Oilprice Intelligence Report

The stunning news of a tentative OPEC agreement out of Algiers caught just about every trader flat-footed. Speculative short positions in oil had been growing, and oil markets and oil stocks rallied spectacularly on the news to rip the guts out of any trader who’d bet on nothing happening at this meeting, as had been the case the four previous times. There’s a lot to unpack here, but first things first: I wouldn’t be fading this move – OPEC is back.

We haven’t been short names in the energy space, quite the opposite – but we had been looking for a retreat in some U.S. shale names for the opportunity to add to core positions. That opportunity is gone. The OPEC agreement, despite its many, many holes, puts a floor under oil I don’t think will ever again be breached.

Here’s a mistake I will never make again, ever since my first days on the floor trading on the NYMEX: Never doubt the words of the Saudis. Every time in my long career that the Saudi oil minister signaled a price shift, whether up or down, they’ve made it happen. I misread a Saudi signal one time, however, in the fall of 2014, when they indicated their desire to pump freely and fight for market share. I lost $15 dollars a barrel in crude price before I remembered what I never should have forgotten and got to the other side of the trade – and I won’t be fooled ever again.  

But first, let’s look. The agreement calls for a modest 750K barrel a day reduction in OPEC output, and does not seem to limit Iran, nor does it mention Russian cooperation. On the face of it, Saudi Arabia could easily cut ¾ million b/d and be done with it, but that wouldn’t make any sense for the Saudis – I can’t believe they’d agree to be entirely alone.

But they might agree to be mostly alone: Their hemorrhage of reserve assets, at an average pace of more than $10b a month since late 2014, has clearly caused a moderate panic:


Yes, the Saudis had the strategy of bleeding the U.S. shale industry white, forcing U.S. producers to go bankrupt and stop producing, and putting the global swing barrel oil threat and responsibility back in the hands of the Saudis.

You’d have to say now that the U.S. shale industry faced this rifle barrel without flinching. With this OPEC announcement, they can declare at least a pyrrhic victory. Through stringent cash control, quick refinancing and secondaries, efficiency gains and concentration on core drilling, the strongest shale producers have continued to survive, if not thrive. It is Saudis that blinked.

The U.S. players that will benefit the most, and are rallying the most strongly off of this news are those with ready acreage that breaks even above $50 a barrel – companies that haven’t taken the foot off the gas pedal much during this downturn, like Pioneer Natural Resources (PXD), Parsley Energy (PE) and Continental Resources (CLR). 

I won’t chase them here, as they’ve all caught short sellers in the headlights that are scrambling to cover and magnifying their pop, but I will target them as the dust clears. I believe the details of this OPEC agreement, yet to be worked out in November, should give the markets enough pause to lose some interest in these names during October.

And looking at the very few details of the agreement that have been announced, there remain plenty of questions: Who else besides the Saudis will participate? How will the cartel balance the coming production increases from Libya and Iraq? After a long history of disregarding quotas, who’s to believe they can be enforced now? Can the Saudis and Iranians really agree upon anything, considering their overall confrontational stance and real time confrontations in Syria and Yemen?

I say forget all that – I learned something in 1983, my first year on the floor, that I forgot for a moment in 2014. I won’t make the same mistake again.



OPEC did the unthinkable – it decided to cut production for the first time since the global financial crisis in 2008. The group met in Algiers and decided to cut its production from 33.24 million barrels per day (mb/d) to a range of between 32.5 and 33.0 mb/d. The details will be finalized in November, but the tentative deal succeeded in boosting oil prices more than 6 percent on Wednesday, and by another 1 percent on Thursday.

Deal still uncertain. There are plenty of reasons OPEC won’t reach a deal. The group did not allocated production limits to each of its members, so it is still unclear who will be cutting. Also, some of the members could cheat, even if they do seal the deal in Vienna in November. Moreover, if the cap is placed at the high end of the range – 33.0 mb/d – it would amount to a very unimpressive cut of just 200,000 barrels per day. On top of that, Nigeria, Iran, and Libya are exempt from the limits. 
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They are allowed to produce at “maximum” levels, and combined they are hoping to bring back 1.5 mb/d. The psychological effect on the oil market has been enormous, with oil prices up big on the week. But with oil traders starting to question the viability and the significance of the deal, the rally came to a temporary halt on Friday.

Iraq questions numbers. Another unexpected sticking point could be Iraq, which is no longer exempt from OPEC limits after years of special treatment as it recovered from war. Iraq’s oil minister questioned the data that OPEC was using – the minister argued that Iraq was producing much more than OPEC was giving it credit for. The discrepancy would potentially limit Iraq’s production more than it should, Iraqi officials say. The conflict poses another stumbling block for the November meeting.
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Saudi Arabia needed a deal. The OPEC production cut only came because Saudi officials did an about-face, a 180-degree turn from its position over the past two years of letting the market sort out the surplus. The Wall Street Journal reports that Saudi officials, including energy minister Khalid al-Falih, grew concerned about the economic toll on the kingdom from persistently low oil prices. 
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The minister reportedly became alarmed from the latest forecast for oil prices remaining low through 2017, and the revelation was enough to lead the Saudis to reverse course. “I’m not convinced they have changed from the market-share policy but I have to think they have erased the ‘We don’t care if it goes to 20 $/bbl’ policy,” Olivier Jakob of Petromatrix told the WSJ. “They seem less idealistic, a little more realistic.”
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Refiners down on OPEC deal. The surge in oil prices will be welcome by producers, but not by refiners. The BI North America Refining & Marketing index, an index of refiners, dropped by 4.6 percent on Thursday. Higher oil prices is bad news for refiners, which need to purchase crude in order to process it into refined products. Gasoline inventories are still high, and margins are low, Moody’s said, a problem that could persist for some time.
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Oil analysts not impressed by OPEC cut. Oil prices skyrocketed this week after OPEC came to terms, but seasoned oil analysts are not exactly overwhelmed. Several major investment banks – including Goldman Sachs, Societe Generale, Jeffries and UBS – did not alter their oil price forecasts on the news. Citi’s Ed Morse said the decision is “still kicking the can down the road.” Goldman, however, did say that if the deal is implemented, it could add $7 to $10 per barrel to the oil price next year.
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U.S. Congress overturns Obama’s veto on 9/11 bill; but now regret it. This week both the U.S. House and Senate overwhelmingly overturned President Obama’s veto of a bill that would allow the victims of the 9/11 terrorist attacks to sue Saudi Arabia. But by Thursday, many of them expressed regret for doing so, fearing reprisals for Americans abroad. It’s a bizarre development from the Congress, given that the President explicitly vetoed the bill for just that reason. The bill also threatens to disrupt the relationship between the U.S. and Saudi Arabia, and Saudi stock exchange took a beating as the bill progressed.
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Court decision in Pennsylvania could hurt shale gas drilling. The Pennsylvania State Supreme Court overturned an industry-friendly law that could be a burden for shale gas drillers. The court ruled that the 2012 law unfairly favors the gas industry. The law allowed drillers to notify public water suppliers but not private well owners about spills or leaks. 

