Oil prices rose on Friday as a result of a strong draw to U.S. oil inventories and early signals that OPEC is following up on their pledge to cut output
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Friday, January 6, 2017
Oil prices are set to end the week slightly up from where it started, following a few rocky days of trading. After a sharp correction earlier in the week, oil regained ground on a steep fall in crude oil inventories. Still, the gains would have been much larger if not for the fact that U.S. gasoline stocks rose sharply. Nevertheless, oil is starting off the year on a positive note, and early signs of OPEC compliance (more below) are buoying the market.
Tesla gigafactory starts up. Tesla (NYSE:TSLA) announced that its gigafactory has started commercial production of batteries at its much-hyped gigafactory in Nevada. The inauguration of mass battery production marks a new era for the energy industry. The gigafactory could lower the cost of batteries for electric vehicles as well as home energy storage systems. Tesla says that at peak production, slated for 2018, the factory will add as much battery capacity to the global market as the rest of the world currently produces.
U.S. to become net-energy exporter. The EIA released its Annual Energy Outlook 2017, with projections out through 2050. The report estimates that the U.S. will become a net-energy exporter in the years ahead under most of its possible scenarios. That is largely due to falling oil imports and rising natural gas exports. The higher energy prices go, the quicker the U.S. becomes a net-exporter.
Saudi Arabia says that it is already is complying with OPEC deal. Saudi Arabia offered encouragement to oil traders this week when it announced that it is lowering its output to 10.058 million barrels per day (mb/d) in January, complying with its promised cuts laid out in the November OPEC deal. OPEC members are required to bring their six-month average production levels to the targeted range, but Saudi Arabia said it will meet that level immediately. The announcement adds credibility to the deal and raises the likelihood that other members will comply with their targets.
Second quarter to see tightest supply conditions. The second quarter of 2017 appears to be the period of time in which the global oil market will experience its tightest conditions: Other OPEC members will ratchet down their production levels to comply with the deal; non-OPEC countries including Russia will lower output; U.S. refineries will begin to ramp up operations to meet summer driving demand; Middle East countries such as Saudi Arabia and Iraq burn more oil in warmer months; inventories will decline as supply drops; plus underlying growth in oil demand continues to soak up excess supply. Many oil analysts expect oil prices to rise the most in the first two quarters of 2017, with the market easing in the second half of the year, potentially leading to lower prices in late 2017.
Speculative bets on rising oil prices continue to increase. Oil speculators continued to add bullish bets on oil prices at the end of 2016. For the week ending on December 27, bullish positions rose by 7 percent to 358,573, with the current makeup the most net-long since 2014. Long bets outnumbered short positions by a factor of 35 to 1, the WSJ reports. That sets up the market for downside risk if bearish news emerges in the coming weeks. If speculators get spooked, they could begin to unwind their positions rapidly, leading to a sharp correction in oil prices.
Oil deals hit $69 billion in 2016. Oil M&A activity reached $69 billion in 2016, more than double the total from the year before, according to research firm PLS. Much of that activity was focused in the Permian Basin in West Texas, as companies rushed to scoop up acreage in the country’s most prolific shale basin. "In 2017, we do believe that acquisition activity will expand beyond the Permian into other known, proven plays that become significantly more economic at pricing above $50," Brian Lidsky, managing director of research and content at PLS, told CNBC.
Goldman Sachs sees EOG Resources as “favorite” pick. Goldman Sachs’ says that EOG Resources (NYSE:EOG) is their “favorite” pick in the E&P space, noting that the company could grow production 20 percent annually through 2020. EOG will have free cash flow in 2018 and beyond; the company will also see expensive rig contracts signed back in 2014 start to expire this year, reducing costs; and EOG is working through already drilled but uncompleted wells this year, which should boost cash flow.
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OPEC production falls in December. Output from the cartel dipped in December on falling Nigerian output. Nigeria was exempted from the OPEC deal, but saw its production fall by 200,000 bpd in December. Meanwhile, Royal Dutch Shell (NYSE:RDS.A) shut down the Trans Niger Pipeline this week after a fire struck the line. The pipeline is one of the country’s largest, able to transport 180,000 barrels per day to the Bonny Export Terminal. The outage raises the possibility that Nigeria’s oil production could fall even further. Output was down to 1.45 million barrels per day in December, not far above the 1.39 mb/d low reached in August.
China to invest $360 billion in clean energy. China announced plans to invest $360 billion in renewable energy over the next four years. The move comes as Beijing has been choked in smog this winter, adding urgency to the country’s campaign to cut pollution. Separately, a report from the Institute for Energy Economics & Financial Analysis finds that China is surpassing the U.S. in clean energy investment and leadership. At a time when U.S. president-elect Donald Trump is poised to roll back clean energy investment, China could widen its lead over the U.S. in an industry that could dominate the 21st century energy landscape.
New gasoline taxes. The U.S. has seen gasoline consumption rise to record highs, but consumption could flatten out as oil prices rise. Gasoline prices are now 35 cents per gallon higher than they were a year ago. On top of that, several U.S. states have imposed steeper gasoline taxes that came into effect in the New Year. New Jersey tops the list, adding a 23-cent per gallon tax at the pump.
By Evan Kelly of Oilprice.com
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