After rallying to 16 month highs on the back of the OPEC output deal, oil is falling as a result of record OPEC production, complicating the proposed cuts.
(Click to enlarge)
Chart of the Week
(Click to enlarge)
• U.S. natural gas exports to Mexico are set to rise as new pipelines come online connecting the two countries.
• Pipeline capacity currently stands at 7.3 billion cubic feet per day (Bcf/d), but will double to more than 14 Bcf/d by 2018.
• The U.S. has already become a net exporter of gas this year with the commissioning of an LNG export terminal along the Gulf Coast. Texas shale fields will find the market for their gas is set to grow with the new cross-border pipelines over the next two years.
• Royal Dutch Shell (NYSE: RDS.A) is selling a 20 percent stake in offshore oil and gas fields in the Gulf of Mexico to Mitsui (OTCPK: MITSY) for an undisclosed figure. The fields hold an estimated 100 million barrels of oil equivalent.
• Chesapeake Energy (NYSE: CHK) saw its share price shoot up more than 5 percent after it announced its decision to sell part of its Haynesville Shale acreage for $450 million.
• Energy Transfer Partners (NYSE: ETP) and Sunoco Logistics Partners (NYSE: SXL) lost more than 3 percent at the market opening on Monday after the Obama administration rejected an easement for the Dakota Access Pipeline (more below). Both the companies saw their share prices recover some of those losses later on Monday.
Tuesday December 6, 2016
Oil prices fell back from 16-month highs on Tuesday, after fresh data showed that OPEC hit another record high in production in November. Brent briefly rose above a key threshold of $55 per barrel on Monday for the first time since the summer of 2015, but retreated on Tuesday to $53 per barrel.
Since the OPEC agreement was announced last week, WTI climbed 19 percent and Brent prices are up 16 percent. "OPEC sentiment continues to support oil markets. Speculative short positions are still at elevated levels and as more traders unwind these positions they could trigger more support for oil prices," Hans van Cleef, senior energy economist at ABN Amro, told Reuters.
OPEC production hit record in November. But OPEC’s collective production set a record high in November, rising to 34.19 million barrels per day. That means the group will need to cut 1.69 mb/d from their production levels, not just the 1.2 mb/d in announced cuts last week in Vienna. However, the problem for OPEC is that a lot of the gains came from countries that are exempted under the November deal. Angola, Libya and Nigeria all added output in November from the month before. To offset those gains, OPEC would have to make deeper cuts, but since that was not specified in the agreement, there is little chance that it will happen. The data caused oil prices to fall more than 2 percent on Tuesday. Related: OPEC Winners: Iran Brags It Can Now Sell As Much Oil As It Wants
OPEC meets with non-OPEC producers. OPEC is set to meet with non-OPEC producers to finalize the technical details of their agreement. Non-OPEC producers have agreed to cut 600,000 barrels per day beginning in January, which will come on top of the 1.2 mb/d cut from OPEC. Russia alone will cut 300,000 barrels per day, although Russian officials have said that they would do so gradually.
Questions about implementation. By any measure, OPEC’s latest meeting was its most successful in years. But there is still some uncertainty surrounding the cartel’s ability to implement the deal, and the willingness of individual members to adhere to their prescribed production allotments. OPEC has a history of not living up to agreements, with each member having the individual incentive to produce more than they say they will. The markets rallied last week on the severe cuts OPEC agreed to, but if the cuts are not carried out as promised, it will eventually undermine the effectiveness of the deal. "The only tool they have is to constrain production," former Saudi oil minister and legendary OPEC icon Ali al-Naimi said at an event in Washington, D.C last week. "The unfortunate part is we tend to cheat."
Dakota Access denied. The Army Corps of Engineers rejected an easement needed for Energy Transfer Partners (NYSE: ETP) to finish up the construction of the more than 1,000 mile pipeline. The pipeline is not dead yet, but delayed until at least President-elect Donald Trump assumes the Oval Office. Most analysts expect the Trump administration to move quickly on reversing this policy, but the pipeline delay will cost the companies involved. According to court filings, Energy Transfer Partners is under contract to have the pipeline operational by January 1, meaning its customers will have the opportunity to back out of contracts to ship their oil through the pipeline if it is not completed in the next few weeks. Related: Is The Pain Finally Over For Oilfield Services?
Trump could privatize Indian lands. Not only will the Trump administration move to support the Dakota Access Pipeline, but Reuters reports that some Trump advisers want to make even more radical change in Indian country. A few advisers close to Donald Trump, sources told Reuters, want to loosen the rule regarding drilling on Native lands, which are subject to more onerous conditions. The move would divide Native Americans, who differ on whether or not to promote fossil fuel production on their ancestral homelands. A full privatization would be much more “politically explosive,” Reuters says, but something under consideration as part of the incoming administration’s efforts at promoting drilling and development.
Citi bullish on commodities. Citigroup expects commodity prices to rise in 2017 on the back of faster economic growth and the tightening of supply after several years of a glut. Citi sees prices for oil, copper, zinc and wheat rising for the next six to 12 months. “For commodities in general, the oversupply that was induced by high prices in the first decade of this century are finally being balanced,” Citi analysts wrote in a recent research note. “What’s more, the cost structures across commodities are reaching an end of a period of persistent and record deflation.”
Mexico offshore auction a success. Mexico pulled off a successful auction for offshore blocks in the Gulf of Mexico, with twice as many awards issued than officials had expected. The auction led to the sale of eight of the 10 blocks offered, which could ultimately lead to investment of some $40 billion over time. The winners included ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX), Cnooc, and BHP Billiton (NYSE: BHP). BHP will join state-owned Pemex in developing the Trion oil field, the most sought after offer because the field is already discovered. The auction was the latest offering from Mexico, stemming from its historic liberalization legislation from a few years ago.
Oil hedging rises. With oil prices shooting above $50 per barrel, more oil producers are starting to hedge their production for 2017 and 2018. Bloomberg says that a rash of new hedges could ensure U.S. oil production rises next year. But that will also flatten the futures curve, locking in oil at around $50 per barrel for futures for 2017 and 2018. "The curve is screaming producer hedging," Adam Ritchie, founder of consultant AR Oil Consulting, told Bloomberg.
ISIS loses control of Sirte. U.S. airstrikes helped Libyan forces push ISIS out of Sirte, its last main stronghold in the country. ISIS militants have controlled the city for almost two years. Libya is still crippled by political infighting between factions, but the losses that ISIS have suffered bodes well for the country’s prospects. It also is a sign that more oil production could be forthcoming. Libya has a goal of tripling its output from 2016 levels to 900,000 barrels per day next year.
By Evan Kelly of Oilprice.com
More Top Reads From Oilprice.com:
- How Russia Outsmarted OPEC
- IEA Chief Expects OPEC Deal To Work
- Dakota Pipeline Activists Shouldn’t Celebrate Just Yet