It also restricted health care professionals from obtaining information about the chemicals used. The court ruling also struck a blow against eminent domain, a procedure that allowed gas drillers to seize private and public land for drilling. Opponents of fracking in the state hailed the ruling, but the Marcellus Shale Coalition, an industry trade group, said it would make investment difficult.

Deepwater Horizon movie a headache for BP. The British oil giant may have thought it put the 2010 disaster behind it, but a new movie about the Deepwater Horizon disaster paints the oil major in a very bad light. “Deepwater Horizon,” starring Mark Wahlberg, Kate Hudson and John Malkovich releases on Friday. 

The movie is particularly ill-timed for BP as the company is hoping to drill off of Australia’s southern coast and has run into stiff environmental opposition. Australian regulators sent a request this week to BP for more information regarding its oil spill response plan. Critics of BP have used the example of Deepwater Horizon to argue for blocking the drilling plan in the Great Australian Bight.

source: Evan Kelly , oilprice.com

•    The Brazilian state-owned Petrobras could spend $6 billion on new oil platforms, and could solicit offers beginning next year. The company announced a five-year spending plant last week, lowering spending by 25 percent to $74 billion for 2017-2021.

•    Noble Energy (NYSE: NBL) says it has secured a deal with Jordan’s state-owned electric utility to export natural gas from the giant Leviathan gas field in the Mediterranean. The agreement could see Israel export 300 mcf/d of gas over 15 years to Jordan.

•    TransCanada (NYSE: TRP) announced its intention to purchase Columbia Pipeline Partners (NYSE: CPPL), a deal worth roughly $848 million. The acquisition will give TransCanada stakes in three regulated natural gas pipelines in the U.S., plus an array of processing assets.

oil and natural gas prices:

chart:

•    So much attention is paid to shale basins such as the Bakken or Permian, but the lesser-known Utica Basin has seen production grow steadily over the past several years.

•    The Utica is mainly a source of natural gas production, with more lucrative spots producing natural gas liquids. Monthly production has increased from 0.1 billion cubic feet per day (Bcf/d) in December 2012 to more than 3.5 Bcf/d in June 2016.

•    The Utica only produces about 76,000 barrels of oil, however. Natural gas production has leveled off as well.


All eyes are on Algeria this week where the International Energy Forum is being held. But instead of the conference itself, the global oil markets are anxiously awaiting the developments of an informal meeting to be held on the sidelines of the Forum between OPEC and non-OPEC officials. At the time of this writing, no deal had been announced, although there are some unconfirmed reports that Iran and Saudi Arabia are considering some sort of limit on production.

The proposal would call for Saudi Arabia cutting output by several hundred thousand barrels per day if Iran froze production at 3.7 million barrels per day. Oil prices surged on Monday on hopes of a deal, jumping more than 2 percent. However, in early trading on Tuesday, WTI and Brent were back down by more than 2 percent as expectations of an agreement began to fade.

The result may not be known until Wednesday, but comments from Iran’s oil minister, saying that the talks were simply “consultative,” seemed to dash hopes of any specific agreement. For now, it appears that if anything is agreed to, it would only be the outlines of a deal, which would make the official Nov. 30 summit in Vienna much more important for finalizing the specifics.

U.S. Total Rig Count:

Saudi Arabia appears more desperate than Iran. For years, Iran wanted higher oil prices while Saudi Arabia was satisfied letting other producers sweat. But after two years of low oil prices, Saudi Arabia is under serious fiscal pressure, an unfamiliar predicament in Riyadh. Saudi Arabia just announced that it would cut its ministers’ salaries by 20 percent and slash benefits for government employees as the country pursues deeper belt tightening. Meanwhile, Iran is seeing a resurgence in its economy after the lifting of international sanctions and the return of supply.

Saudi Arabia has a massive budget hole equivalent to 13.5 percent of GDP, while Iran’s deficit will only reach 2.5 percent of GDP. In other words, Saudi Arabia seems to be more desperate than Iran for higher oil prices.

IEA reiterates bearish forecast. On the sidelines of the energy conference in Algiers, IEA’s executive director Fatih Birol said that the global surplus in crude oil will persist until late 2017. Unless there is “major intervention,” Birol said, referring to OPEC production cuts, "We don’t see the oil market re-balancing until late 2017.” He sounded especially bearish on the demand side of the equation, “demand is weak, weaker than many of us thought…about 0.8 million barrels per day…less than 1 million barrels per day.” He went on to add that “supply is coming strongly, especially from Middle East countries. And the stocks are huge. As a result of that, we have lower oil prices with huge implications for the next few years.”

China SPR a “wildcard.” S&P Global says that the oil markets are facing a “wildcard” with the potential slowdown of China’s oil imports as the country’s strategic petroleum reserve system is filling up. OPEC could act to boost prices by limiting output, but China could respond to the higher prices by cutting imports, leaving the oil market no better off. Even if OPEC does nothing to restrain oil exports, China may soon ratchet down imports because it no longer needs to fill its SPR, at least with the same urgency as the past two years. This presents a downside risk to the oil markets.

Goldman Sachs lowers oil price forecast. Citing a larger supply surplus than previously expected, Goldman Sachs lowered its fourth quarter oil price forecast from $50 to $43 per barrel.

Russia ramps up unconventional drilling. Reuters reports that Russia’s Rosneft and Gazprom Neft are ratcheting up their efforts to increase oil and gas production from unconventional sources. By 2020, Russia hopes to source 11 percent of its output from unconventional sources, up from 7 percent in 2016. The potential is enormous – government officials estimate Russia has 88 billion barrels of unconventional oil reserves, or about two-thirds of its total reserves.

With much of Russia’s current output coming from large but aging oilfields, there is increasing pressure to expand into shale and other hard-to-reach oil reserves. The U.S. and its western allies slapped sanctions on Russia back in 2014, focusing on blocking the spread of shale drilling technology. But Russia is moving forward anyway, or at least trying to.

Niger Delta Avengers strike again. The fragile and short-lived ceasefire between the Niger Delta Avengers and the Nigerian government seemed to come to an end this weekend. The Avengers announced on their website that they struck the Bonny crude export line on September 23. The militant group said that the “so-called dialogue and negotiation process on the side of President Muhammadu Buhari and his government” has been an “over dramatization.”

