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Oil Rallies Over 12% As OPEC Rumors Reach Markets

Oil Rallies Over 12% As OPEC Rumors Reach Markets

When we take a look at this week's key figures in oil and gas, we see that commercial crude inventories stay steady above 500 million barrels and that gasoline prices continue to fall accross the U.S.

(Click to enlarge)

(Click to enlarge)

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Related: Rig Count Plunges Yet Again, Down Another 30

It was yet another brutal week for crude oil as global stockpiles continue to build and capital is increasingly looking towards safety.

U.S. Federal Reserve Chair Janet Yellen spoke to Congress on Wednesday, and sounded much less certain about the health of the global economy than she did in December. She downplayed the Fed’s plans to raise interest rates multiple times this year, and said that any increase would be “data dependent,” meaning it all depends on whether or not the economy stays on track.

The downbeat comments contributed to a global sell off on Thursday, with investors increasingly looking to safe-haven investments such as the U.S. dollar, the yen, gold, and other safe bonds.

Oil storage levels rising. Meanwhile, in the oil markets, there is little to be excited about. Global stockpiles remain elevated, and U.S. storage levels were unchanged from their 80-year highs. The hub of Cushing in Oklahoma is seeing storage space fill up. The facility’s storage capacity is almost 90 percent full. That is weighing on crude prices.

The cracks in the economy are helping to push oil down, and WTI fell to $27 per barrel on Thursday. While many market watchers think oil prices will rise later this year, the near-term is still troubling. “We think it’s going to be lousy and nasty for the next three to six months at least,” a trader with TD Securities told the WSJ.

OPEC rumors. Late Thursday and into Friday, oil prices erased some of their losses on yet another round of rumors about an emergency OPEC meeting. The Wall Street Journal reported that the UAE’s energy minister said that OPEC was ready to negotiate. Still, he asserted that the market was taking care of the oil glut by capping production from higher-cost producers. It was unclear if the minister’s comments marked a new commitment from the oil cartel, or if he was reiterating the group’s previously held position. The markets traded up on the news, but as we have noted before, it is better not to trust the OPEC rumors until an actual emergency meeting is announced.

Related: In Spite Of Its Vast Oil Reserves, Cuba Fails To Woo Investors

Deep capex cuts. It is worth pausing and taking stock of the damage done to oil and gas investment since the oil price downturn began. IHS estimates that the industry has cancelled or deferred $1.5 trillion worth of oil and gas investments between 2015 and 2019. At some point figures that large start to lose meaning to the average investor, but it is a staggering sum that will ensure future supplies will be much lower than they otherwise would have been.

Bad energy loans. Several major banks have increased their reserves to cushion against souring loans. Most large banks do not appeared worried about bad loans affecting their financial positions, arguing that energy debt represent only a small portion of their overall portfolio. But more oil and gas companies could go bankrupt in the months and years ahead. Several small drillers – Midstates Petroleum, Linn Energy, and SandRidge Energy – maxed out their revolving credit lines in recent weeks, according to the WSJ. That is a worrying sign that could mean the end of the line for these companies as further credit likely won’t be forthcoming. Moody’s says that defaults on high-yield energy debt have hit 14.5 percent, much higher than the 3.1 percent default rate for high-yield debt as a whole. “We are in the early innings of the downturn, in our view, and we expect loan losses to rise over the next two years, even if energy prices rebound modestly from current levels,” S&P recently concluded.

Syria ceasefire. U.S. Secretary of State John Kerry and Russian Foreign Minister Sergey Lavrov announced a breakthrough in the negotiations over the war in Syria. The parties agreed on a “cessation of hostilities” to allow for emergency delivery of humanitarian aid to the Syrian people, and the warring factions have agreed to implement a more official nationwide ceasefire within a week. Sec. Kerry admitted the plan was “ambitious,” but if implemented it would be the first ceasefire since the civil war broke out in 2011. It is unclear if the historic agreement will hold, especially since groups like ISIS are not party to it.

Refining margins shrink. Refining margins continue to shrink as stockpiles of refined products increase and demand remains tepid. Last year, the downstream sector enjoyed boom times as cheap fuels led to a surge in demand. But refining margins have narrowed in recent weeks, forcing some refineries in the U.S. to cut back on production. Valero Energy (NYSE: VLO) announced a 25 percent cut at one of its gasoline refineries in Tennessee. Monroe Energy will cut production at its Philadelphia refinery by 10 percent. More cuts could be coming. Weak market conditions could trickle upstream if refiners buy less crude amid slow demand. That could push oil prices down further. Related: There Will Be No OPEC Cut

Oil field shut down because of prices. Repsol (OTMKTS: REPYY) announced plans to shut down a North Sea oilfield because of low oil prices, the first time a producing field in that region has succumbed to the downturn. Although the oil and gas industry is suffering across the globe, it still has not been a common occurrence to entirely abandon a producing field as companies instead try to reduce costs and carry on. The Varg field, which Repsol acquired when it purchased Talisman Energy for $13 billion in 2014, was supposed to shut down in 2021. “Varg has been cash-negative since August 2015,” Repsol said in December.

Dividends cut. On Tuesday, Anadarko Petroleum (NYSE: APC) announced its decision to cut its dividend from 27 cents per share down to 5 cents, an 81 percent cut. In recent weeks and months, we have seen dividend cuts from ConocoPhillips (NYSE: COP), Chesapeake Energy (NYSE: CHK), Noble Energy (NYSE: NBL), Marathon Oil (NYSE: MRO), Encana (NYSE: ECA), among others. Barclays says that it is more likely than not that other companies will cut dividends in the near future, including Apache (NYSE: APA), Devon Energy (NYSE: DVN), plus Encana and Marathon.

TransCanada plans job cuts. TransCanada (NYSE: TRP) announced that it would issue more layoffs in 2016, which would follow the elimination of 10 percent of its workforce in the fourth quarter of 2015. The Canadian pipeline company posted a $2.5 billion loss for the quarter, which is mostly due to the $2.9 billion impairment charge for the Keystone XL pipeline.

California gas leak plugged. The natural gas leak at Aliso Canyon in California, which has been spewing gas for months, was finally stopped on February 11. Southern California Gas Co. announced the temporary halt to the gas leak after drilling a relief well to siphon off the gas. It is working now on permanently sealing the well.

By Evan Kelly for OIlprice.com

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Leave a comment
  • Chris on February 13 2016 said:
    Trying to convince us the oil rally was simply due to rumours is a great bearish trick.
    Becareful, unbiased, and weigh these articles carefully.

    Increasing fear levels will only help to drive the price even lower than a price based on fundamentals.


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