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Evan Kelly

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Why Oil Can’t Pull Higher In The Near Term

Oil prices are falling on Friday in volatile trading session after having see-sawed on the usual headlines regarding OPEC compliance and U.S. production figures


(Click to enlarge)

Friday, January 27, 2017

Oil prices are set to close out the week slightly up after a bumpy ride, seesawing on the usual headlines regarding OPEC compliance and U.S. production figures, plus some influence from currency movements. Not much has changed in the market over the past week regarding fundamentals, although another week of EIA data continues to indicate rising activity in the U.S. shale patch, with production figures, crude stocks and gasoline stocks all on the rise. Oil production in the U.S., at least according to weekly surveys, is now just slightly below the 9 million barrel per day mark, a level that it has not hit since March of last year.

Trump’s border tax? President Trump sent confusing signals on Thursday regarding the proposed 20 percent tariff on Mexican goods. The border tax would have enormous implications for the energy trade between the U.S. and Mexico, a relationship that has grown in recent years, much to the benefit of U.S. exporters. Problems with refineries in Mexico have led to a surge in imports of U.S. refined products. A growing economy has Mexico in need of U.S. natural gas as well. The border tax would disrupt much of this. The White House seemed to back off the plan after a public outcry, but it is unclear what avenue the administration will pursue.

TransCanada submits Keystone XL application. President Trump revived the pipeline battles of the Obama administration, pushing Dakota Access towards the finish line and breathing new life into the defunct Keystone XL proposal. His executive orders sought to advance both projects, but it is too early to know what the outcome will be. TransCanada (NYSE: TRP) quickly submitted a new permit application for the Keystone XL project, which the Trump administration has promised will receive an expedited environmental review. But the pipeline landscape in Canada looks different than it did two years ago. The Canadian government approved Kinder Morgan’s (NYSE: KMI) Trans Mountain Expansion and Enbridge’s (NYSE: ENB) Line 3 pipelines late last year, which combined would carry more oil than Keystone XL.

Iran oil tankers head to Europe. Iranian oil tankers are set to dock in Rotterdam next week, the first time the state-owned supertankers have arrived in Europe since sanctions were lifted a year ago. Iran has shipped oil to Europe over the past 12 months, but has done so with independent tanker companies because of residual uncertainty regarding international sanctions and shipping insurance. The latest development could allow Iran to step up its battle for market share in Europe. Related: Large Rig Count Gains Rock Oil Markets

Saudi Aramco enlists Baker Hughes to audit oil reserves. In preparation for its planned IPO next year, Saudi Aramco has asked a unit of Baker Hughes (NYSE: BHI) to audit its oil reserves. Saudi Arabia is thought to be in possession of around 265 billion barrels of oil, although the exact figure is subject to a great deal of speculation. Aramco is set to offer up a small slice of the company in a public offering in 2018, which will generate revenues that the government hopes will help the Saudi economy diversify for the long-term.

Chevron earnings disappoint. Chevron (NYSE: CVX) was the first oil major to report fourth quarter earnings, reporting profit of $415 million, or 22 cents per share. Analysts had expected earnings of 64 cents per share. Still the figures were up from a $588 million loss a year earlier. Chevron’s peers report next week.

U.S. to start SPR sales. The U.S. is set to sell off roughly $375 million worth of oil from its strategic petroleum reserve, part of a Congressional authorization to sell off 190 million barrels between 2017 and 2025. The Department of Energy awarded the first contracts this week and sales could begin this month. The logic behind the authorization is that the revenue generated from the sales will help pay for infrastructure upgrades for the SPR. But several years of low oil prices have convinced American policymakers that the U.S. no longer needs to hold 700 million barrels in its SPR. Critics argue that the SPR is a crucial element of U.S. energy security, and warn that refilling the SPR in the years ahead could cost the U.S. Treasury if oil prices rise.

U.S. to streamline permitting for energy development on Indian lands. Native Americans sit on just 2 percent of the land surface in the U.S., but by some estimates could hold one fifth of its oil and gas reserves. Some Indian tribes are opposed to drilling on their lands, but others are looking for economic opportunities and are working with the Trump administration on streamlining permitting and even considering privatization. The Republican-controlled Congress looks poised to take up the issue. Related: Leaner and Meaner After The Crash, Oil Sands Industry Expands

Libyan oil production rising. Libya’s oil production topped 620,000 bpd in December, and by some estimates is already up to 700,000 bpd, more than double mid-2016 levels. According to S&P Global Platts, the North African OPEC member is targeting output of 1.25 million barrels per day by the end of 2017. Those figures should be taken with a grain of salt, given that the war-torn country has been producing well below its potential for more than five years. But the recent surge in output is raising optimism in Libya that it can achieve its goals. The addition of 630,000 bpd over the course of the year would offset much of the cuts made by other OPEC members, a downside risk for the market.

Dispute over global supply balance. Several prominent oil market analysts expect inventories to draw down in the first half of this year because of OPEC production cuts. Barclays, for example, estimates oil inventories will fall by 900,000 bpd in the first quarter, helping to tighten the market. But the EIA has a much more bearish view of the situation, expecting inventories to increase throughout this year by 300,000 bpd, only starting to draw down in the second half of 2018. As such, the agency expects oil prices to remain below $60 per barrel over the next two years.

By Evan Kelly of Oilprice.com

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  • Ashley on January 28 2017 said:
    Is there an expiration date for refined oil in storage?

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