The Avengers still favor negotiation, but said there has been “no progress and no breakthrough.” Nigerian government officials recently said that they brought back several hundred thousand barrels per day of lost output to the market, with plans to ramp up production with repaired infrastructure. A renewed bout of violence threatens that objective.

Venezuela sweetens pot on debt swap proposal. Venezuela’s PDVSA is hoping to push off debt payments that soon fall due, but after the state-owned oil company approached creditors with a proposal to spread out $7 billion worth of near-term payments for payments over the course of several years, investors balked. PDVSA increased its offer for payments made on bonds due in 2020 in exchange for payments maturing in 2017. Wall Street analysts, according to Reuters, say the new offer could earn a better reception from investors. If PDVSA succeeds in bringing investors on board, it could help prevent a default.

Rice Energy to purchase Vantage for $2.7 billion. Rice Energy (NYSE: RICE) announced its decision to purchase the private company Vantage for $2.7 billion, making Rice one of the largest shale gas drillers in the Marcellus in Pennsylvania and Ohio.  

source : Evan Kelly , Oilprice.com

Spoiler:

•    Gasoline prices in the southeast U.S. spiked over the weekend due to an outage at the Colonial Pipeline, the largest gasoline pipeline in the country. The line sprung a leak and has been temporarily shut down.

•    GE says its will spend $10 billion in Argentina over the next decade, building out 1 GW of electrical capacity.

•    Chesapeake Energy (NYSE: CHK) fell by more than 4 percent after news surfaced that Carl Icahn reduced his 9.4 percent stake in the company to just 4.55 percent.

Spoiler:

OPEC’s Secretary-General said over the weekend that the upcoming meeting in Algeria between OPEC members and a handful of non-OPEC countries would not end with a definitive agreement. For its part, Venezuela says that OPEC and non-OPEC countries are close to a deal. But that could simply be a bit of bluster.

“It is an informal meeting, it is not a decision-making meeting,” Secretary-General Mohammed Barkindo said, according to Algerian state media. The oil markets could end up disappointed next week if OPEC has little news to announce.

The only way this turns out bullish for oil is if OPEC agrees to a production limit to be finalized at a future meeting. Even then, the devil will be in the details.

Chart of the Week:

New York AG investigates ExxonMobil accounting practices. The NY Attorney General initiated an investigation into ExxonMobil (NYSE: XOM) last year, focusing on the oil supermajor’s shady history with climate science.

But more recently, the AG has suggested that he is less concerned with the company misleading the public on climate science decades ago, and more interested in it misleading investors today. At issue is whether or not Exxon is defrauding investors by failing to write down assets that may no longer be worth as much as once thought.

While competitors have written down $200 billion in assets over the past two years, Exxon has written down nothing. Exxon says the assets could still be worth their stated value if oil and natural gas prices rebound. The NY AG is not so sure. What began as a climate investigation is turning into one over accounting practices.

Oil majors grow through M&A, not exploration. Wood Mackenzie says that the oil majors have slashed their exploration budgets to such a degree that they appear to be forgoing growth through the drill bit.

Growth in oil reserves will increasingly come from M&A activity, the consultancy says. The industry will cut $1 trillion from their exploration and development budgets over the next five years, ensuring that very little new discoveries will be made.

“The need for M&A in exploration is likely to be here for a considerable time," Andrew Latham, vice president of exploration research at WoodMac, said in an interview. Companies will focus their efforts “on assets rather than on taking over companies.”

Libya targets 1 million barrels per day, but fresh fighting raises obstacles. Libya has ruled out any cooperation with a potential OPEC freeze deal as it aims to triple oil production from today’s levels.

Despite the ambitious target, Libya’s main oil ports continue to change hands, as rival factions battle for control. Oil prices rose on the news that fresh fighting will delay petroleum shipments from the North African OPEC member. Libyan oil is very uncertain, but if output comes online, it presents a large downside risk to oil prices.

Niger Delta Avengers…the sequel? A militant organization calling itself the Niger Delta Greenland Justice Mandate blew up an oil pipeline operated by Nigeria’s state-owned NNPC on Sunday.

"The Niger Delta Greenland Justice Mandate is just starting, you are yet to see what we are about," the group said. The Niger Delta Avengers made international headlines this year after a long list of successful attacks against oil pipelines and platforms brought Nigeria’s oil production down by 700,000 barrels per day.

The Avengers have since agreed to negotiation with the government. But the problem for Nigeria is that militants have splintered into a variety of groups, not all of which are willing to adhere to a ceasefire. The latest attack shows that despite the Avengers agreeing to halt attacks, violence in the Niger Delta is not over.

The good news for Nigeria is that oil production is now back up to 1.75 million barrels per day, up from about 1.4 mb/d earlier this year. Nigeria’s oil minister expects output to keep climbing if they can keep a lid on the violence in the region.

PDVSA rebuffed by investors on debt swap. Venezuela’s state-owned oil company PDVSA has been shopping a proposal to swap $7 billion in upcoming debt payments for notes that instead have repayments over the next several years.

But investors are not interested. PDVSA did not offer any more than face value, but instead offered a lien on Citgo, its U.S. refining division. “PDVSA considers its Citgo collateral to be attractive, but I’m not sure the market will take it the same way,” Anthony Simond, a money manager at Aberdeen Asset Management, which holds PDVSA notes due in 2016 and 2017, told Bloomberg in an interview.

“This may be too optimistic an assessment of Citgo’s potential market value,” Francisco Rodriguez, the chief economist at Torino Capital LLC, said in an email to Bloomberg. The poor response from investors increases the odds that PDVSA may not be able to meet its debt payments.

Petrobras slashes spending plan again. The Brazilian state-owned firm, the most indebted oil company in the world, once again revised its five-year spending plan down, lowering it to $74.1 billion. That is down sharply from the $98.4 billion the company previously laid out for its five-year program, and from the $236.5 billion the company planned on spending back in 2012. Petrobras is desperately trying to lower its debt.

India's oil imports rise to record. Led by a hunger from Indian refiners, India’s crude oil imports rose to a record high of 4.45 million barrels per day in August, up 9.1 percent from a year ago. Gasoline consumption is also up by a massive 25 percent from 2015. India is the largest source of demand growth in the world right now and will continue to play that role for years to come.

Oil markets, investors await central banks. Both the U.S. Federal Reserve and the Bank of Japan are due to release decisions on Wednesday on whether or not they will raise interest rates. Most analysts see the Fed punting for now.

source: Evan Kelly , News Editor, Oilprice.com

Oil prices posted another down week after the IEA dashed hopes that the global supply and demand picture would come into balance this year. The Paris-based energy agency said demand is much slower than it previously expected, and supplies are also surprising on the upside, mostly due to record OPEC production.

