Oil prices see-sawed on Monday in slow electronic trading on a U.S. bank holiday, but spiked on Tuesday after bullish Saudi comments and a plunging U.S. dollar.
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Chart of the Week
• U.S. natural gas spot prices in 2016 dropped to the lowest level since 1999, averaging just $2.49 per million Btu.
• It is no coincidence that natural gas production peaked in early 2016 after rising without interruption for years.
• More recently, however, prices have been on the upswing as storage levels have gone from excessively high back down to long-run average levels.
Market Movers
• YPF (NYSE: YPF) saw its share price skyrocket 24 percent last week after news broke that the Argentine government agreed to extend fixed natural gas prices for several more years. The fixed prices at $7.50/MMBtu is intended to attract billions of dollars in foreign investment to Argentina’s massive Vaca Muerta shale basin.
• ConocoPhillips (NYSE: COP) announced a new oil discovery on Alaska’s North Slope. The discoveries could eventually lead to production of 100,000 bpd, and the project could come online by 2023.
• Noble Energy (NYSE: NBL) has agreed to take over Clayton Williams (NYSE: CWEI) for $2.7 billion in cash and stock, which will give Noble a greater foothold in the Permian Basin.
Tuesday January 10, 2017
Oil prices were flat to start off the week on mixed news. The U.S. oil rig count dropped for the first time in 12 weeks, and while it is too early to tell, the drop off could be an indication that the ratcheting up in drilling activity by shale producers could be reaching its limits. While that offered a bit of bullishness to the market, oil investors were a bit concerned over comments from Saudi officials that suggested that the OPEC deal probably will not be extended for another six months once it expires in June. Then, on Tuesday, oil turned positive after firmer comments from Saudi Arabia regarding the OPEC deal (see below).
OPEC deal to end? The production cuts only just started but Saudi Arabia believes they will be able to declare “Mission Accomplished” in June after the terms of the six-month deal expire. Saudi energy minister Khalid al-Falih said that the oil market will already reach a balance by that point, with inventories drawn down to reasonable levels. As such, he sees little chance of an extension of the deal that will see 1.2 million barrels per day (mb/d) plus 0.6 mb/d from non-OPEC countries taken off the market. But it is an open question whether or not inventories will merely resume their upward trajectory if OPEC members go back to producing full-tilt – some analysts think that the supply surplus would return if OPEC opens the taps again.
Oil down…and up again on Saudi comments. Every utterance from the Saudi energy minister seems to be moving the market these days. Oil was down on al-Falih’s comments regarding the extension of the OPEC deal, but turned positive on Tuesday after he said that OPEC as a whole – and not just Saudi Arabia – would adhere to its deal. Meanwhile, the U.S. dollar fell after president-elect Donald Trump said that dollar strength was hurting U.S. competitiveness. The weaker dollar helped crude oil prices. "The market genuinely seems quite happy here (around $55) ... but people are watching with caution as the slightest hint of this OPEC/non-OPEC agreement going wrong is going to drive the market down," Matt Stanley, a fuel broker at Freight Investor Services (FIS) in Dubai, told Reuters.
1 billion barrels obstacle to balance. The CEO of Dana Gas says that a massive pile of global oil inventories will prevent oil prices from rebounding. “We still have a significant global storage of oil, close to a billion barrels, and we’ll need to work that storage away before we can really say that we are in a firm supply/demand balance,” Dana Gas CEO Patrick Allman-Ward said Tuesday in a Bloomberg TV interview from Davos at the World Economic Forum. He also warned of “latent capacity” in Libya and Nigeria, which could present volatility to the market. Related: GreaseBook: Reporting Oil Production Just Became Much Easier
IEA: oil price volatility to rise in 2017. The uncertainty surrounding OPEC production cuts coupled with the rebound in U.S. shale, which could push oil prices down again, will ultimately lead to much more volatility this year. That comes from the IEA’s executive director Fatih Birol. “I would expect that we will see a rebalancing of the markets within the first half of this year,” he said over the weekend, according to Reuters. “But what I want to say (is) that we are entering a period of much more volatility in the market ... the name of the game is volatility.” He also warned about a supply shortfall towards the end of the decade if the oil industry does not substantially increase upstream investments from multi-year lows seen last year. “This year, if there are no major investments coming we may well see in a few years from now significant supply-demand gap with serious implications on the market,” he warned.
Drilling costs on the rise. U.S. shale is rebounding, with drilling rigs and production already increasing from the lows seen a few months ago. E&Ps are confident that the lower breakeven prices achieved over the past few years from cutting costs and improving drilling techniques will serve them well in this $50-per-barrel pricing environment. But the WSJ reports that drilling costs are now rising in conjunction with the level of activity. The price for oilfield services and supplies, such as frac sand, are up between 10 and 20 percent this winter. Costs for drillers will continue to rise the more oil prices increase.
China’s oil production continues to fall. China’s output is expected to drop by 7 percent this year, which comes after contracting by a record amount in 2016. Last year, China’s state-owned oil companies shut down mature and expensive oil fields, losing a total of 335,000 bpd. Analysts expect an additional 240,000 bpd drop off this year. Related: Is Las Vegas Really 100% Renewable?
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China halts construction on 100 coal plants. Chinese regulators halted construction on 100 coal-fired power plants with a combined capacity of about 100 gigawatts. The move is an aggressive step to address horrific air pollution in the country. The government is also targeting the installation of about 130 GW of renewable energy by 2020.
UK to break from EU. British Prime Minister Theresa May proposed a clean break from the European Union, dismissing the prospect of a “half in, half out” situation that would provide access to the single market. The news sent the British pound tumbling. However, the currency rebounded when the PM said that any proposal would be put to a vote in parliament.
IEA: no peak oil demand anytime soon. The IEA’s executive director Fatih Birol took to twitter to dismiss notions that global oil demand will peak anytime soon. The IEA sees rapid growth in oil consumption in several sectors over the next several decades that will offset any savings from the growth in electric vehicles. Oil consumption in aviation, petrochemicals, freight and maritime transit will overwhelm the efficiency gains in passenger vehicles, the agency predicts.
ExxonMobil makes acquisition to double Permian Basin assets. ExxonMobil (NYSE: XOM) agreed to purchase companies owned by the Bass family of Fort Worth, TX. The acquisition will cost $5.6 billion and will double Exxon’s reserves in the Permian to 6 billion barrels of oil equivalent.
By Evan Kelly of Oilprice.com
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