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Evan Kelly

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This Week In Energy: Can This Current Rally Last?

This Week In Energy: Can This Current Rally Last?

After weeks of floundering in the mid-$40s per barrel, a new rally for crude oil got underway this week. WTI jumped to $50 per barrel and Brent is now over $53 per barrel. There are several reasons behind the rally, some of which we have touched on before. U.S. oil production is declining, despite confusing weekly data from the EIA that sometimes suggests otherwise. The rig count fell sharply last week, which underpinned the notion that the sector is contracting.

This week, a few more bullish developments surfaced. One was a sudden weakness in the U.S. dollar. After minutes were released from the latest Fed meeting, global financial markets saw hesitation on the behalf of the central bank to raise interest rates. The possibility that the Fed might hold off pushed down the dollar, which tends to push up the price of crude. Related: Does This Offhand Gov't Comment Signal A Big Oil Opportunity?

Another reason oil prices are rising is the escalating conflict in the Middle East. Russia’s airstrikes in Syria are raising concerns about a worsening conflict. It is hard to imagine that the war in Syria, now more than four years old, could possibly get worse. However, Russia’s intervention adds even more complexity and potential for deterioration. The U.S. military is dramatically scaling back its assistance to Syrian rebels after the multiyear effort has proved to be an utter failure. The move is also being made with an acknowledgment about the seriousness of Russia’s intervention. Privately, the Obama administration believes that Russia will get itself bogged down in a conflict that has no viable solution at this point. In any event, it has been a while since geopolitical conflict has slapped a risk premium on the price of crude oil, but Russia’s actions appear to be doing just that.

Goldman Sachs, which has made headlines with its bearish calls for oil, reiterated its stance this week. The investment bank says that the recent rally is overblown and that the underlying fundamentals in the oil market for supply and demand are unchanged. Global oil markets are still oversupplied. Despite a contraction in U.S. production, other producers from around the world are making up for the shortfall. After everyone realizes that the rally in prices is too much, too soon, “we expect this rally to reverse and reiterate our forecast for lower prices for longer,” Goldman analysts wrote. Related: Historic Failure For Brazilian Oil Auction

The Bank of England is growing concerned about the financial system’s exposure to the collapse in commodity prices. The regulator asked British banks to disclose their exposure to plummeting values of commodity assets. In particular, the selloff of Swiss mining giant Glencore (LON: GLEN) over the past month caused the Bank of England’s Prudential Regulation Authority to step in. Glencore saw its share price melt down by 30 percent in a single day last week. The regulator wants to make sure that banks are preparing themselves for a lower-for-longer bust in commodity prices.

Encana (NYSE: ECA) announced plans to divest itself from oil and gas assets in Colorado. The Canadian company hopes to raise $900 million by selling 51,000 net acres from the Denver Julesburg Basin, and Encana will use the revenue to shore up its balance sheet. After taking damage from the collapse in crude prices, Encana is streamlining its operations and plans on focusing on four key areas: the Eagle Ford, the Permian, and the Duvernay and Montney Basins in Canada.

The movement by the oil and gas industry to convince the U.S. Congress to repeal the ban on oil exports continues to play out in Washington, despite some hiccups. After appearing to pick up inexorable momentum, the campaign has now become split along party lines after the White House issued a veto threat. The House will vote on a bill to lift the ban on October 9, and while passage is likely with Republican support, the bill is probably going nowhere unless Republicans can figure out ways to bring on board reluctant Democrats. The conversation has shifted to what kind of incentives can be added to the package to sweeten the deal, such as an extension of tax credits for renewable energy and funding for land conservation. Those sorts of things may attract Democrats, but an approach that includes a bunch of amendments may also collapse under its own weight, as too many unrelated interests bog down the effort. Meanwhile, the Republicans’ disarray over who will become the next Speaker of the House will absorb all of Washington’s attention until it is sorted out. Related: Energy Storage Just Got A Massive Vote Of Confidence

Investment in renewable energy reached $70 billion in the third quarter of this year, according to Bloomberg New Energy Finance. The total was down 1 percent from a year earlier, but the Americas saw a large increase in activity. Brazil saw investment in renewables jump by 131 percent; Chile’s investment shot up by more than eight-fold; and the United States saw investment surge to $13.4 billion, a 25 percent increase. Falling costs are allowing technologies like solar and wind to increasingly compete with fossil fuels around the world.

Malaysian state-owned oil and gas company Petronas is reaffirming its determination to develop a massive LNG project on Canada’s Pacific Coast. Petronas said that the C$36 billion (USD$28 billion) Pacific NorthWest LNG project will proceed despite the significant downturn in LNG markets. According to IHS Inc., only one in every 20 proposed LNG export terminals around the world will actually be needed by 2025. Japan is returning to nuclear power, which will cut into its LNG demand. China’s LNG demand is not growing as much as expected. As a result, many of the proposed projects will never be built.

By Evan Kelly of Oilprice.com

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