The end result? The supply surplus might not be worked through until the middle of next year. Oil prices plunged on the news earlier this week and have struggled to regain ground.

Spoiler:

Goldman pessimistic on oil prices. Jeff Currie, the head of commodities research at Goldman Sachs, sees low oil prices sticking around for a while. Not only that, but Currie says the risk to oil is on the downside, not the upside. He sees a dearth of bullish catalysts, and unexpectedly high output from Saudi Arabia, Iran and Russia adding to global supplies.

He predicts oil will trade within a narrow range of $45 to $50 per barrel. “It really looks similar to the period of the early 1990s, when we were at $20 oil,” he said. “Is $45 to $50 the new $20? I am not ready to say we are in this new equilibrium environment, but it sure does feel like we’re moving in that direction.”

The negative sentiment echoes the latest monthly report from the IEA, which surprised the markets with its downbeat assessment, predicting a rise in crude oil inventories through much of next year.

Spoiler:

Libyan and Nigerian supply raise fears of deeper surplus. After several oil ports were briefly taken over by a rival general in Libya’s east, the government lifted a block on sales from three ports, which could see exports rise by 300,000 barrels per day relatively quickly.

That would take output up to 600,000 barrels per day, and Libyan officials are targeting further increases to 950,000 barrels per day by the end of the year, or about triple current levels. Libya has repeatedly failed to follow through on such promises, but the prospect of a return of some Libyan supply is weighing on oil prices.

Also, violence in the Niger Delta is finally calming a bit. ExxonMobil (NYSE: XOM) said that it would resume shipments of its Qua Iboe crude, the largest Nigerian grade. Royal Dutch Shell (NYSE: RDS.A) is also expected to bring an additional 200,000 barrels per day back in Nigeria.

Spoiler:

Bottom for offshore rig market within sight. Offshore rig owners have been slammed by the collapse in oil prices as drilling activity has screeched to a halt. However, Transocean (NYSE: RIG) says that the bottom for the market could arrive by the middle of next year, with rig utilization rates stabilizing at some point in 2017.

The third-largest offshore rig operator also said that rental rates have probably already stabilized, although at levels ($200,000 daily) less than one-third of 2013 levels ($650,000 daily).

Spoiler:

Colonial pipeline down, but should restart on weekend. The Colonial Pipeline, the largest refined product pipeline in the United States, suffered a leak this week, spilling about 6,000 barrels of gasoline in Alabama.

Its owner shut down the main gasoline and distillates line last Friday, although the distillates line has since been restarted. The gasoline line should start back up over the weekend. The outage led to surging refining margins, owing to the supply disruption. The incident could also temporarily push up gasoline prices in the U.S. Southeast.

Spoiler:

Nord Stream 2 moving forward. The pipes being used to build the Nord Stream 2 expansion should be delivered in December or January, the head of Pipe Innovation Technologies said at the Reuters Russia Investment Summit this week.

The pipeline, which would double the volume of Russian gas to Germany via the Baltic Sea, is highly controversial in Europe. Many EU countries, particularly in Central and Eastern Europe, are opposed to the expansion because it would increase EU dependence on Russian gas. The prospects for the pipeline have been up in the air but the confirmation about the delivery of pipes suggests the project is moving forward.

Spoiler:

PDVSA looking at $7 billion debt swap. Venezuela’s state-owned PDVSA is looking to defer hefty debt payments that come due this year and next, hoping for some breathing room. Bloomberg reports that the oil company is hoping to swap $7 billion in debt, asking unsecured bond owners to take notes with payments spread out over the next few years.

The specifics have not been disclosed, but the effort is an attempt to avoid default, and an economist with Capital Economics in London told Bloomberg that Venezuela could buy itself 12-months if it succeeds with the swap.

Spoiler:

UK government greenlights controversial nuke plant. EDF’s $24 billion Hinkley Point nuclear power plant got the go ahead from the British government this week, a highly controversial project that will be Europe’s largest energy project. The approval came after a tightening up of security over fears of Chinese involvement in the project.

The announcement is a win for EDF, but analysts are not sure it is a good idea for the UK. “In light of a changing energy landscape, the falling cost of renewables, and lower financing costs, we are not convinced that this would be the right decision for the U.K. consumer,” Martin Young, an analyst at RBC Capital Markets, said in a research note on Thursday. The two reactors are expected to take ten years to build.

In our Numbers Report, we take a look at some of the most important metrics and indicators in the world of energy from the past week. Find out more by clicking here.

source: Evan Kelly, Oilprice.com

We will then look at some of the key market movers early this week before providing you with the latest analysis of the top news events taking place in the global energy complex over the past few days. We hope you enjoy.

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oil ans natural gas prices:

U.S. Toral Rig Count:

Chart of the Week:

•    India has replaced China as the world’s largest source of oil demand growth. It still has a long way to reach China on an absolute basis, but growth will increasingly come from the sub-continent. 

•    Because of its rapidly rising import dependence, India is also following in China’s footsteps in its decision to build out its strategic petroleum reserves (SPR). India’s first phase of SPR construction includes three facilities with a combined capacity of 39.1 million barrels, or about 13 days’ worth of supply based on 2015 data.

•    India hopes to add another 91 million barrels by 2020. India’s objective is to eventually have 90 days’ worth of supply, which is what IEA member states, including the U.S., have in their stockpiles. 

Market Movers

•    Royal Dutch Shell (NYSE: RDS.A) says that it will slash its deepwater Gulf of Mexico workforce by more than 25 percent, eliminating 200 out of its 770 jobs in the region. Shell hopes to cut 2,200 jobs by the end of the year as part of its plan following its merger with BG Group.

•    The head of Libya’s National Oil Corporation objected to a deal between the government and guards at key oil export ports. His opposition tosses a fragile deal into doubt, which could delay the return of disrupted oil exports from Libya.

•    Transocean (NYSE: RIG) saw its share price sink more than 5 percent on Friday after it revealed that it had stacked another six rigs, bringing its total number of stacked rigs to 28.

Tuesday July 26, 2016

Oil prices have taken another turn for the worse, with both WTI and Brent moving down below $45 per barrel at the start of the week. Fears of oversupply of both crude oil and refined products continue to act as a drag on oil, and prices have dropped to their lowest level in months. For the second year in a row, a multi-month rally in oil prices has come to an end in the month of July. 

