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Evan Kelly

Evan Kelly

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This Week In Energy: Oil Markets May Finally Be Adjusting

The oil price rally is finally underway. This week saw both WTI and Brent hit their highest levels in all of 2015 thus far. WTI closed on April 16 above $56 per barrel and Brent extended its lead into the $60s, settling above $63 per barrel. Through all the fits and starts over the past few months, the gains this time around appear to be more justified. That is because the markets are finally adjusting.

U.S. oil production is poised to post a monthly decline of 57,000 barrels per day in May as the main shale regions in North Dakota and Texas feel the pinch. Not only that, but inventories increased by just 1.2 million barrels, much less than expected. That indicates that not only is the flood of new oil slowing, but also that refiners are stepping up the rate of processing. Refining throughputs are much higher than they typically are for this time of year. The spread between crude oil prices (WTI trades at a discount to Brent) and the product markets for gasoline, diesel and other refined products (which trade much closer to the higher Brent prices), has provided a windfall for refiners. Instead of taking a lot of refineries offline for maintenance, they are running at higher capacity in order to take advantage of the unique opportunity right now. And that extra activity is providing more pull on the demand side. As production curtails and demand picks up, oil prices are finding their footing. Related: Why It Won’t Matter If Oil Prices Rebound

Still, that stands in contrast to some of the bearish news of the week – that Saudi Arabia was pumping oil at a near-record rate. Now standing at 10.3 million barrels per day, Saudi Arabia is unwavering in the face of low oil prices. OPEC increased its monthly output in March to 31.49 million barrels per day, led by gains from Saudi Arabia, Iraq, and Libya. Combined, OPEC increased its production by an astounding 1.2 million barrels per day in March from a month earlier.

But, interestingly, oil traders barely flinched. The markets feel the extra output from OPEC will be more than offset by slowing production in the U.S. coupled with rising global demand around the world. The IEA, in its monthly Oil Market Report, concluded that oil demand will rise by more than 2 percent between now and the end of the year. Oil prices have broken into new, higher territory this week, raising the likelihood that a true rally could be beginning.

Oil prices may rise, but the damage from the oil bust has already taken its toll on some. Schlumberger (NYSE: SLB), one of the world’s largest oil field services firms, just announced another round of layoffs. The company will lay off an additional 11,000 workers, bringing its total job losses to 20,000. That amounts to about 15 percent of the company’s entire workforce. Other companies are hurting worse. Bloomberg looked at the companies that build lodging for oil field workers. Man camp companies are running dangerously low on cash. Civeo (NYSE:CVEO), a man camp builder, has seen its stock price plummet by 89 percent over the last year. Boom times are over in North Dakota and Texas. Related: Latest EIA Predictions Should Be Taken With More Than A Pinch Of Salt

On Tuesday we brought you news on Gazprom’s subtle threat to European Union members on the prospect of negotiating a gas deal collectively. Gazprom’s chief said that a single price for the entire EU would be much higher than what individual countries receive, words that no doubt were intended to scuttle Europe’s motivation to play hardball with Gazprom. Some countries receive preferential prices that could go away if the EU wants a single price, Gazprom seemed to suggest. But the EU fired back. The EU’s Competition Commissioner had some tough words aimed at Moscow. Margrethe Vestager was in Washington where she said she would take a hardline on energy companies that “harm rivals, block energy flows from one EU country to another, or threaten to close the tap.” Gazprom was not mentioned by name, but there is little mystery over which company she was referring to. Her comments also carry some extra weight coming on the heels of formal charges that the EU filed against Google for violating anti-trust laws. Vesta
ger and the EU Commission are no pushovers, and an investigation against Gazprom could be released in the coming weeks, perhaps accompanied with formal anti-trust charges.

China greenlighted the construction of a nuclear reactor, a move that made headlines because the technology that will be used comes from a domestic design. China has a huge queue of nuclear reactors under construction, and is one of the few countries still moving forward on nuclear power with gusto. But up until now it has used foreign technologies, typically designs from western companies. American-based Westinghouse and the French nuclear giant Areva have led the race to build reactors in China. However, both have struggled with terrible construction delays and cost overruns, a plague that has bedeviled the growth of the nuclear industry worldwide. Areva is bogged down with delays on multiple projects in France and elsewhere. Westinghouse also has a nuclear project in China facing delays. Related: Has The Bakken Peaked?

China, fed up with the hassle, is going it alone. Originally, China planned on leaning on western firms until its domestic companies could get up to par, but it is taking a more assertive approach now. The Hualong One reactor design will be used for units 5 and 6 at the Fuqing nuclear power plant, which is located in Fujian province. The road will be tough, but if China National Nuclear Corporation – the lead on the project – can successfully demonstrate world-class design and safety standards, and build the project on schedule, western firms could find their largest market start to shrink as China relies more heavily on its own companies. “Technologies used in the Hualong One reactor are based on experience gained after two decades of producing nuclear power for civilian use and have taken reference from the world's top-notch designs,” China’s State Council said on April 15.

By Evan Kelly Of Oilprice.com

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