Oil Under Pressure As Saudi Arabia Downplays OPEC Deal

We begin by taking a quick look at some of the critical figures and data in the energy markets this week, which show that oil prices have bounced up and dow as a result of continued OPEC output freeze rumors.

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Friday, August 26, 2016

Oil prices faced some downward pressure at the end of this week as Saudi Arabia seemed to downplay the chances of an OPEC deal in Algeria (see below). But oil prices moved back up during midday trading on Friday as reports surfaced that Yemeni missiles hit Saudi oil facilities. Meanwhile, Fed Chair Janet Yellen said that the U.S. Federal Reserve’s case to raise interest rates “has strengthened in recent months,” a sign that rate hikes could resume in the relatively near future. Ultimately the markets do not expect an increase in September, but the chances of a December hike are more likely. The dollar fell slightly following the news, providing a small boost for oil. 

Saudi oil minister casts doubt on freeze deal. In an interview with Reuters, Saudi Arabia’s oil minister Khalid al-Falih said that he did not think that intervention in the oil market was necessary, raising questions about the viability of a deal in Algeria next month between OPEC and Russia. He also said that no “discussions of substance” have been conducted yet. The comments throw cold water on the chances of a freeze deal, but they come just after Iran said that it would attend. Oil analysts are now at odds over the chances of a successful outcome.

China’s oil production in decline. The WSJ reports that China’s oil production likely peaked last year at 4.3 million barrels per day and is already in decline, perhaps permanently. China gets most of its oil from aging and depleting oilfields. The collapse of oil prices has made many of them unprofitable, and several of China’s state-owned companies have abandoned the least attractive fields. The result will be a higher dependence on imports in the years to come. China’s top oil companies posted awful financial numbers this week, revealing sharp declines in profits.

Environmental groups turn Dakota Access Pipeline into Keystone XL rerun. A group of 31 environmental groups sent a joint letter to President Obama this week, urging him to stop construction on the Dakota Access Pipeline, a $3.7 billion oil pipeline that would run from the Bakken in North Dakota to Iowa. The project has burst onto the scene, thrust into the political limelight. Environmental groups seem intent on turning it into another Keystone XL – a project that they can raise national attention around, putting pressure on the federal government. But it isn’t just environmental groups; the 450,000 barrel-per-day pipeline would cross tribal lands, so Native American communities have been at the forefront of the protest.

Wall Street pours cash into Permian Basin. The Permian Basin in West Texas is one of the few shale regions in the U.S. where drillers can still produce at a profit, even at today’s prices. With production falling off in North Dakota (Bakken) and South Texas (Eagle Ford), billions of dollars are flowing out from shale basins around the country and instead flowing into the Permian. Blackstone Group announced on August 25 its decision to invest $1.5 billion in Permian holdings, plus an additional $500 million in a group of oilmen in a separate part of the Permian, according to The Wall Street Journal.

Private equity, banks, and oil companies themselves are pooling all of their resources and going big into the Permian. The result is that land prices are shooting through the roof. About half of the $25.5 billion in asset deals this year have occurred in the Permian Basin, according to RBC Capital Markets. “There’s this one corner of the world, the Permian Basin, where investors will keep financing you to keep on acquiring,” said Bryan Sheffield, CEO of Parsley Energy, a company that recently spent large sums on Permian assets. While the Permian has attracted so much attention, some worry the money spent is overdone. “Some are starting to feel like this is a bubble,” said Charles Robertson II, an analyst at Cowen Group, according to the WSJ. Related: Trump Unnerves Fracking Chiefs While Obama Admin Supports It

Banks cut lending. Banks slashed lending to the oil and gas industry by 3 percent overall in the second quarter, according to Barclays. But that masks the much deeper cuts to credit lines by individual banks. Green Bancorp, for example, decided that it would end lending to the sector entirely because oil and gas lending has become such a headache. U.S. Bankcorp and Comerica, two other banks, slashed their energy exposure by 11 percent in the second quarter. Not only has lending become a riskier proposition in recent years as more companies default on their debt payments, but federal regulators are also scrutinizing banks for their exposure to distressed assets.

Venezuela not importing enough oil. Venezuela has been unable to import the necessary oil and refined product it needs to cover domestic needs, as the country’s oil production continues to fall. Oil imports fell 21 percent in the first seven months of this year, according to Reuters, but not because it does not need the supplies. Suppliers are reluctant to sell Venezuela oil because of the country’s inability to pay for the shipments. "We have no more access to purchases under any type of credit. We are importing under two mechanisms: prepayment and swap," a source told Reuters.

Coal rail traffic plunges. The decaying state of the U.S. coal industry continues. According to the Association of American Railroads, coal traffic on the railways for the week ending on August 20 plunged by 16.6 percent year-on-year. And so far this year, coal shipments by rail have fallen by 27.5 percent compared to a year earlier. Declining rail shipments mirror the decline of U.S. coal production – coal miners produced 437 million tons so far in 2016, or about 25 percent less for the same period a year earlier.

By Evan Kelly of Oilprice.com

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