Oil dips on higher rig count and stronger dollar. In addition to the glut of crude oil and refined products in storage, the rising U.S. rig count is adding to the growing concerns about a resurgence in U.S. oil production. The rig count has climbed for four weeks in a row. The dollar added strength in the past few days, which put more pressure on crude to start off the week. Looking out over the next several months, demand could slow as summer ends (more on that below). 

Another phase of short selling.Oil seems to be entering another downturn, the depths of which are uncertain. The speculative positions of hedge funds and money managers have turned decidedly pessimistic, with the liquidation of long positions and the increase in shorts. And as Reuters notes, speculators have pushed the market into its fourth phase of a buildup in short positions since the downturn began two years ago. The speculative movements often provide clues into where the market is heading, as the liquidation of longs and the increase of shorts foretells a decline in oil prices. For now, speculators are pessimistic. On the other hand, the speculative movements have opened up an opportunity for traders to buy the dip – so pessimism today does not mean that negativity will continue.

BP suffers another loss. BP (NYSE: BP) reported its third straight quarterly loss on Tuesday, revealing a replace cost loss (a metric similar to net income) of $2.25 billion, which is smaller than the $6.27 billion it lost in the second quarter of 2015. The Deepwater Horizon disaster in 2010 continues to haunt the British oil giant – BP’s second quarter figures include a $5.2 billion pretax charge, which brought its final estimated tally from the incident to $61.6 billion. Excluding those charges, BP’s underlying earnings stood at $720 million, about 45 percent lower than the $1.31 billion the company earned in the second quarter of 2015. BP’s share price dropped by 2.4 percent in early trading. 

ExxonMobil declares force majeure on Nigerian production.  ExxonMobil (NYSE: XOM) declared force majeure on its Qua Iboe production because of damage to its 300,000 barrel-per-day pipeline. The Niger Delta Avengers have claimed credit for the outage, but the oil major denied that its pipeline had been hit with any attack, instead citing a “system anomaly” as a reason for the outage. But a company security official told the Associated Press that the damage was too extensive to be a system anomaly. Either way, the disrupted supply could be offline for weeks. The outages in Nigeria continue to plague the oil majors operating in country, but the disruptions are supporting oil prices. 

Refiners switch to winter blends. Some refiners are switching to winter fuel blends ahead of schedule, which could be bad news for oil prices. With a glut of refined products sitting in storage, some refiners are taking the opportunity to conduct maintenance and switch away from the legally required summer fuel blends (which are cleaner but more expensive) earlier than usual. Summer demand has not been able to cut into large inventories, and the glut has pushed down margins. Typically, refiners begin switching to winter fuel blends in August, but Reuters says some are already doing so. If refining runs drop significantly it could lessen the demand pull on crude oil. 

Oil by rail declining. The practice of shipping oil by rail became commonplace a few years ago, as the surge in oil production, particularly from the Bakken, came at a time when pipeline capacity could not keep up. As recently as 2014 more than 1 million barrels per day flowed on U.S. railways, or more than 10 percent of production. But that volume plunged to just 430,000 barrels per day as of April. Low oil prices have cut into upstream production, but at the same time new pipelines have come online to ease the congestion. New regulations have also made oil-by-rail less competitive, as it is more costly than pipeline shipments. The decline of rail as a means of transportation for oil could be permanent. Meanwhile, in Canada, older rail cars that have been implicated in a string of derailments and explosions in recent years, will be phased outahead of schedule.   

North Sea oil strike begins.A 400 worker strike in the North Sea began on Tuesday, a 24-hour event that will affect at least eight [i]Royal Dutch Shell (NYSE: RDS.A)platforms. The strike is the first to hit the UK oil industry in 28 years. Workers are protesting a planned 30 percent pay cut and are following up the stoppage with other strikes in the coming weeks.

source by: Evan Kelly News Editor, Oilprice

The OPEC meeting in Vienna ended with no agreement on production targets, despite some rumors ahead of time that Saudi Arabia had floated a reinstatement of those limits. Iran still has no use for OPEC’s coordinated action, and Iran’s oil minister says that it still has some lost ground to regain. Iran won’t consider any possibility of limiting its production until it reaches 4 million barrels per day (mb/d) of production; its output currently stands at about 3.8 mb/d. As a result, OPEC couldn’t agree on anything, but such an outcome was largely expected by oil analysts. Still, prices plunged by more than 1 percent on the news from Vienna.
Oil storage levels fall. But the losses were quickly regained on June 2 as the fundamentals continue to provide some reassurance. Storage levels in the U.S. fell by another 1.4 million barrels, the first time that the U.S. has posted consecutive weeks of declines in a long time. Also, U.S. oil production fell by yet another 32,000 barrels per day last week – the losses continue to mount and output is down by more than 900,000 barrels per day from last year’s peak at nearly 9.7 mb/d. The oil markets were buoyed by these figures, pushing WTI and Brent back towards $50 per barrel following the disappointment from Vienna.

Weak jobs report. On the other hand, the Labor Department released the worst monthly jobs report in years on June 3, revealing that the U.S. added only 38,000 jobs in the month of May. The unemployment rate fell to just 4.7 percent, but largely because of people dropping out of the labor force. The dismal report could put downward pressure on crude oil, but it could also cause the Fed to delay a rate hike, which would be seen as a positive for oil prices. 
Nigeria output back up. Nigeria’s oil minister said that his country’s output has climbed to 1.6 mb/d, up from 1.4 mb/d in May. Still, the Niger Delta Avengers continue their aggressive campaign against oil companies operating in the Delta. This week the militant group claimed that it successfully carried out attacks against two oil wells controlled by Chevron (NYSE: CVX). The Nigerian government has had very little success in slowing the attacks and much of the country’s oil production remains offline. 

ExxonMobil considers $10 billion investment in Argentina. Argentina could be home to the next shale revolution, as the vast Vaca Muerta shale holds large volumes of oil and gas. Several oil majors have had a presence there for several years, but have not yet been able to crack the shale basin in a massive way. ExxonMobil (NYSE: XOM) announced that it is considering a $10 billion investment in the Vaca Muerta over the next few decades. The oil major has already poured $200 million into Argentina, and is now looking at another $250 million for a pilot project. If that is successful, Exxon’s CEO Rex Tillerson says that the company would make investments over the next 20 to 30 years “that would be well in excess of $10 billion.” 
Banks require more liquidity from oil and gas companies. Lenders are increasingly requiring oil and gas drillers to set aside cash in order to keep a certain level of liquidity. The measures are intended to reduce the banks’ exposure to debt that might not be paid. Also, the banks are concerned that indebted drillers might exhaust their credit lines ahead of a bankruptcy event. Banks are under their own scrutiny from regulators to minimize their vulnerability to bad energy debt.  

