Oil prices continued to pick up steam for the week ending on February 13. Brent crude traded above $60 per barrel for the first time in 2015, a psychological threshold that caught the markets by surprise and points to a potential price rebound quicker than many had previously thought.
The price surge is underpinned by a continued pull back by the industry. There were also several catalysts this week that pushed oil higher. Apache Corporation (NYSE: APA) reported its fourth quarter earnings this week, and announced a significant draw down in its drilling plans for the year. One of the biggest drillers in Texas, and in the Permian basin in particular, Apache plans on reducing its drilling fleet by 70%, and revised its estimated production growth down to essentially zero.
Also, Royal Dutch Shell’s (NYSE: RDS.A) CEO Ben van Beurden warned investors about the potential for prices to spike in the next two years or so. Echoing prior comments from OPEC officials, van Buerden said that severe cutbacks in investment and drilling could result in a supply shortage, not necessarily in 2015, but in the coming years.
Several other background indicators supported oil prices, including positive news coming out of Europe. German GDP figures beat estimates, reducing fears of a European-wide recession. The markets also raised hopes that a resolution to the Greek debt situation would be less intractable than previously thought. Greek officials are meeting with international creditors on February 13. Moreover, the U.S. dollar weakened a bit this week. Retail sales in the U.S. disappointed, falling 0.8% in January from a month earlier. That contributed to a 1% decline in the dollar index. Since oil is priced in U.S. dollars, the depreciation helped push up oil prices.
Meanwhile, it appears that German and French diplomacy in Eastern Europe may have paid off. Angela Merkel and Francois Hollande achieved a major breakthrough, getting Russia and Ukraine to agree to a ceasefire that is set to begin on Sunday, February 15. It is far from clear that the deal will stick over the long-term. And the details of the ceasefire largely resemble the deal agreed to last September, which crumbled in subsequent months. The deal leaves both sides falling short of their goals – Ukraine ostensibly retains control of its eastern provinces, but must pull back its forces, essentially granting territory to pro-Russian rebels. On the other hand, Russia will not be able to rid itself of western sanctions anytime soon, and under the terms of the deal, it acknowledges Kiev’s authority in Ukrainian lands along the Ukrainian-Russian border. This raises a lot of uncertainty around the longevity of the ceasefire, but for now, it has eased tensions and significantly reduced the prospect of the U.S. shipping weapons to Ukraine.
Back in the U.S., ExxonMobil (NYSE: XOM) is hoping to break the logjam in its favor in negotiations between the oil industry and striking refinery workers. ExxonMobil is offering bonuses to workers at its Beaumont, Texas refinery, if they agree to sign five-year contracts instead of the traditional three years. The longer contract would lower the chances of a future work stoppage, something ExxonMobil is keen to avoid as it considers a massive expansion that may not be completed until 2020. The multibillion dollar build out would increase the refinery’s capacity by 60%. To sweeten the deal for workers who agree to sign up for five years, ExxonMobil will offer $4,500 bonus checks. But it would also breakup the unity between the local union and its national brethren, an added advantage for the industry. Still, it is unclear if this offer will lead to a solution. As the strike nears its third week, there are no negotiations scheduled but the industry is reportedly in the midst of considering a union counterproposal.
Speaking of ExxonMobil, the Wall Street Journal explored the idea that the oil giant may consider a takeover of BP (NYSE: BP), a peer that has been chastened and weakened in recent years. A purchase of BP would allow ExxonMobil to grow its production base, while getting enormous assets on the cheap. ExxonMobil has a track record of snatching up competitors during weak market conditions. It purchased Mobil in 1999 during a rough patch, and took over XTO shortly after the financial crisis. If ExxonMobil were to take over BP, it “would create an oil company of a size without modern precedent,” the WSJ says. Still, it is far from a done deal, and consolidation in the face of market weakness may be a thing of the past. “The idea that bigger is better I don’t think holds water,” Amy Myers Jaffe, a respected voice on energy matters, told the WSJ.
In Washington, the seemingly endless debate over the Keystone XL pipeline appears to be at an end stage. The U.S. House of Representatives passed legislation approving the much-maligned pipeline project, but it is destined for a Presidential veto. The President is expected to reveal whether he will ultimately allow the project to move forward or not in the coming weeks.
With few options left, TransCanada is looking to build pipelines elsewhere. The Canadian pipeline builder is applying for a permit from the State Department to build a 200 mile pipeline that would connect oil in the Bakken in North Dakota to a Canadian pipeline in Saskatchewan. The proposed pipeline would then tie into TransCanada’s massive Energy East pipeline, a project on the drawing board that would transport oil 3,000 miles across Canada to reach the Atlantic Coast. While the U.S. does not allow crude oil exports, the U.S. government often grants waivers for exports to Canada. TransCanada may run into trouble obtaining the go ahead for the same reasons that Keystone XL has, but as a smaller pipeline that is only dealing with exports, opposition will probably be much more muted.
By. James Stafford of Oilprice.com