Markets remain on edge despite a recent upturn in oil prices. The risk that oil may fall into the mid-$30s is looming and could spell disaster for investors.
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• Oklahoma has seen a surge of seismic activity over the past several years, and the USGS points the finger at underground injection of wastewater, a practice that takes place during oil and gas drilling.
• According to the EIA: “Before 2009, Oklahoma might have experienced one to two low-magnitude earthquakes per year. Since 2014, Oklahoma has experienced one to two low-magnitude earthquakes per day.”
• The state has had to step up regulatory action to limit the volume of wastewater disposal.
• EQT Corp. (NYSE: EQT) saw its share price jump sharply after FERC granted its final environmental impact statement for the $3.5 billion Mountain Valley pipeline. The pipeline, which would carry gas from West Virginia to southern Virginia, could be online by the end of next year.
• Cheniere Energy (NYSE: LNG) inked a deal with Lithuania for LNG cargoes, which could arrive as soon as August. LNG imports have been key for Lithuania, which has succeeded in breaking Gazprom’s monopoly over its gas supply.
• The solar industry could be devastated if the Trump administration imposes tariffs on imported solar panels. A bankrupt panel maker filed a complaint, asking the administration to do so. A report from GTM Research says that panel installations would drop from a forecasted 72 GW between 2018-2022 down to just 25 GW if tariffs were imposed.
Tuesday June 27, 2017
Oil prices bounced off ten-month lows, posting solid gains over the past several trading days. Much of the latest price movements have been attributed to short-covering from hedge funds and other money managers (see below). The markets eagerly await the next release of EIA data on Wednesday. Related: Hedging Rush In U.S. Shale Could Send Prices Tanking
Hedge funds sell off crude. Hedge funds have built up the most bearish oil position since last year, a sign that major investors are highly pessimistic about the trajectory for crude in the short run. A growing number of analysts suggest that speculative activity could help drive prices below $40 per barrel. At the same time, the preponderance of bearish positions also creates the possibility of a rebound in prices if sentiment shifts. In fact, a bout of short covering underway could already be helping oil prices to rebound a bit from their lows last week.
Exxon and Shell under regulatory fire in the Netherlands. ExxonMobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS.A) operate the massive Groningen natural gas field in the Netherlands through a joint venture, but are facing scrutiny over the field’s role in sparking earthquakes. In 2013, the Dutch government passed production restrictions, cutting output from the field by more than half. But with earthquakes persisting, the government is calling for another 10 percent reduction. A criminal investigation is also set to open. Exxon and Shell say the actions are “out of proportion and not effective” and threaten the economics of the project. The field accounts for almost 10 percent of both Exxon and Shell’s total global natural gas production.
Oil demand growth looks shaky. While everyone is watching the oil supply story – with news of resurgent production from Libya, Nigeria and U.S. shale – Bank of America cautions investors not to lose sight of the demand side of the equation. "We now doubt that demand growth will accelerate sufficiently," Bank of America analysts said in a recent note. In the first half of 2017, demand grew at half of the rate that it did in 2015 and 2016, the analysts say. On top of that, economic activity is "moving sideways or already turning south" in the U.S., China, and the rest of Asia.
Shale industry’s debt to increase. According to Bernstein Research, the U.S. shale industry is set to outspend revenues by about $20 billion in 2017, assuming today’s oil prices. That will lead to higher debt levels as new equity issuance becomes more difficult.
Brazil oil exports increase. Brazil’s oil production is on the rise, but its deep recession is also leading to a fall of domestic demand, putting even more barrels onto the global market. Oil exports were up 39 percent in the first four months of 2017, compared to a year earlier. As a result, Brazil will account for the second largest increase in non-OPEC oil production after the U.S.
China invests $7 billion in floating LNG in Africa. It is still an emerging technology, but China is hoping to seize the lead in floating LNG terminals. To that end, it reportedly is planning investments of $7 billion in floating LNG in Africa. While the LNG markets remain oversupplied, China is betting that by the time the projects come to fruition in the early 2020s, the market will have tightened. At the same time, China is very hungry for imported gas so that it can shut down coal plants and clean up its air quality. "We see a real commitment to FLNG in China both from the construction side and from the LNG consumption side where decreasing costs mean potentially lower cost LNG," Steve Lowden, chairman of NewAge, a floating LNG developer in Africa, told Reuters. Related: The Downturn Is Over, But U.S. Oil Companies Face A Huge Problem
BP steps up offshore drilling. Despite the 2010 Deepwater Horizon disaster, BP (NYSE: BP) is betting its future on deepwater while other oil majors are going big in U.S. shale. BP plans $17 billion in annual investments through 2021 in order to grow production by 5 percent per year. Much of that will go into exploring and developing large-scale offshore projects. The strategy is notable because its peers – including ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and Royal Dutch Shell (NYSE: RDS.A) – see short-cycle shale projects as the future.
Shale industry increases production, lowers breakevens…but where is the cash? The Wall Street Journal reports that eight leading shale companies have generated a combined $414 billion over the past decade, but have negative free cash flow of $68 billion. There were hopes that with efficiencies and lower breakeven prices, the shale industry would start to really generate positive cash flow this year. In February, the consensus was that they would generate $1 billion in positive cash flow in 2017, however, that figure is now down to less than $60 million, due to the latest drop in oil prices. Shale is great at producing oil, but not so great, as of yet, at generating a lot of cash.
High-yield bonds in danger with oil at $35. Deutsche Bank says that if oil prices drop to $35 per barrel, it could start cause problems for the high-yield market. At that price level, the debt-to-enterprise value ratios of high-yield energy companies start to rise above 55 percent, Bloomberg reports. If oil prices hold onto their most recent gains and start to stabilize, the risk would not be of much concern. But if oil prices fall towards $35, Deutsche Bank says, there could be contagion in the high-yield market.
By Tom Kool for Oilprice.com
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