Natural gas inventories rise at slower pace. Natural gas prices jumped to a nearly six-month high on EIA data showing that inventories increased at a much smaller-than-expected rate. Spring typically brings strong gains in natural gas storage levels because of lower demand. The EIA reported that inventories climbed by 82 billion cubic feet last week, lower than the 86 bcf expected by some analysts surveyed by The Wall Street Journal. In the last week of May, inventories stood at 35 percent above the five-year average, down from 37 percent a week earlier. In other words, inventories are still extraordinarily high, but the glut is a bit smaller than was expected only a few weeks ago. Low prices since last year have halted production levels, which should help narrow the supply overhang going forward. Natural gas prices jumped to $2.42 per million Btu (MMBtu), sharply up from the sub-$2/MMBtu range where gas had been trading at for weeks. 

BP reaches $175 million settlement. BP (NYSE: BP) reached a $175 million settlement related to some outstanding legal claims from the Deepwater Horizon disaster in 2010. The claims were brought by investors that purchased BP shares following the disaster, a class-action suit that was about to go to trial. 

Petrobras could undergo major changes. The new head of Brazil’s state-owned Petrobras backs reforms that would scrap the legal requirement that Petrobras operate all of the pre-salt oil fields. If the law is loosened, it would be a huge opportunity for international oil companies, opening up some of Brazil’s most prized oil fields in the Atlantic Ocean. Petrobras has $130 billion in debt and can no longer afford the expenditures required to develop many of the pre-salt fields. The political crisis and the change of government in Brazil could accelerate market reforms and liberalize Brazil’s oil sector. 

ConocoPhillips offers best value. Bank of America Merill Lynch said in a report that ConocoPhillips (NYSE: COP) offers the best relative value in its peer group. Although its dividend is only 2.2 percent, lower than some of the other oil majors, Conoco offers the “top ‘free cash’ yield idea.” BofA Merrill Lynch’s Doug Leggate said that Conoco was best positioned to deliver outsize returns to shareholders from share buybacks.

sourece: Evan Kelly , Oilprice.com

•    The Memorial weekend is normally a time when Americans hit the roads for some vacation. This past holiday saw retail gasoline prices average $2.30 nationwide, 47 cents per gallon lower than last year.
•    Memorial Day 2016 saw the lowest gasoline prices since the aftermath of the financial crisis in 2009.
•    The West Coast has the highest gasoline prices at $2.66 per gallon, in part due to the major disruption at ExxonMobil’s Torrance refinery in Southern California. Also, the Californian market is somewhat separated from the rest of the country’s retail fuel market.
•    The Gulf Coast, near much of the nation’s refinery capacity, has the cheapest fuel prices, averaging $2.03 per gallon.


•    Noble Energy (NYSE: NBL) and Delek Group (OTCPK: DGRLY) signed an agreement to send natural gas from the Leviathan field in the Eastern Mediterranean to an Israeli power plant. The deal comes as the regulatory barriers to developing the massive gas field are clearing away.

•    Suncor Energy (NYSE: SU) announced that it has restarted some operations in the Fort McMurray area, following several weeks of outages related to the wildfires. That will bring several hundred thousand barrels per day back online.

•    Pipeline operators lowered rates after wildfires disrupted Canadian supply, which cut into demand for pipeline space. Tallgrass Energy Partners (NYSE: TEP), Legacy Reserves (NYSE: LGCY), and Suncor Energy (NYSE: SU), and Red Butte Pipe Line Co. lowered pipeline tariffs.



Oil prices were hit with some bearish news to start off the week, as Canada is set to bring much of the more than 1 million barrels per day of oil production that was disrupted from wildfires back online. But optimism is rising in the oil markets.

Is $60 around the corner? Even with that crude coming back online, there is a growing bullishness pervading the markets as of late, as forecasters raise their price projections and speculators gamble on steadily higher prices. Bloomberg reports that speculators shorting crude oil have been squeezed out of the market, and short bets have fallen to their lowest levels in almost a year. The shift in trades reflects more and more confidence that oil will not fall back down, at least not to the depths seen earlier this year. Also, several banks, including Standard Chartered Plc and SEB Bank have come out and said that oil will hit $60 before the end of the year. UAE’s economic minister, Sultan Bin Saeed Al Mansoori, said on Monday that he could see oil hitting that threshold by summertime. A survey conducted by The Wall Street Journal found that the array of investment banks polled raised their price targets for Brent crude in 2016 by $2 on average in May compared to the previous month’s forecasts.

Not everyone is so bullish, however. Some analysts attribute the recent price gains simply to the supply disruptions in Canada and Nigeria, outages that were always going to be temporary (at least in the case of Canada). "The output disruptions are a key factor supporting prices at the minute. We don't think prices will go much further from here," Thomas Pugh of Capital Economics told Reuters. "In fact, we think prices are vulnerable to a downturn in the short term if some of the disrupted supply returns, or there is evidence that higher prices are stimulating more production." Even with the upward revisions, many are still cautious – the average projections polled by the WSJ expect oil to trade at only $48 per barrel in the fourth quarter.  


New drilling possible. The rig count fell again last week, but with oil prices hovering around $50, market watchers are looking for clues to see if shale drillers will get back to work. Pioneer Natural Resources (NYSE: PXD) recently said that it is considering redeploying rigs if it grows confident that prices will stay above $50. But the WSJ reports that the oil majors could be more cautious, having been burned by megaprojects that cost tens of billions of dollars in recent years. “We’re not going to try and get into a boom and bust,” BP’s CFO, Brian Gilvary, said in April. “We wouldn’t be looking to significantly ramp [activity] up” even if oil prices rose to $60. The oil majors do operate in U.S. shale basins, but also source much of their oil and gas from large-scale long-lived projects. That means they won’t move as nimbly as smaller shale drillers as oil prices rebound.

OPEC meeting set to begin. OPEC officials are arriving in Vienna for the start of their semi-annual meeting. After the inability to set a production target in December 2015, plus the collapse of the Doha production freeze deal in April, few expect any result to emerge from the discussions this week. Moreover, the sharp gains in oil prices over the past few months has reduced the urgency to act. Although many OPEC members are still hurting terribly from oil prices that remain at less than half of their 2014 peak, prices are trending in the right direction. OPEC’s strongest member, Saudi Arabia, was highly unlikely to change strategies even when crude was $30 or $40 – now that it has moved up to $50, Riyadh is likely perfectly happy to stay the course and let the market sort out the winners and losers. Moreover, Saudi Arabia’s economic overhaul has made domestic economic and political objectives a much higher priority than cooperation with OPEC.


