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Oil Storage Levels Point To Longer Downturn

We kick off with the most important data from the oil and gas sector this week:

Related: Oil Market Supply Imbalance Getting Worse, Not Better

Friday November 13, 2015

The latest clues from global oil markets indicate that prices could remain subdued in the near-term.

In its monthly report, OPEC’s output dipped a bit as export problems in Iraq cut into shipments. Iraq’s exports fell from 4.2 million barrels per day (mb/d) to a little over 4 mb/d. Collectively, the group produced 31.38 mb/d in October, falling by 256,000 barrels per day compared to September. Despite the hiccup, OPEC reported that oil supplies from around the world are still exceeding demand.

In fact, in a worrying sign, OPEC says that global storage levels are topping off. In OECD countries, crude oil storage hit 2,942 million barrels, which is 210 million barrels above the five-year average. With storage tanks filling up, oil is increasingly being diverted to tanker storage at sea. The Financial Times reported that oil tanker storage has hit 100 million barrels, a rather glaring indication that supplies are exceeding demand and, so much so, that onshore storage space is starting to run down. In short, global oil production continues to exceed demand, even though U.S. shale production continues to decline. For a rather pointed illustration of the problem, see the graph below from OPEC.

 Related: Can Russia Withstand Saudi Onslaught In The European Oil Market?

The news put a chill on oil markets, killing off the notion that a rebound was beginning to form after weeks of oil trading at stable levels in the mid$40s per barrel. This week saw a renewed downturn as rising inventories and persistently elevated production feeds the perception that “lower for longer” is here to stay. At the same time, oil production in the United States is still declining. The EIA expects U.S. shale basins to lose 118,000 barrels per day in production in December, and once again the largest declines (78,000 barrels per day) will come from the Eagle Ford. The Permian Basin could post a small uptick in production as it emerges as one of the few places where production is still profitable. In its latest forecast, the EIA projects WTI to average just $51.31 per barrel in 2016. Hard times for E&P companies could continue a while longer.

Encana Corp. (NYSE: ECA) posted a disappointing third quarter loss this week. The Canadian oil company reported a net loss of $1.2 billion for the quarter, or $1.47 per share, weighed down by some pretty hefty impairment charges. Last year, Encana earned $2.8 billion in the third quarter. Encana would have reported a much narrower $24 million quarterly loss if not for $1.1 billion in write-downs. Still, the company was able to boost liquids production by 35 percent from last year, its eighth consecutive quarter of growth. The company now produces about 140,000 barrels per day with a focus on the Permian and Eagle Ford in Texas, and the Duvernay and Montney in Canada.

Anadarko (NYSE: APC) made a preliminary offer to takeover Apache Corp. (NYSE: APA), but has since withdrawn the bid. Although the value of the offer was not disclosed, Anadarko said it was a modest premium on Apache’s $20 billion market value. Anadarko’s CEO Al Walker said he was not willing to go through with the deal without access to Apache’s non-public information. Apache does not appear eager to sell, and reports suggest that the company will only accept a takeover if the offer is well above its current share price. Related: Argentina Pulling Ahead In The Race To Be The World’s Next Shale Hotspot

While Anadarko considers its next move, the oil majors are sitting on a mountain of cash that could be used for takeovers. According to a Bloomberg analysis, the world’s six largest publicly traded oil companies have more than a half trillion dollars in both stock and cash; a war chest that could be used for blockbuster takeovers, if they choose to go that route. ExxonMobil (NYSE: XOM) alone has $320 billion that it could tap into for acquisitions. Chevron (NYSE: CVX) has a much smaller but still very large $65 billion at its disposal, BP (NYSE: BP) has $53 billion, and Royal Dutch Shell (NYSE: RDS.A) has $32.4 billion. The collapse of oil prices has bled the oil majors, draining them of cash, but they are still some of the world’s most valuable companies and could use their stock to takeover smaller players. Shell is the least likely to make another splash, having already agreed to purchase BG Group (LON: BG) for nearly $70 billion.

Noble Energy (NYSE: NBL) announced plans to lay off 180 workers, primarily in Texas, as part of a previously announced plan to cut back on spending. Noble has focused on the Permian Basin and the Eagle Ford, after its purchase of Rosetta Resources. But the collapse in oil prices has hit the company hard, and it announced plans to cut spending further after posting a $283 million quarterly loss.

Spanish oil giant Repsol (BME: REP) reported a 62 percent decline in quarterly earnings, with net income falling to 159 million euros from 415 million euros in the third quarter of 2014. Repsol purchased Talisman Energy in May 2015 for $13 billion. But its share price has sunk in recent months as debt has mounted. Repsol announced more than $1 billion in asset sales in the third quarter as it sought to raise cash and cut costs.

In a sign that it is moving forward after the rejection of the Keystone XL pipeline, TransCanada (NYSE: TRP) won a contract to build a natural gas pipeline in Mexico. The 155-mile Tuxpan-Tula pipeline will cost $500 million, and will be TransCanada’s fifth in Mexico. Construction is expected to begin in 2016, and when completed towards the end of 2017, the pipeline will carry 866 million cubic feet of natural gas from Texas. The pipeline will bring TransCanada’s total investments in Mexico to $3 billion. Mexico is aggressively building out its natural gas pipeline infrastructure in order to boost access of gas supplies for power producers.

By Evan Kelly Of Oilprice.com

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