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This Week In Energy: Rout Begins As WTI Can’t Stand The Pressure

A top Gazprom official met with European regulators this week to discuss the antitrust case the EU is bringing against the Russian gas giant. Gazprom’s Deputy Chairman Alexander Medvedev said on July 23 that the company wants to “settle this case amicably” with Europe, but still denies one specific allegation – that it charged countries in Eastern Europe exorbitant prices for natural gas. “Our prices are nearing a record low for our customers across Europe,” he said in a statement. The EU filed antitrust charges against Gazprom over a variety of issues, but mostly over pricing of natural gas. Medvedev said that he hopes his company and European regulators can come to a “mutually acceptable solution.” The deadline for such a deal is September.

The EU scrutiny could throw a wrench in Gazprom’s plans for market growth. A new report from the Russian Institute for Strategic Studies finds that Gazprom is running into an unfavorable political landscape as it tries to build greater pipeline connections to Europe. There are two key projects that Gazprom is pushing. First is the expansion of the Nord Stream Pipeline, which would allow the flow of Russian gas to reach Germany, bypassing the contentious transit country of Ukraine. The other is the Turkish Stream Pipeline, a project that would achieve similar objectives of cutting out Ukraine, only this one would travel south and west through Turkey and Greece. However, both projects are running into a wall of opposition that could block construction, Russian researchers say. Related: The Four Noble Truths Of Energy Investing

The woes in Canada’s oil and gas sector continue. A shortage of pipelines is forcing some Canadian natural gas production to shut in. Traffic along the pipeline system in Canada, due in part to maintenance, is causing operators to throttle back on output. Perhaps more importantly is the ongoing boom in natural gas production in the United States, which is pushing out Canadian gas from the market. “We’re struggling to get our gas to market,” Darren Gee, CEO of Peyto Exploration and Development Corporation (TSE: PEY), said to the Financial Post. “This is the first time in our 17-year history that we’ve experienced this.” Peyto was forced to cut back on gas production by 10 percent in May. Canada’s gas exports declined by 21 percent in 2014 compared to four years ago.

On the plus side, Canada’s National Energy Board predicts that technological improvements in drilling should lead to continued improvements the initial production rates of natural gas fields in Western Canada.

WTI fell below $50 per barrel this week, ushering in some of the most pessimistic sentiments in months. After a wave of bearish events – the Greek debt crisis, the Chinese stock market meltdown, and the all-important Iran nuclear deal – oil prices cratered and were looking for some direction. The latest bit of data from the EIA did nothing ease the fears of a bear market. The EIA reported on July 22 that crude oil inventories unexpectedly climbed for the week while analysts had expected a drawdown, jumping 2.5 million barrels. Weekly production figures, as suspect as they are, ticked downwards just slightly. On a more bullish note, refineries are running at record highs, taking advantage of cheap crude, processing 16.8 million barrels per day. Related: Texas Weathers The Oil Slump Better Than Expected

OPEC officials continue to assert that low oil prices will only be temporary and that there is no need for the group to make a policy change. Kuwait’s oil minister this week said that stronger global demand will lead to a price rebound. Even if prices decline significantly below $50 per barrel, “[p]rices will not stay down forever,” one OPEC official from an Arabian Gulf country told Reuters.

The low prices will likely lead to fresh rounds of layoffs across the oil industry, especially if they do not rebound soon. In a sign that such a development could be in the offing, Weatherford International (NYSE: WFT), an oil field services company, announced that it would be cutting an additional 1,000 jobs, bringing its total job casualty number to 11,000 so far in 2015 and 18,000 over the past year and a half. The latest eliminations will mostly take place in U.S. onshore support staff. FMC Technologies (NYSE: FTI) also said that more positions would be eliminated, although it did not specify how many. FMC has already slashed 15 percent of its workforce in its land services unit.

In a sign that the appetite for drilling is slowing, orders of rail cars fell by 29 percent in the second quarter from the first. Even more staggering is the fact that the 3,155 rail car orders in the second quarter were down 70 percent from the same period a year earlier. That mirrors the 46 percent decline in energy shipments by rail for Kansas City Southern (NYSE: KSU). Related: Aluminum Markets Could Be In For A Price Rebound Soon

The U.S. government gave Royal Dutch Shell (NYSE: RDS.A) the final go-ahead for drilling in the Arctic this week. Shell’s two drilling rigs departed from southern Alaska for the Chukchi Sea, where it plans on drilling two wells into the Burger Prospect. However, the Obama administration limited Shell’s drilling to the upper parts of the well, prohibiting the company from drilling into oil-bearing zones until its ice-breaker can be repaired. Shell saw its icebreaker, the Fennica, suffer damage that required it to head to Oregon for repairs. Until that ship can be repaired and moved to the Chukchi Sea, Shell isn’t allowed to drill into oil zones. The Fennica carries required oil spill response equipment. The big question is whether or not Shell will be able to send the icebreaker back to the Arctic with enough time to drill before the end of the drilling season in late September.

Although the Arctic raises serious questions over Shell’s financial position – having already spent several billion dollars on the venture – credit ratings agencies are more worried about the Anglo-Dutch company’s purchase of BG Group (LON: BG). Standard & Poor’s (S&P) downgraded Shell’s long-term credit rating this week to AA-, mostly on the back of low oil prices and high spending. The ratings agency maintained a “negative” outlook for Shell because of BG purchase and the large debt load that it will require.

Meanwhile, Shell has bid on two onshore blocks in Albania, along with its partner, Canada’s Petromanas (CVE: PMI).

By Evan Kelly Of Oilprice.com

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