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Oil Recuperates But Market Uncertainty Spikes

Drilling Colombia

Oil prices pared some post Brexit loses on Thursday and Friday, but uncertainty has taken hold of oil markets. In the meantime, U.S. crude oil production continues to fall, lending more support to oil prices.

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Friday, July 1, 2016

Oil prices bounced around this week, stabilizing after the Brexit chaos, but failing to rally as the oil markets returned to concerns about oversupply. Nigeria has brought back somewhere around 500,000 barrels per day to the market, restoring disrupted supply. Canada continues to rebound from the wildfires a few weeks ago as well.

But there is no consensus about where crude oil prices will go from here. The restoration of supplies from Canada and Nigeria have caused the market contango to widen, indicating concerns about short-term oversupply. Moreover, OPEC production hit a record high in June, on gains from Iran and Saudi Arabia. Still, because the markets have moved closer to a balance, chipping away at the global surplus, there are some analysts who argue that things are not so grim. EIA reported another strong reduction in oil storage levels, falling by 4 million barrels last week, while production also continues to slide.

In short, the markets and energy analysts are at odds over whether prices will rise or fall in the short run. The uncertain effects of the British exit from the European Union is also adding to the confusion. “We see more uncertainty than we have seen before in terms of price formation,” Eldar Saetre, chief executive of Statoil ASA, told The Wall Street Journal in an interview. WTI and Brent stayed just below $50 per barrel in early trading on Friday.

U.S. oil production continues to fall. The EIA released new monthly figures for April, showing that U.S. oil production fell by 222,000 barrels per day compared to a month earlier, tipping U.S. output below 9 million barrels per day for the first time since September 2014. The retrospective monthly figures tend to be more accurate than the more recent weekly data. Still, the EIA says that for the week ending on June 24, it estimates oil production fell by another 55,000 barrels per day to 8.62 million barrels per day.

Earthquakes fall in Oklahoma, regulation of disposal wells credited. The number of earthquakes to hit Oklahoma this year have fallen by 25 percent, and the limits placed on injection wells is believed to be the reason. In the first half of 2016, Oklahoma saw 1,098 earthquakes, compared to 1,400 for the same period in 2015. State regulators required companies to reduce the volume of wastewater that they inject underground following a frac job, and the reduction in earthquakes is a sign that the limitations are working. Related: Is Raymond James’ $80 Oil Realistic?

Shale drilling stops sharp initial decline rates. According to a Reuters analysis, U.S. shale drillers are increasingly able to slow the very sharp initial decline rates that shale wells typically experience. When a shale well is drilled, producers usually see an initial burst of production, followed by a precipitous decline in output in short order. That meant that hundreds of wells had to be continuously drilled by an individual producer to grow production. Reuters found that an average Permian shale well declined by 31 percent from peak production through the fourth month of the well’s life in 2012. But drillers cut that decline rate to just 18 percent in 2015. Slower decline rates could have huge ramifications: marginal wells will become more profitable, more drilling could take place, and U.S. shale production has proven to be resilient and could even rebound quicker than many expect. Further improvements are expected to continue.

Highest number of Americans expected to travel for July 4th holiday. AAA projects that 43 million Americans will hit the roads for the holiday weekend, the highest number on record. “Spurred by the lowest gas prices since 2005, more people than ever are planning to travel this Independence Day weekend,” said Marshall Doney, AAA President and CEO. U.S. gasoline demand continues to hover at record levels.

Chevron suspends Gorgon LNG production. Yet another setback hit the Gorgon LNG export facility in Australia. Chevron (NYSE: CVX) said that a leak forced it to shut down the export facility once again, although the oil major said that it remains on track to ship a second LNG shipment in the coming days. The $54 billion LNG export facility suffered from cost overruns and delays, and shortly after it inaugurated operations earlier this year, the terminal was forced to temporarily shut down for repairs. The costs for the megaproject are not scaring Chevron – separately, the company is nearing a final investment decision on the world’s most expensive oil project in 2016. It could green light an expansion of the Tengiz oil field in the Caspian Sea, which could cost $40 billion, but could add 250,000 to 300,000 barrels per day of additional production on top of the field’s existing 595,000 barrels per day of output. Related: Double Digit U.S. Rig Count Increase Impacts Oil Prices

Major Canadian oil pipeline hits another setback. A Canadian court shot down a federal approval for the Northern Gateway pipeline, an oil pipeline proposed by Enbridge (NYSE: ENB) that would carry Alberta oil to the Pacific Coast. The court said that the Canadian government of former Prime Minister Stephen Harper had not adequately consulted with First Nations tribes, sending the matter back to the federal government. The current government of PM Justin Trudeau now faces a tough decision. He has placed a much higher value on environmental protection, but Canada’s oil industry is desperate to build out pipeline infrastructure to expand market access for the country’s oil sands production.

California attorney general investigating oil refiners. California’s attorney general issued subpoenas in May to oil refiners over their alleged manipulation of retail gasoline prices. The subpoenas were sent to Tesoro Corp. (NYSE: TSO), Chevron (NYSE: CVX), and ExxonMobil (NYSE: XOM). The allegations are that the refiners may have held back supply in order to push up prices.

By Evan Kelly of Oilprice.com

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