts through the end of the year could evaporate. In that case, Rosneft cautions, another price war could take place in which all parties fight for market share. This prediction stands in stark contrast to the growing whispers of support for an extension from within OPEC. Kuwait became the first country this week to officially endorse a six-month extension of the deal in an effort to balance the market.

Efficiency keeps oil prices low. Oil companies boasted about their lower breakeven prices at the CERAWeek energy conference in Houston last week, a trend that could keep oil prices from rising again in the near- to medium-term. "Everyone is driving break-even prices down," Deborah Byers, head of U.S. oil and gas at consultants Ernst & Young LLP in Houston, told Bloomberg. "It isn’t just shale companies; it’s everyone, from deep-water to conventional." Statoil (NYSE: STO) trumpeted its extraordinary improvement in its cost structure – the Norwegian oil company’s breakeven price declined from $70 per barrel to “well below” $30 per barrel. But even amidst this optimism, a handful of shale companies also suggested that oil prices could fall again because of the strong resurgence of U.S. shale output.

Libyan output down to 602,900 bpd. Violence continues to knock some Libyan production offline, with output down nearly 100,000 bpd from the 700,000 bpd level in February. The reversal in Libya’s fortunes presents one of the few bullish stories in the oil market right now.

Nigeria could lose OPEC exemption. If OPEC decides to extend its production cuts for another six months, Nigeria may lose its exemption status. Violence could continue to dissipate, allowing Nigerian output to rise further in the coming months. That would mean that Nigeria no longer has a rationale to be excluded from the caps on output, OPEC officials say. Related: U.S. Shale Faces A Workforce Shortage

U.S. Federal Reserve to hike rates. After another strong U.S. employment report, all eyes are on the Fed and the consensus is that they will hike interest rates by 25 basis points this week. There is also speculation that two more rate increases are coming in 2017.

Saudi prince to meet President Trump. Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman, who has a large hand in setting Saudi economic policy, will travel to the U.S. to meet with President Trump on Thursday.

Royal Dutch Shell scraps Canadian LNG project. Royal Dutch Shell (NYSE: RDS.A) cancelled plans for an LNG export terminal in British Columbia on Monday, although the company said that it is still considering an alternative. The Prince Rupter LNG project is off the table because of depressed market conditions, while the Kitimat, BC-based project is still under consideration.

By Tom Kool of Oilprice.com

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