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Oil Reverses Despite Market Uncertainty

Oil Rig

We begin with a look at the key data for the oil and gas industry this week, which shows an unexpected draw in U.S. oil inventories as well as sinking production. Meanwhile, U.S. crude stocks, gasoline stocks and refinery runs continue to fall.

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Friday, June 17, 2016

Oil prices fell to a five week low on Thursday as a more bearish sentiment took hold of crude markets, but Friday’s trading saw oil rally to close out the week. During the week, a less than expected drawdown in U.S. crude inventories caused a brief spike in oil prices, but traders continued to see signs of Canadian production coming online again after the EIA reported a 525,000 barrel build at the Cushing crude delivery hub. Oversupply concerns have taken a turn for the worse in recent weeks due to the willingness of North-American shale oil companies to pick up drilling after prices surpassed the $50 mark. In addition to this, markets were shaken as the possibility of a Brexit and a looming interest rate hike by the U.S. Federal Reserve Bank continued to drive investors to safe havens such as the U.S. dollar and gold. Friday’s turnaround however, suggests that these fears are waning and markets are looking for further upside coming from increasing outages in Nigeria and Latin-America.

Rising U.S. rig count. All eyes are on the U.S. rig count this week after Baker Hughes (BHI) reported two consecutive weeks of increases in the rig count. Tight oil operators added 12 rigs over the last two weeks, most of them being deployed in the prolific Permian basin. The concerns about the rising rig count should not be overstated as the U.S. rig count still hovers near all-time lows and U.S. legacy production continues its downward trend.

North Dakota oil output faces steepest decline in history. North Dakota’s oil production has declined more than 70,000 barrels in April, resulting in the largest drop in production the oil province has ever seen. The Bakken/Three Forks formation is now producing less than 1 million barrels per day as a result of cold weather and persistently low oil prices. North Dakotan oil statistics indicate an average decline of over 250 barrels per well on a total of 12,739 producing wells. Operators active in the Bakken are likely to remain cautious and are not expected to ramp up well completions and add new drilling rigs until WTI prices surpass $60.

Oil bust turns into trillion dollar retrenchment. According to energy researchers from Wood Mackenzie, a whopping $1 trillion will have been cut from total investment in oil and gas development through the end of this decade. Although nearly every oil producing country has adjusted capital investment downward, the biggest capex cuts this year and in 2017 ($125+ billion) will be made made in the U.S. oil patch. The Canadian and Russian oil sector are expected to cut between $25 and $40 billion. The effects of expiring hedges, lower revenues and ongoing oil price uncertainty continue to weigh on capex budgets Related: Can Trump Change The Direction Of U.S. Energy?

Oil majors to trim lower margin assets. Oil majors Chevron (CVX) and Royal Dutch Shell (RDS.A) are reportedly shedding some lower margin refining assets now crude prices are improving. High profit margins stemming from downstream activities made up a big part of total revenues for most major integrated oil companies during the lows of the oil price slump back in 2015. However, refiners now find themselves between a rock and a hard place as crude feedstock costs go up while gasoline prices see a much more gradual growth. According to IHS Energy’ Lysle Brinker, Shell and Chevron are most motivated to sell assets soon as these oil majors are facing serious cash flow deficits.

All new cars in Germany to be emission free in 2030. In order to achieve an 80-95 percent carbon emission reduction in 2050, Germany aims to completely phase out fossil fuel based transportation as soon as 2030. Germany’s Deputy Economy Minister Rainer Baake notes that Germany hasn’t seen any reduction in CO2 emissions stemming from the transportation sector since 1990 and thus has to take serious measures to meet these ambitious goals. German adoption of electric cars has been lagging behind that of European countries such as Norway and the Netherlands. Germany’s 45.5 million fossil fuel powered vehicles continue to consume over 2.3 million barrels of petroleum products per day in the meantime.

Value Norwegian oil and gas fields drops $50 billion. A declining natural gas price as a result of increased competition in the European marketplace and tanking oil prices worldwide have led to a significant reduction in value of Norwegian state owned oil and gas fields. Rystad Energy expects the grim outlook for European natural gas prices to continue to weigh on revenues derived from the large state owned stakes in Norway’s giant Troll, Oseberg and Johan Sverdrup fields. The energy consultancy expects Norwegian oil and gas production ‘’to remain largely flat’’ until 2024.

Rosneft CEO sees competition increase. Rosneft CEO Igor Sechin, Russia’s most influential oil executive, expects the battle for market share in the key markets of Asia and Europe to further heat up as Russia doubles down on exploitation of oil and gas reserves from East Siberia, giving the country an edge in the world’s fastest growing markets. The question remains whether Saudi Arabia will respond by discounting its crude as it did last year in order to protect its most valuable market share in Asia. Related: Bribery, Corruption And Changing Contracts: Oil Investment In Iran

BP not interested in Aramco IPO. Bob Dudley, BP’s (BP) Chief Executive told reporters at the St. Petersburg International Economic Forum that his company is unlikely to participate in the privatization of Saudi Arabia’s Aramco. BP is not the first oil major that has signaled disinterest in investing in the Saudi oil giant, earlier this month, Russian oil major Lukoil also mentioned that it is not planning to take part in Aramco’s IPO.

Venezuela: PDVSA won’t default with oil at $50. Venezuela’s oil minister Eulogio del Pino said in an interview with Bloomberg on Thursday that he reckons that oil prices around $50 are high enough to prevent state owned oil company PDVSA from defaulting on debts coming due later this year. He further commented that Venezuela will continue to operate the U.S. refineries which the company is not planning to sell in order to improve liquidity.

By Evan Kelly of Oilprice.com

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