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This Week In Energy: Oil Prices Under Pressure From All Sides

This Week In Energy: Oil Prices Under Pressure From All Sides

In a move that will reverberate throughout the country, the local Lancashire County Council in the United Kingdom rejected a permit for a shale gas project. We discussed the pending case in Tuesday’s newsletter. The landmark decision will delay – if not derail entirely – Britain’s shale gas hopes. Cuadrilla Resources, a shale driller, had hoped to develop one of the U.K.’s first major shale gas project using fracking. But local opposition has been fierce, and the project has been working its way through the government permitting system for years. Lancashire ultimately rejected the permit out of concerns over too much truck traffic. Cuadrilla is still awaiting a decision on a second permit, which is expected to be issued on June 29.

The British government led by Prime Minister David Cameron has embraced fracking and shale gas development in a way that much of the rest of Europe has not. With fracking blocked in France, Scotland, Bulgaria, Romania, the Czech Republic, and Germany, among others, the shale gas revolution has not spread to Europe. Poland was seen as the continent’s greatest hope for shale gas, and the Polish government went out of its way to court major companies. Poland even saw significant drilling activity and investment from international drillers, but ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and others have pulled the plug on those projects in recent years after disappointing results. That left the U.K. as one of the remaining countries that could spark shale development. The setback for Cuadrilla now throws that into doubt.

The negotiations over Iran’s nuclear program are coming down to the wire. With the June 30 deadline a few days away, both the U.S. and Iranian diplomats have signaled their willingness to work into the early days of next month in order to complete the historic agreement. There are conflicting signs emerging from talks, however. A senior U.S. official who spoke on the condition of anonymity said on June 25 that a path exists for a “very good” deal with Iran, although some issues have yet to be overcome. The remarks would seem to suggest that the parties are making progress. Related: Investors Should Prepare For The Long Infrastructure Boom

However, earlier this week, the Supreme Leader of Iran, Grand Ayatollah Khamenei, dug in deeper with harsh words on the state of the negotiations. He appeared to take a tougher line, demanding the removal of sanctions on the same day that a deal is signed, something that the U.S. would likely balk at. Khamenei also emphasized his opposition to allowing international nuclear inspectors into the country, and said that the decade-long freeze on Iran’s nuclear program was unacceptable. Khamenei’s comments threw cold water on the state of play, and it is hard to see how those demands can be reconciled with the positions of the P5+1 nations.

The EIA reported an ongoing decline in crude oil inventories this week, with stocks falling by a brisk 4.9 million barrels for the week ending on June 19. Oil storage is now down nearly 30 million barrels from a peak earlier this year, suggesting that demand continues to outstrip supply in the United States. But once again the EIA reported a slight uptick in weekly U.S. oil production to 9.6 million barrels per day. That flies in the face of the agency’s own prediction that oil output would decline in both June and July. The conflicting numbers are muddying the oil market picture in the United States.

On the other hand, when put into a global context, the disparities in U.S. supply estimates matter less. If an Iran deal is completed, the Middle Eastern country could send an additional 400,000 barrels per day online within just a few months, ramping up to well over 1 million barrels per day by next year. Add to that the fact that Iraq is posting significant production gains, adding several hundred thousand barrels per day to global markets this year. Libya is another variable. The outages at several Libyan ports have blocked the North African country’s oil exports, but some of those could begin to come back online as soon as this summer, adding another several hundred thousand barrels per day to global supplies. Related: What Would A Saudi-Russian Partnership Mean For World Energy?

In Canada, the provincial government of Alberta announced plans to boost its carbon tax beginning as early as next year. The plan will result in an increase from $15 per tonne to $20 per tonne in 2016, and then jump to $30 in 2017. The tax applies to industrial emitters that release more than 100,000 tonnes of CO2 equivalent per year. The new NDP government was seen as less friendly to the oil and gas industry than its more conservative predecessor. Alberta is home to Canada’s vast oil sands region, which holds some of the largest oil reserves in the world.

French oil giant Total (NYSE: TOT) decided to finally pull the plug on a massive natural gas project in the Russian Arctic. The Shtokman natural gas field, located in the Barents Sea, could hold an enormous volume of natural gas, potentially as high as 3.8 trillion cubic feet, but developing the field has proven to be prohibitively costly. Located in icy waters off Russia’s northern coast, the project faced steep engineering challenges. It has been suspended for several years as the companies involved try to sort out a way to make it economical. Total had a 25 percent stake in the project, and was working with Russia’s Gazprom, to which it will hand over its share. Western sanctions slapped on Russia after the crisis in Ukraine has made it even more difficult for Total to stay involved. Statoil (NYSE: STO) had already pulled out of the project in 2013. Total says that it would be interested in participating in the project if it moves forward. Related: Why Buffett Bet A Billion On Solar

Finally, a BP (NYSE: BP) official this week said that the oil industry faces several years of weak prices, and that drillers need to find a way to weather the storm. BP’s chief economist Mark Finely told a Houston audience that oil prices may not rebound strongly in the short-term. “When we crunch the numbers, it looks like we could be in this for an extended period,” he said. “For at least a couple of years, we think it’s prudent to re-base operations around the prevailing reality we find ourselves.” He went on to say that while U.S. shale has upended energy markets “it might be premature to write OPEC’s obituary,” arguing that “OPEC is relevant by choosing not to act, just as they are when they choose to act.” For the oil majors, a multi-year period in which prices are weak will be painful but won’t present any sort of existential threat. The same is not true for some of the more indebted smaller drillers in the U.S. shale patch.

By Evan Kelly From Oilprice.com


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