Oil prices continue to show some strength, closing out the week near their highest levels for 2015. The EIA reported another slight decline in oil production in the United States, the third decline in four weeks. For the week ending on April 17, the U.S. was producing 9.36 million barrels per day, a drop off of about 22,000 barrels per day. Crude inventories did rise, however, indicating that there is still a lot more production than refineries can handle. But on the other hand, gasoline stocks were drawn down by 2.1 million barrels, suggesting demand is gaining some momentum.
Once again, the picture is as clear as mud, but signs are starting to point in the direction of a more balanced market. WTI traded up to $57 per barrel and Brent to $65 per barrel. That is still far below the peak in 2014, and low enough to continue to inflict damage on a lot of the oil industry. But it is almost high enough that some drillers may start completing some of their wells they have put on hold. Bloomberg projects that if WTI reaches $65, an additional 500,000 barrels per day could come online by the end of 2016 as the backlog of wells awaiting completion is worked through. There are an estimated 4,731 wells sitting on the sidelines that will be completed when oil prices rise to a level drillers see as sufficient. That additional output could keep a lid on prices, effectively pushing them back down after they rise past a certain point. Related: How To Spot An Undervalued Oil Company
Another reason why oil prices may not surge much higher than where they are now is that Saudi Arabia is clearly stepping up its production levels in order to keep the pressure on high cost producers. Saudi Arabia is dipping into its spare capacity – the only real reserve potential in the world – in order to raise output to their highest levels in decades. Those additional flows, pushing OPEC production well above its stated quota, will keep the market saturated. Over the longer-run, if Saudi Arabia produces flat out and shrinks its spare capacity to low levels, the markets will grow nervous about inadequate backup supplies and will bid up oil prices. But in the near-term, higher Saudi output will keep prices from rising much beyond the $55-$70 range.
Spare capacity is particularly important to guard against unexpected geopolitical events. The war in Yemen – which is not affecting oil supplies at the moment and in all likelihood won’t in the future – is an example of one type of unforeseen event that can breakout with little warning. Although Yemen is not a significant oil producer, the Gulf of Aden sees a lot of oil traffic – an estimated 4.7 million barrels per day. Saudi Arabia, despite announcing it was calling off airstrikes, continued to pound Houthi rebels in Yemen this week. The violence is likely adding a few dollars per barrel to the price of oil, a geopolitical risk premium that had become all too familiar in recent years but has been largely absent over the last 9 months or so amid a glut in supply. Related: Putin Betting On An Argentinian Shale Boom
Earnings season is underway and there will be a lot of attention paid to the results from the first quarter in the oil industry over the next few weeks. With across the board spending cuts, many of the larger producers that are not in a distressed situation have an opportunity to slim down and rein in costs and right-size their spending for the next decade or so. Some of the gargantuan oil projects of the future may no longer be green lighted the way that they were in the past, as the oil majors focus on providing shareholder value. Aside from Eni (NYSE: ENI), most of the oil majors insist that their dividend payouts –a semi-sacred policy for the biggest companies – will not be touched.
Petrobras (NYSE: PBR) finally disclosed more concrete financial numbers that provide a detailed picture of the losses it suffered as a result of the corruption scandal. The scandal, which consisted of contractors overcharging Petrobras for work and then kicking back cash to top Petrobras executives as well as the ruling Workers’ Party, has decimated Petrobras’ balance sheet. Having missed several reporting periods, Petrobras flirted with a technical default as creditors demanded more information. This week Petrobras finally came forward. It reported a $2.1 billion loss directly from the scandal, as well as billions more in write downs for overvalued assets. In total, the company wrote down $17 billion. Drowning in debt, Petrobras needs to find a way out. However, the move to publish the losses was well received by the markets, as it offers the company a chance to put the issue in the past. Still, with so much debt – exacerbated by low oil prices – Petrobras will not be able to fulfill its production targets for the near and medium term. A much more modest future awaits. Related: Big Hit For U.S. Oil Production In January
Back in the United States, scientists working for the state of Oklahoma have concluded that the disposal of water after fracking is contributing to a monumental increase in the frequency of earthquakes hitting the state. Although scientists have suspected a strong link between disposal wells and seismic activity for some time, officials in Oklahoma have been slower than others to come to such a conclusion. But the number of earthquakes has become too hard to ignore. Oklahoma has seen its seismicity rate skyrocket – it is now 600 times greater than it was in 2008. Regulators are not necessarily cracking down at this point, as they do provide quite a bit of leeway to the industry. But the statement released by state seismologists this week was the strongest worded statement yet, possibly portending more of an active approach in the future from a regulatory standpoint.
Coal mining giant Peabody (NYSE: BTU) reported disappointing figures for the first quarter. In a sign of the times, Peabody is struggling under weak coal prices, weak demand, and oversupply. The U.S. is rapidly switching from coal to natural gas in the electricity sector, undercutting demand. Also, coal demand in China is much softer than the company (and the industry) had expected. It points to an interesting trend unfolding – countries around the world appear to be moving much faster than expected towards natural gas. That bodes well for LNG exporters, but not so much for coal producers.
By Evan Kelly of Oilprice.com
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