Oil prices appear to have recovered from last week's flash crash following a significant draw in U.S. inventories and bullish rumors surrounding the OPEC deal.
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Friday, May 12, 2017
Oil prices showed some life this week after an encouraging drawdown in inventories in the U.S., sparking large gains on Wednesday. Crude stocks dropped by a sizable 5.3 million barrels last week, and importantly, there was not a corresponding uptick in gasoline inventories, confirming a significant reduction in storage. WTI and Brent jumped up from their six-month lows.
OPEC ponders deeper cuts. We are roughly two weeks away from OPEC's official meeting in Vienna, which is expected to result in a six-month extension of the production cuts. But now top OPEC officials are wondering if it will be enough. OPEC's monthly report revised expected U.S. shale growth sharply upwards, predicting output to increase 64 percent more than originally expected. That equates to projected growth from U.S. shale of 950,000 bpd this year. OPEC fears that an extension will boost prices just enough to allow shale companies to lock in hedges once again, ensuring another wave of supply.
2018 supply balance now a concern. U.S. shale is coming back so quickly that market analysts see additional production posing a threat to oil prices next year as well. "Risks are emerging to 2018 balances," said Martijn Rats, oil analyst at Morgan Stanley, in a Bloomberg interview. "The U.S. is set up for strong supply growth next year, that could exceed one million barrels per day." The Rapidan Group, an energy consultancy, also sees problems looming next year. "The supply and demand balance for 2018 looks very bad," said Fared Mohamedi, chief economist at consultant The Rapidan Group. Several top shale players, including Pioneer Natural Resources (NYSE: PXD) have breakeven costs that are down around $20 per barrel, so "even in a $40 world, in a $50 world, we are making good returns," Pioneer's senior vice president, Frank Hopkins, told Bloomberg.
Amid bearish calls, Goldman sticks to bullish outlook. Goldman Sachs reiterated its belief this week that the oil market is already in a supply deficit. Goldman's head of commodities, Jeff Currie, said at a London Conference that oil investors should be betting on higher prices. "Do I want to be long oil? The answer is absolutely yes because we are going into a deficit market," Currie said at the S&P Global Platts Global Crude Summit in London on Wednesday. "With demand continuing to surprise to the upside," the oil market could find itself short on oil by some 2 million barrels a day by July. Related: Why Goldman Thinks You Should Go Long On Oil
IEA to review oil demand scenarios after EV push by China and India. China and India recently announced major initiatives to accelerate the adoption of electric vehicles. Because they are two of the most important sources of oil demand growth going forward, any efforts to cut into oil demand will have global implications. China said in April that it will aim to have EVs make up one-fifth of its car fleet by 2025. India is considering a plan to have its entire auto fleet electrified by 2032. As a result, the IEA said it would review its oil demand projections as part of its World Energy Outlook to be released later this year.
China suspends coal-fired power plants in 29 provinces. China's central government will bar new coal-fired power plants in much of the country because of overcapacity. Many coal plants have lower and lower utilization rates, due to an overbuild in power plant capacity and slowing growth in consumption. The government hopes to cancel or slow the construction of more than 50 gigawatts of coal capacity this year.
Repeal of methane emissions fails in Senate. An attempt to rollback Obama-era methane regulations failed in the U.S. Senate this week, as three Republican Senators crossed the aisle to help derail the effort. It was the first failed vote in the Senate so far this year. The rules require oil and gas companies to capture methane rather than flare it into the atmosphere during the drilling process. It only applies to drilling on federal lands. The failed effort might not be the end of the saga - the Department of Interior, which wrote the rule during the Obama years, can now undo it. But that is a long drawn-out legal process with an uncertain outcome.
Trump admin to consider seismic testing in Atlantic. The Department of Interior scrapped decisions dating back to 2014 that shot down applications for seismic testing in the Atlantic. Seismic testing is a crucial precursor to oil and gas drilling, and although further permitting reviews are needed, the latest move could eventually pave the way for seismic testing. Related: Oil Edges Higher As OPEC Reaches Consensus On Cut Extension
Occidental Petroleum to dock large supertanker at Texas port. Occidental Petroleum's (NYSE: OXY) plan to try to dock an enormous oil supertanker at the Corpus Christi Bay port could allow for greater volumes of crude exports from U.S. shores, if successful. The tankers could take U.S. crude to Asian markets.
U.S. and China come to terms on trade. The U.S. says that a new agreement with China could pave the way for greater access for U.S. LNG to be exported to China. The deal outlines trade sectors beyond energy, including beef and financial services, but U.S. Secretary of Commerce said it will also boost gas exports. However, it should be noted that the announcement does not offer any concrete detail on how the latest move will actually lead to more gas exports.
By Tom Kool of Oilprice.com
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Tom majored in International Business at Amsterdam’s Higher School of Economics, he is Oilprice.com's Head of Operations More