Forget oil prices, invest in majors. UBS offers some advice to energy investors. Don’t try to bet on oil prices, instead just pick up stocks in the oil majors. They will rise along with oil prices, they are also not as vulnerable to price swings, and they pay a dividend.

Nigeria’s supply outages continue; President to let currency float. Nigeria has been hit hard by the downturn in oil prices but its problems have been compounded by the fact that militants have successfully carried out a series of attacks against pipelines and platforms, cutting off roughly half of the country’s oil production. The woes have plunged the country into an economic calamity. The government has tried to defend its fixed exchange rate, but after burning through the country’s cash reserves, the President has thrown in the towel. On Monday, Nigerian President Muhammadu Buhari gave the green light to allow flexibility in the exchange rate. If a looser monetary policy proceeds, it will likely lead to a devaluation, or at least a depreciation. That will raise inflation and the cost of imports, but ease pressure on the central bank’s reserves. Meanwhile, the Niger Delta Avengers have promised to step up attacks against oil infrastructure until its demands for full sovereignty are met, issuing a May 31 deadline for oil companies to withdraw from the region.

ISIS on the back foot. Iraqi forces began an assault to retake Falluja from ISIS this week, a symbolic prize because it was the first city that the militant group took over in 2014. Also, in Libya, ISIS has lost control of two towns as security forces that protect oil ports have dislodged ISIS fighters with minimal losses. Libya is still producing sharply below its potential – a few hundred thousand barrels per day compared to a pre-war capacity of 1.6 mb/d. Iraq, for now, has seen its production levels hold up. In fact, Iraq raised its export target for June.

source: Evan Kelly, News Editor, Oilprice.com

Yesterday, to much fanfare from the online financial sites and business television stations, WTI, the benchmark for U.S. oil, broke through the $50 level. No sooner had the breathless talk of a complete recovery in oil prices begun, though, than it ended as WTI reacted to the level like a scalded cat and retreated as quickly as possible. This morning brought some attempts to explain why that rapid retracement occurred, but as far as I can see none of them have hit on what I consider to be the real reason.

In some ways it may seem that analyzing and attempting to explain what happened yesterday is a bit pointless; it is all over after all. Usually I would feel that way, but it is important that what happened yesterday is understood by anybody who trades oil, or for that matter any commodity futures from home, as it is not a rare phenomenon. To understand what caused the rapid retreat, you have to first understand what probably caused the run up above $50, and to do that you have to put yourself in the position of a desk or floor trader, a job that I did for nearly twenty years.

Real-Time Trade Alerts

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The above chart is for oil futures from 1 AM on Wednesday to early morning Friday U.S. Eastern time. When traders in the U.S. came to their desks at around 6AM they would have seen a chart that showed that oil had been basically flat for the last 6 hours. There had been an attempt to push lower that had failed, which suggested some support at around 49.70, but otherwise 49.76/96 had covered most of the trades. I can assure you that if I had come in in the morning and seen a chart like that, with that level of proximity to a round number, I would have been a buyer straight away, but only to set up a sell.

The round number, in this case $50 per barrel for WTI really means nothing to traders, except in one sense. They will be aware that it does look significant to retail traders and many of their customers, so orders will likely be clustered around the level. Most importantly it is reasonable to assume that there are stop losses just above $50…and that sets up a classic squeeze. In the thin early market it would take a relatively small amount of purchases to push the price up through $50 and trigger those stops. Keep in mind, though, that this is not a move that is in response to any fundamental factors, nor is it done with any conviction by those traders.

Once the price gets to the point where most of those stops have probably been triggered, in this case $50.20, those same traders who bought to drive the price up, sell into the stops that they have triggered. It is a basic, bread and butter play by desk traders and one which, I am sure has hurt most people who trade at some point. It is often done by people who already have long positions in order to squeeze the last little bit of profit out of that position.

What is important in understanding yesterday’s action, though, is that other than as a short term, technical play the traders who buy in that situation have no interest in remaining long. They are looking to dump positions as soon as possible. In some cases the whole reason for buying is to sell. It is little wonder then that the first break of a round number such as we saw in WTI yesterday is usually a false one, and once momentum is reached in the other direction, those that misread the situation and bought on what they saw as a breakout above $50 get squeezed out on the way back down. (Incidentally, if you think that this is trading with 20/20 hindsight, I should point out that I advised the Energy Trader Team members to sell at $50.10 yesterday morning).

source: Oilprice.com

This week’s key data from the oil and gas industry shows that both the ongoing decline in U.S. oil production and decreasing crude stockpiles have bumped up oil prices, whereas U.S. average gasoline prices continue to inch up this Memorial Day weekend.

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Oil hit a milestone this week, with Brent crude briefly touching $50 per barrel on May 26 before falling back again. Supply outages continue to tighten the market in Canada and Nigeria. But the catalyst for price gains this week came from the EIA, which reported a surprisingly strong drawdown in crude oil stocks – down 4.2 million barrels – which beat estimates. Also, U.S. oil production fell by another 24,000 barrels last week as the contraction continues. Oil prices appear to be on sound footing more than at any time during the nearly two-year downturn. 
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More production? Of course, higher prices raise the specter of a resumption in drilling. Short-cycle shale drilling allows for quicker response times than, say, offshore projects that have long lead times. Shale was the first to go offline because of low oil prices, but drillers could once again open up the taps if they feel that they can turn a profit. The jury is out on whether $50 oil is enough to do the trick, but oil slipped back on May 26 as traders grew concerned that drilling could pick up again. Also, the major supply disruptions, particularly in Canada, are temporary. There are still trap doors for the oil price rally to fall through. 

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One company is thinking of stepping up drilling. Pioneer Natural Resources (NYSE: PXD) said in in its earnings release in April that it would consider adding five to ten rigs this year if oil prices rebound to $50. "I think it is fair to say we're more optimistic than we were last month and even the month before that. We're cautiously optimistic that we're going to see improvement here in the second half of the year," Frank Hopkins, Pioneer’s senior vice president of investment relations, said in an interview. Now that oil is back at $50, will Pioneer add rigs? "It's not so much getting to $50 at a particular point in time. It's having a view that oil at $50 will stay at $50. The industry supply/demand fundamentals have to improve. We have to have a view that it's a positive price environment," Hopkins said. And there is at least one other metric that will convince Pioneer that the market has turned. "What's really going to convince us is that inventory levels continue to come down," he said. The EIA just reported a strong 4.2 million barrel drawdown in inventories. A few more weeks of numbers like that, and Pioneer could be set to resume drilling. 

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Natural gas prices fall on higher inventory. Natural gas prices fell to their lowest levels in a month on Thursday after the EIA reported a stronger-than-expected uptick in storage levels. Inventories rose by 71 billion cubic feet, putting total storage levels at 2,825 Bcf, well above the five-year average. Natural gas prices dipped back below $2/MMBtu on May 26 and are likely to remain a little above or below that level for quite a while.

