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This Week In Energy: The Markets Defy Expectations Once Again

This Week In Energy: The Markets Defy Expectations Once Again

Oil production levels are finally starting to decline after months of depressed prices. New data from North Dakota shows that the state’s oil output fell in January to 1.19 million barrels per day, a 3.3% decline from an all-time high the month earlier. The drop off occurred because companies significantly reduced the number of wells completed – well completions dropped from 183 in December down to just 47 in January. Rigs are also down to just 111 for the Bakken, below the estimated 115-130 needed just to keep production flat. Nationwide, a decline in oil output may not be here just yet, but in the Bakken it has already begun.

But North Dakota’s contraction has not been enough to affect oil prices, which reversed the gains from recent weeks and headed back towards the lows for the year. At the close of the week, WTI traded near $46 per barrel and Brent is back down to $56 per barrel. Speculation that storage capacity is filling up is renewing worries of a supply glut. To make matters worse, the IEA raised its forecast for U.S. oil production this year, having been surprised that the precipitous fall in the number of active rigs has not yet cut into production. “Stocks may soon test storage capacity limits,” the IEA said in its monthly report. “That would inevitably lead to renewed price weakness, which in turn could trigger the supply cuts that have so far remained elusive.”

Low oil prices are terrible for producers, but for consumer nations depressed prices present new opportunities. China and India are expected to stockpile more oil for their strategic petroleum reserves this year. China had already stepped up imports in 2014 as prices declined, revealing in November for the first time data on its stockpiles. China has about 91 million barrels stashed away, and with new storage capacity reaching completion, the IEA projects its purchases will remain elevated this year. India, on the other hand, is new to the game. But the low price environment will allow the country to begin stashing away oil for the first time, with stockpiles expected to reach 6.5 to 7 million barrels this year. More construction underway will provide India with the capacity to store 28 million barrels by the end of 2015.

Global greenhouse gas emissions flattened unexpectedly in 2014, marking the first time in decades that the global economy expanded while carbon emissions did not. “This is a real surprise. We have never seen this before,” said Fatih Birol, the IEA chief economist and next executive director. The major reason was China’s ongoing crack down on major polluters and its impressive effort at reining in the consumption of coal. China’s coal consumption and its overall level of emissions both declined in 2014. Also, OECD countries have to some extent decoupled their economic growth from energy consumption.

One country not turning away from coal is Japan. The island nation has no significant indigenous energy sources and has relied on energy imports to power its modern economy. But after shuttering more than 50 nuclear reactors after the Fukushima meltdown, Japan has needed even more imported fossil fuels. As it struggles to bring some of its reactors back online amid widespread public opposition, Japan is increasingly turning back towards coal even as much of the world moves away from it. Japan could see 7.26 gigawatts of new coal capacity over the next ten years.

Urgent Note: We invite you to take a look at this week’s Inside Opportunities, in which our trader Martin Tillier provides you with a Canadian stock that he initially identified last year as one that had a huge upside. Turns out he underestimated its fortunes. Now, despite the enormous growth this company has already achieved, he still thinks it is worth another look. Find out more by clicking here.

Meanwhile, in the Middle East, Iraq is facing an economic crisis. The combined effect of low oil prices and the security threat presented by the Islamic State have sapped the Iraqi government of much needed revenue. Iraq survives on oil exports, so just like other oil producers it has seen its budget upended because of the price collapse. The situation has become so bad that the Iraqi government reportedly sent letters to the major private oil companies operating in the country, asking them to cut back on their investment. The reason for such a seemingly counterproductive request is because the government can no longer reimburse the companies for the costs of developing oil fields. As a result, several major oil companies operating in Iraq have proposed significant spending reductions and project delays. BP (NYSE:BP) offered to pare spending from $3.5 down to $3.25 billion. Russia’s Lukoil (MCX: LKOH) plans on reducing spending from $2.3 down to $2.1 billion. ExxonMobil (NYSE: XOM) decided to leave its spending levels unchanged. Royal Dutch Shell (NYSE: RDS.A), on the other hand, offered the largest reduction, dropping spending from $2.4 billion down to just $1.5 billion. For now, the largest oil fields in Iraq’s south are operating normally, but if investment is scaled back, Iraq’s ambitious plans to ramp up production over the long-term will take a hit. Consequently, the projections for future Iraqi oil production will likely need to be revised in the months ahead.

Back in the U.S., the oil industry is stepping up its campaign to convince the federal government to allow crude oil to be exported from American shores. The top executive of a lobbying group for oil exports met with a senior White House official on March 11. But that wasn’t all. The CEOs of Marathon Oil (NYSE: MRO), Chesapeake Energy (NYSE: CHK), and Occidental Petroleum (NYSE: OXY), also met with top government officials from both the executive and legislative branches. Changing the export ban is a top policy goal for the industry, which would allow producers to reach the broader global market, provide a lift to domestic prices and incentivize more drilling. The Obama administration has cracked open the door to exports by granting waivers for the export of ultralight condensate, oil that has been lightly processed. But producers want a blanket repeal of the export ban. The new makeup of the U.S. Congress is friendlier to the industry than it has been in years, and powerful members in the Senate are gearing up for a legislative campaign to rewrite energy laws this year.

The biggest U.S. refinery strike in three and a half decades may have reached a resolution this week. The United Steelworkers union reached a tentative deal with Royal Dutch Shell – negotiating on behalf of the industry – to end the strike. The deal appears to involve annual wage increases and no significant changes to healthcare plans. While a broad framework was agreed to, individual refineries now need to hammer out the details with local chapters of the union. The strike has impacted 15 refineries accounting for about one-fifth of U.S. refining capacity. Still there has not been a significant impact on gasoline prices, largely because refineries continued to operate with nonunion labor.

By James Stafford of Oilprice.com

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