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Only Crisis Or Cuts Will Move Oil Markets

Oil Barrels

Despite hints from OPEC that the cartel would be extending its production cut deal, oil prices fell slightly this week. Oil continues to trade within a range with volatility falling to almost a three year low.  

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Friday, February 17, 2017

Oil prices fell slightly this week as more signs emerged that the market is still oversupplied. OPEC officials said that they were considering extending the production cut deal for another six months, a move that could be interpreted as bullish in the sense that they will keep oil off of the market for longer. However, it failed to inspire confidence – an extension would come because the market is still woefully oversupplied. Oil prices reacted in a way that has become a familiar pattern in recent weeks – moving only slightly up and then down and then back to where they were beforehand.

Oil stuck in narrow range. In fact, oil prices have traded between a narrow band of $4 per barrel for much of this year, pushing volatility to its lowest level in nearly three years. “We’re kind of resigned to the fact that the price is at about the right level,” Tim Evans, a Citi Futures analyst, told the WSJ. Even bearish inventory figures have not managed to move prices significantly. Evans says that to break out of this range, it might require a geopolitical crisis affecting supplies. Otherwise, it could be several more weeks of a bobbing around in the mid- to low-$50s per barrel before some new pattern emerges.

Libya output above 700,000 bpd; more to come. Libyan officials have said that oil production is now above 700,000 bpd, more than double the production level from last summer. More importantly, they are aiming to boost output to 1.2 million barrels per day (mb/d) by August and 1.7 mb/d by March 2018. That is a staggering amount of new supply if it comes to pass, and while there are good reasons to be suspicious of those targets given the turmoil in Libya, they are not entirely unrealistic. Eni (NYSE: E) and Total (NYSE: TOT) are ramping up activity and Bloomberg reports that many of the hurdles standing in their way – ISIS attacks and political infighting chief among them – have been sufficiently dealt with to allow them to resume operations. A wave of new supply from Libya is a downside risk to oil prices that needs watching.

Saudi Arabia attacks domestic oil demand. Saudi Arabia saw its oil demand skyrocket by 77 percent in the ten years through 2015, a massive increase in demand that ate into oil exports. Now, even as the oil kingdom cuts production in order to shore up prices, the cuts are undermined by the fact that demand is also waning a bit. New natural gas production is displacing oil in the electric power sector and the government has announced large investments in solar in order to also free up more oil for export. The summer peaks are getting smaller, which should help Saudi Arabia export more.

Related: U.S. Rig Count Rises As Crude Inventory Levels Hit Record High

Eagle Ford production up 14,000 bpd. According to the EIA’s latest Drilling Productivity Report, output from the Eagle Ford could rise by about 14,000 bpd in March, signaling a potential turnaround for the once prolific South Texas shale play. Meanwhile, Occidental Petroleum (NYSE: OXY) is trying to divest itself of its Eagle Ford assets, which could be worth about $500 million. Occidental has been doing what many other companies are doing: getting out of other shale basins and jumping into the Permian. But land prices are sky-high in West Texas, so there could be a growing trend to find bargains outside of the Permian. For now, there are early signs that the Eagle Ford is rebounding.

Land deals are back. The Houston Chronicle reports that the mood at the NAPE conference in Houston, the largest conference for buying oil and gas land, is ebullient. The number of deals expected to get done should be significantly higher as companies rush back to the shale patch. “We’re crazy busy,” Robert Cocanougher, a land owner in the Permian’s Delaware Basin, told the Houston Chronicle.

Crude oil inventories break new record. Surging by 9.5 million barrels last week, U.S. oil inventories jumped to 518 million barrels, a new all-time record. The massive build up in storage this year has been waved off by oil traders, who attribute the surge in stock levels to a temporary flood of OPEC oil at the end of 2016 ahead of their production cuts. Still, record high inventory levels will put a ceiling on oil prices for some time to come. Related: Natural Gas Prices Fall To 3 Month Lows On Disappointing Inventory Draw

Russian oil field could see new lease on life. The Samotlor oil field, Russia’s largest, could see a revival in production due to a favorable tweak in the Russian tax code. Samotlor is a gargantuan 25 billion-barrel field that once produced over 3 million barrels per day in the Soviet era. However, depletion, lack of investment and falling reservoir pressure have pushed output down to just 425,000 bpd. Now the field produces much more water than crude oil. But Bloomberg says output could rise if taxes change.

TransCanada files Keystone XL application. The Keystone XL saga is not over. After President Trump reversed the Obama administration’s rejection of the pipeline, the project is back on the table. TransCanada (NYSE: TRP) just filed for permits in the state of Nebraska, one of the key legal hurdles it still needs to clear.

Natural gas prices plunge. Natural gas prices fell to $2.84/MMBtu for March delivery this week, the lowest level in three months. The reason is that storage levels, which typically fall during winter months, have declined only modestly. That could result in another bout of oversupply as winter comes to an end. For several years, prices languished below $3/MMBtu because of a glut, most acutely in early 2016. The supply problems appeared to be over this winter, but they might linger a little while longer. Winners and losers? Natural gas drillers are hurt, obviously, and so are coal miners. Winners include petrochemical companies, gas-fired utilities, and consumers.

By Evan Kelly for Oilprice.com 

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  • Bud on February 17 2017 said:
    Ok, but what happens when we exit maintenance season and imports are down a few million bpd on the gulf coast, where your I mean the eia charts show the current surplus. They call them futures for a reason.
  • Dale on February 18 2017 said:
    Oversupply can almost exclusively be blamed on imports. For instance, When, on the Feb. 3 report, we are imported 9.3 m. bbls a day, which is 1.4 m. a day more than the average for 2016, and you are refining .4 m. more for the same week as the average for 2016, you are going to have a build of 1.0 + build per day that week.... The problem is not how much we are producing, but how much we are importing. Cut 1.0 a day in imports and inventories begin to fall.....One might say...we have contracts! Why not re-negotiate those contracts. Instead of a build of 14 m. bbls from 1/27, you only have a build of 2 m. bbl. for the week.
  • Dale on February 18 2017 said:
    I am enjoying seeing what this site holds. Thank you...for that. However, it seems that your headlines and articles are a little more overjoyed with the negative and downside reports. I am new to the site and that may not be true overall but I just has that feel. I am looking forward to having this information as the days move on. Thank you.

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