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Evan Kelly

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Oil Rallies On As Traders Ignore Red Flags

In the latest key figures from the oil and gas industry we see that oil rallied throughout the week, ignoring the fact that U.S. crude oil stocks have risen to over 540 million barrels.

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Friday 29th April 2016

Oil prices continued their gains this week, breaking out of a trading band that could mark a new period for the market. As of early trading on Friday, WTI was above $46 per barrel and Brent traded above $48 per barrel. There are some warning signs that the oil rally may not last – the EIA reported another uptick in storage levels – but for now, traders are feeling optimistic. Related: Why Canada’s Oil Industry May Never Be the Same

ExxonMobil loses AAA rating, reports earnings. It has been a busy week for ExxonMobil (NYSE: XOM). The world’s largest publically-traded oil company lost its sterling AAA credit rating by S&P earlier this week, a perfect rating that it has held for more than 80 years. S&P was concerned about rising debt levels and a hefty shareholder dividend that weighs on cash flow. A day later, however, ExxonMobil appeared unfazed when it announced an increase in its dividend by 2 cents per share, or a 3 percent increase. Exxon has hiked its dividend every year for a quarter century.

On Friday, Exxon reported its first quarter earnings, revealing a profit $1.8 billion, down from $4.9 billion a year ago and its lowest result in more than a decade. But the news was not all bad. The company saw production rise on by 1.8 percent year-on-year on an oil equivalent basis. Its downstream unit performed well, and the oil supermajor reduced spending by 33 percent compared to the first quarter of 2015. Exxon’s share price rose on the news.

Chevron announces a loss. Chevron (NYSE: CVX) reported a first quarter loss of $725 million, compared with a $2.6 billion profit a year earlier. But the company feels more optimistic because it recently completed several large projects – including the massive $54 billion Gorgon LNG export facility in Australia – which should improve cash flow moving forward.

Eni swings to a loss. Italian oil giant Eni (NYSE: E) reported a 792 euro loss ($897 billion) in the first quarter, down from a profit of 832 euros in the first quarter of 2015. Although it sounds bad, the result was largely in line with expectations and the company’s share price barely budged. Related: Weaker Dollar Continues To Drive Oil Prices Up

ConocoPhillips loses $1.5 billion. ConocoPhillips (NYSE: COP) reported a quarterly loss of $1.5 billion, down from a profit of $272 million in 2015. It also cut 2016 spending from $6.4 billion to $5.7 billion the company said that bringing its debt below $25 billion would be a top priority. The company’s CEO Ryan Lance also said that Conoco would not “grow for growth’s sake.”

PetroChina reports a loss as well. China’s state-owned oil company, PetroChina, reported a quarterly loss of 13.8 billion yuan ($2.13 billion), which was its first quarterly loss on record. The company has many aging and expensive wells, with production starting to decline.

Saudi Arabia to boost oil production. In order to meet a spike in summer demand, Saudi Arabia is expected to increase its oil production in the coming weeks, with some analysts expecting output to rise to 10.5 million barrels per day (mb/d), up from 10.15 mb/d in April. Since the increase is expected to be consumed domestically, it may not add to global supplies. Still, Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman said just before Doha that the oil kingdom had the ability to ramp up output by an additional 1 mb/d “if we wanted to,” which was perceived as a veiled threat towards Iran. But analysts interviewed by Reuters do not expect them to follow through on that threat.

Floating oil increases. There is a rising number of oil tankers holding crude at sea, a glaring symptom of an oversupplied market. Oil traders have bid up oil prices by more than 70 percent since early February, and there is a clear sense of bullishness throughout the oil markets. However, if the presence of oil sitting in tankers at sea is anything to go by, there is still a large glut of crude. "We...see worrying parallels to 2015, when oil prices rose sharply well into May before collapsing in the second half of the year," Commerzbank analysts concluded. There are reportedly oil tankers off the coast of West Africa and the North Sea that are going unsold. Reuters reports that shipping data shows 7 million barrels of North Sea oil sitting in tankers, and 10 million barrels unsold off the coast of Nigeria. This situation could foreshadow oil price declines in the weeks ahead. Related: How Microgrids May Transform The Future Of Energy

Analysts not revising price forecasts up. The WSJ reports that despite the more than 70 percent increase in oil prices over the past three months, analysts are not substantially increasing their price forecasts for the rest of the year. With so much crude sitting in storage, and output rising in places like Iran, there are still some bearish signals that should give traders pause. Many investment banks were burned last year when oil prices briefly rose to $60 only to fall back again. They appear to be cautious in predicting a rebound this time around.

Russia’s Yamal LNG receives financing. Russia inked financing deals with two Chinese banks, capping more than a year’s worth of discussions. The project sits on the Yamal peninsula north of the Arctic Circle, and the massive LNG export facility could cost $27 billion to build. Yamal LNG secured two 15-year credit facilities, according to Bloomberg, for 9.3 billion euros ($10.6 billion) and 9.8 billion yuan ($1.5 billion). When completed – with a target date of 2017 – the project will produce 16.5 million tonnes of LNG per year.

Libyan oil tanker returns. After trying to defy the international community, an oil tanker that left Eastern Libya is set to return to a Libyan port, following a failed attempt to unload in Malta. The United Nations blocked its delivery when it imposed international sanctions on the delivery. Libya is torn in half, with governments in the East and West. But the national oil company is situated in the West, and the East’s attempt to export its own oil threatens the fragile reconciliation process. With the international community blocking the exports, the East will struggle to get its own national oil company up and running.

By Evan Kelly of Oilprice.com

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