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Oil Gains Momentum On Strong U.S. Economic Data

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Oil continued to gain momentum…

Evan Kelly

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Oil Stages Comeback On Bullish EIA Data

Oil prices spiked five percent on friday reaching two week highs on the back of stockpile draws and declining U.S. production. 

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Oil prices increased from the mid-$30s per barrel this week, with Brent once again rising above $40 per barrel and WTI sitting near $39 per barrel at the end of the week. Prices bounced around, trading down on growing pessimism surrounding the Doha meeting on April 17, but receiving a boost from the latest EIA figures.

EIA data looks bullish. The U.S. saw oil production fall by 14,000 barrels last week. The U.S. oil industry has posted consistent declines in recent months, and while the weekly data from the EIA is sometimes inaccurate, the best guess is that the U.S. is producing 9.008 million barrels per day right now. While it could take weeks or months to know conclusively, the U.S. could be about to drop below the key threshold of 9 million barrels per day in oil production.

Also, oil storage levels dropped last week for the first time in two months. Inventories fell by 4.9 million barrels to 529.9 million barrels and while that is down just a bit from the previous week’s record high, the oil markets grew optimistic that the drawdown finally marked an inflection point. If the U.S. posts a few more weeks of drawdowns, oil prices will likely firm up as the data will be pointing much more confidently towards the supply/demand situation reaching a balance. In other words, the data is showing more decisive signs that the global supply overhang will narrow and potentially disappear towards the end of this year. Related: Crude Rally Pauses After Strong Gains

Russia and U.S. work together on Syria constitution. In a heartening sign that the international community is making progress on ending the half-decade long civil war in Syria, Bloomberg reports that Russia and the U.S. are quietly working on drafting a new constitution for Syria. The discussions are in the early stages and are confidential, so little is known about the effort. But both sides are working towards a political transition in Syria with an August deadline. Last year, the interests between Russia and the U.S. were far apart, but more recently they have converged, both seeking stability in the war-torn country and a military victory against ISIS. Still, they differ on the fate of Syrian President Bashar al-Assad.

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Iran fights for market share. Iran has already said that it would not participate in the OPEC production freeze deal, arguing that it would not tinker with its output until it has brought exports back to pre-sanctions levels. Now it is stepping up its efforts to win back market share by undercutting Saudi crude in Asia, discounting its oil for the third consecutive month after seven years of selling at a premium. The National Iranian Oil Company will sell light Iranian crude at 60 cents below the Middle Eastern benchmark price. It will also sell the Forozan Blend to Asia at a $2.43 per barrel discount to the Oman and Dubai benchmarks. Crucially, the discount will be 3 cents per barrel cheaper than Saudi Arabia’s medium variety, a similar blend to the Forozan. “Unquestionably, since the lifting of sanctions, the Iranians have become a force to be reckoned with in global oil markets,” John Driscoll, chief strategist at JTD Energy Services, told Bloomberg. “Their mission is to recapture market share, pure and simple.” Related: Will Russian Urals Overtake Brent As The World’s Oil Benchmark?

Royal Dutch Shell under pressure to trim spending. Shareholders are pressing Shell (NYSE: RDS.A) to cut spending below $30 billion per year. The Anglo-Dutch company slashed spending by $8.4 billion to $28.9 billion in 2015, but it is expected to spend $33 billion this year, although those spending levels reflect a larger combined company with the completion of the BG purchase. Still, shareholders are not content with such high levels of spending – at $33 billion, Shell is spending $10 billion more than ExxonMobil. Low oil prices are squeezing revenue, and given the recent $50 billion purchase of BG Group, shareholders now want more restraint. Debt stands at 25 percent of Shell’s entire market cap. "Shell needs to cut capex to give the market confidence that the dividend can be sustained, and grown in future," Charles Whall, portfolio manager at Investec Asset Management, told Reuters. Analysts expect the company to lower spending in the coming months, and many have called for spending to drop to $25 billion by 2017.

Argentine President faces challenges. Argentina’s new President Mauricio Macri has a full plate as he tries to rework the economy. He has moved to trim subsidies on electricity and water, which is leading to a 300 percent increase in utility bills for some residents. He has devalued the peso and inflation continues to rage. Retail sales were down 5.8 percent in March as the new measures hit the Argentine public.

Separately, Macri agreed to settle with international creditors over outstanding debt, and in a landmark decision, the Argentine government is set to return to the international bond market next week for the first time since the country’s 2001 default. The government hopes to raise $12.5 billion, using part of the proceeds to pay off creditors. Morgan Stanley says Argentina may be the largest emerging-market bond issuer this year as it likely needs $20 billion. Related: Are The Saudis And Russians Deliberately Sabotaging Doha?

Meanwhile, President Macri’s name showed up in the Panama Papers this week, revealing that he was the director of an offshore company based in the Bahamas between 1998 and 2008. That has raised public ire but Macri insists that he has “nothing to hide.” Only a few weeks ago Macri’s approval rating was near 70 percent, but the enactment of a suite of austerity measures combined with the revelations in the Panama Papers are undercutting his popularity.

DOJ moves to kill Halliburton-Baker Hughes merger. The U.S. Department of Justice filed a lawsuit against Halliburton’s (NYSE: HAL) purchase of Baker Hughes (NYSE: BHI), arguing on antitrust grounds that the merger would stifle competition for an array of products and services in the oilfield services market. Halliburton and Baker Hughes, the second- and third-largest oilfield services companies in the world, have vowed to fight the lawsuit. Halliburton would have to pay a $3.5 billion fee to Baker Hughes if the deal falls apart.

Fire at ExxonMobil refinery. A massive fire hit ExxonMobil’s (NYSE: XOM) refinery in Baytown, Texas on April 7, spewing black smoke into the air. The fire was extinguished and there were no injuries reported.

Top threats to oil and gas industry? A new PricewaterhouseCoopers’ survey of oil and gas CEOs finds that the outside threats that worry executives the most are geopolitical uncertainty and potential unforeseen regulation, particularly from climate change regulation.

By Evan Kelly of Oilprice.com

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