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Russian Backed OPEC Deal Brings Back The Bulls

Offshore night

Oil prices rose fast on Monday after Russian president Vladimir Putin expressed support for an output cut, but fell slightly on Tuesday after IEA’s bearish report.

Chart of the Week

(Click to enlarge)

• For the first half of 2016, residential electricity prices averaged 12.4 cents per kilowatt-hour, a decline of about 0.7 percent from a year earlier. The U.S. is on track to see its first decline in retail electricity prices in 14 years.

• Low natural gas prices are at the heart of the slight decline in prices. Natural gas prices were about 28 percent lower in the first half of 2016 compared to a year earlier.

• The decline in electricity prices may not continue, however, as natural gas prices have rebounded in recent months, rising above $3 per MMBtu in October.

Market Movers

• A federal appellate court said construction could proceed on the Dakota Access Pipeline, but the U.S. Army Corps of Engineers said it has not yet authorized construction after calling for a pause last month. The controversial $3.8 billion pipeline is owned by Energy Transfer Partners (NYSE: ETP).

ConocoPhillips (NYSE: COP) has started production at the second of its two units at its Australia Pacific LNG facility. The coal seam gas-to-LNG plants off of Australia’s east coast has the capacity to ship 9 million tons per year.

Brigham Resources LLC is considering a sale of the company, while also planning an IPO next year. The four-year old company has quality assets in the white-hot Permian Basin and could be worth $2 billion. It is testing the waters for a sale, but also has plans for a 2017 IPO.

Tuesday October 11, 2016

Oil prices continued to add to the latest rally, with credit for the latest gains due to Russian President Vladimir Putin, who lent his support for OPEC’s production cut. Putin said on Monday that Russia “stands ready to join common efforts to limit production” and he also said that intervention from OPEC and Russia to reduce production is “the only way to save the stability of the energy sector.” The comments were enough to push oil prices up to one-year highs on Monday. Russia is the largest oil producer in the world at over 11 million barrels per day.

Putin and OPEC all talk? The comments could once again be an attempt from a top oil producer to push up the prices through a bit of market psychology, only to be followed by some less-than-substantial actions on production levels. But recent history suggests that trying to manipulate the oil markets is indeed possible in the short-term. WTI and Brent are now trading comfortably above $50 per barrel. “I think we’re going to see the market react to a number of potentially competing headlines” over the next several weeks, said Andy Lipow, president of Lipow Oil Associates, according to The Wall Street Journal. Mark Waggoner of Excel Futures agreed. “We still have a glut. We still should have prices going lower,” he told the WSJ. “Everyone wants prices higher but nobody wants to cut. By jawboning the market higher, they don’t have to do anything.”

IEA downgrades demand…again. In its October Oil Market Report, the IEA said that demand continues to soften, with a deceleration underway in China. The energy agency lowered its 2016 oil demand growth estimate to 1.2 million barrels per day, down from 1.3 mb/d in September and 1.4 mb/d in August. At the same time, the IEA said the world remains flush with oil, as OPEC has succeeded in ramping up production to record levels. “Left to its own devices”, the IEA says, the oil market “may remain in oversupply through the first half of next year. If OPEC sticks to its new target, the market’s rebalancing could come faster.”

Higher OPEC production threatens Algiers deal. The IEA also said that OPEC’s rising production threatens to overwhelm the planned production cuts announced in Algeria last month. OPEC’s oil output rose by 160,000 barrels per day in September to an all-time high of 33.64 mb/d. Gains from Iraq, Libya, and Iran pushed production higher, while the Gulf States continued to pump at elevated levels. The problem with that is that OPEC would need to somehow find cuts on the order of at least 600,000 barrels per day just to reach the upper end of the range (32.5 mb/d to 33.0 mb/d) that it said it would lower output to. That may be difficult to pull off and would likely require Saudi Arabia to do almost all of the heavy lifting. Goldman Sachs agreed – in a note to clients the investment bank said that while the odds of a deal in November have become a “greater possibility,” the cuts might be dwarfed by rising production from within OPEC. "Higher production from Libya, Nigeria and Iraq are reducing the odds of such a deal rebalancing the oil market in 2017,” Goldman analysts wrote. Related: Russia Nears Completion Of First Floating Nuclear Plant

Saudi Arabia says oil will last 70 years. Saudi Arabia plans on selling at least $10 billion in bonds in order to raise cash for its depleted treasury, and as part of its bond prospectus, it revealed that it expects its 266.5 billion barrels of oil reserves to last another 70 years, according to Bloomberg News. However, those numbers have not been independently verified and Aramco admits that the figures are difficult to precisely assess. The oil reserves figure of 266 billion barrels, for example, has not changed in years. Still, Aramco is moving forward with an IPO in 2018, and the 5 percent offering of what is expected to be a $2 to $3 trillion company could bring in roughly $100 to $150 billion.

Royal Dutch Shell (NYSE: RDS.A) backed out of plans to build an oil train terminal in Washington State to receive oil from North Dakota. The decision is the latest major infrastructure project planned for the Pacific Northwest to bite the dust. Shell said a tight capital market and persistent low crude oil prices made the project not economically viable. But the failed terminal is another blow to the Bakken, which has struggled to find enough pipeline and train capacity to move product to market.

Turkey and Russia sign agreement to move natural gas pipeline forward. Russia and Turkey continue to improve their relations after the downing of a Russian jet last year along Turkey’s border. On the sidelines of an energy summit in Istanbul, Russian President Vladimir Putin and his Turkish counterpart Recep Tayyip Erdogan signed a deal to push the Turkish Stream pipeline forward. The pipeline would carry Russian gas through the Black Sea to Turkey, and then on to the rest of Europe. Turkish Stream is seen as a rival to European backed pipeline from the Caspian Sea.

BP scraps drilling plans for Australian Bight. BP has cancelled controversial drilling plans for the Great Australian Bight, a stretch of coastline on Australia’s southern coast that the British oil giant billed as one of the last great unexplored oil frontiers. BP said that it was abandoning plans for the Bight because the project would not be able to compete with other projects around the world for increasingly scarce capital. The drilling plan had been subjected to stiff environmental opposition, but BP scrapped the project on commercial grounds.

By Evan Kelly for Oilprice.com

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