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U.S. restrictions on banks limit Iran’s return to oil markets. Lingering sanctions on Iran from the U.S. government are hindering the Islamic Republic’s ability to ramp up oil exports, according to the WSJ. For example, Total (NYSE: TOT) had to work with some small European banks that do very little business in the U.S. to arrange financing for the purchase of Iranian oil. Banks that do business in the U.S. are in danger of running afoul of U.S. sanctions if they do business with Iran. The sanctions are related to Iran’s support for terrorism. 
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Trump to approve Keystone XL. Presumptive Republican presidential nominee Donald Trump gave a much anticipated speech on energy policy in North Dakota on Thursday, at which he said that he would reduce government regulations on the oil, gas, and coal industries. He said market forces should rule the day but also made some comments that contradict that sentiment. Trump vowed to approve the Keystone XL pipeline if elected but added a caveat: he would renegotiate a “better deal” to get the U.S. government “a piece of the profits because we’re making it happen.” 

Three straight years of spending declines. According to Statoil (NYSE: STO), global oil supplies will begin to decline this year, and post several consecutive years of declines as new sources of supply fail to offset natural depletion. That will largely be due to a severe cutback in exploration spending. The world is about to see three consecutive years of spending declines through 2017. “For the first time in history, we’ve seen cutting of capex two years in a row and potentially we risk a third year as well for 2017,” Statoil’s CFO Hans Jakob Hegge said in an interview with Bloomberg. “It might be that we see quite a dramatic reduction in replacing the capacity and of course that will have an impact, eventually, on price.”
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ExxonMobil and Chevron defeat shareholder push on climate. Activist shareholders forced a series of votes on whether or not to require ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) to disclose their risks to climate change. The logic is that the oil majors’ assets could lose significant value in a carbon-constrained world, posing financial risks to shareholders. The votes fell short, but posted relatively strong support – 41 percent of Chevron investors supported the climate resolutions and 38 percent of Exxon shareholders supported the moves. The financial risks to climate change are heating up as a point of concern and controversy in the industry. 
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OPEC to choose new Secretary-General. Changes are afoot in OPEC. The secretary-general, Abdalla Salem el-Badri is set to depart and the cartel is expected to choose a replacement at its meeting next week. El-Badri has been in the position for years, and was expected to retire in 2013 but stayed in the position because OPEC members could not agree on who would replace him. The choice of a new secretary-general at the upcoming meeting might be the only thing that member states agree on. 

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Fuel shortages and protests in France. The large strike that French unions have initiated to oppose a change in labor laws has led to fuel shortages. French riot police were deployed at a fuel distribution depot to break up the protest. 
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source:Evan Kelly, Oilprice.com

Oil prices bounced around this week, flirting with $50 per barrel but stopping short of that key threshold. The major supply outages in Nigeria (now at 900,000 barrels per day) and Canada (more than 1 million barrels per day) continue to put upward pressure on oil prices as they are erasing the supply overhang. Still, much of that will be temporary. The EIA poured a bit of cold water on the rally this week, reporting a surprise uptick in oil stocks. At the same time, U.S. production continues to slowly erode. The markets are more confident than at any point in recent weeks that prices won’t crash back into the $30s, but more movement to the upside is not a given.

FMC Technologies and Technip tie up. Two large oilfield service companies agreed to merge this week, FMC Technologies (NYSE: FTI) of Texas and the French company Technip (EPA: TEC). The combined TechnipFMC would have a market value of $13 billion, and with 2015 combined revenues of $20 billion, the new company would earn more than Baker Hughes (NYSE: BHI). The drilling services sector has been hit hard by the downturn in oil prices as producers cancel rig contracts and cut back on drilling. The WSJ notes the synergies between the two – Technip’s engineering and construction expertise will work with FMC’s underwater equipment portfolio. The deal comes as the Halliburton (NYSE: HAL) and Baker Hughes merger fell apart because of anti-trust concerns.

u.s. oil production:

Canadian wildfires rage but move away from key oil sands facilities. The massive wildfires in Canada continue to spread, encompassing more than 1.25 million acres, but cooler weather and efforts from firefighters have kept the blazes away from oil sands sites. More than 1 million barrels per day have been sidelined over the past two weeks, and the inability to get the fires under control has temporarily shelved some plans for restarts. The Alberta government said this week the 80,000 residents of Fort McMurray could start to return in increments beginning in June.

Canada approves Pacific pipeline expansion. Canada’s National Energy Board (NEB) issued a recommendation for approval for Kinder Morgan’s (NYSE: KMI) expansion of the Trans Mountain oil pipeline that runs from Alberta to the Pacific Coast in British Columbia. However, the thumbs up came with 157 conditions since the NEB also found that it would have negative environmental impacts, not the least of which is a five-fold increase in tanker traffic off the coast of Vancouver. The pipeline would nearly triple the capacity of the existing line from 300,000 barrels per day to 890,000 barrels per day. It would involve running 1,000 km of new pipeline parallel to the existing line. With so much oil trapped in Alberta with inadequate pipeline infrastructure, the expansion would be extremely welcome for oil sands producers. It would also allow Canadian crude to obtain a higher global market price, rather than the heavy discount it pays because of a shortage of pipeline capacity to the U.S. If the Prime Minister approves the project, construction could begin in 2017 and reach completion in 2019.

Norway opens up Arctic for drilling. The Norwegian government offered new oil and gas drilling acreage for the first time in more than 20 years this week. 10 drilling licenses were offered to 13 companies in the Barents Sea and some of the offshore acreage is located in disputed territory with Russia.

u.s.crude oil stocks:

Iraq oil production could be at a peak. An official from Russian oil company Lukoil said that Iraq’s oil production could be at a peak as the government moves to trim payments to oil producers. Lukoil operates in some of Iraq’s southern oil fields near Basra. The Lukoil official told Bloomberg that the oilfields require more investment to boost production but spending cutbacks from Baghdad could lead to a decline in output. 2016 budgets could be cut by 50 percent. Lukoil, for example, will cut spending on the massive West Qurna-2 field from $3 billion in 2015 to $1.3 billion this year. The Iraqi government just reached a deal with the IMF for a $5.4 billion loan, the first major oil exporter to do so.

North Sea asset sell off. BP (NYSE: BP) is mulling a sale of a stake in the Forties pipeline in the North Sea, a crucial pipeline for the whole region. The pipeline connects more than 50 oil fields in the North Sea and has a capacity to move as much as 1 million barrels per day. The British oil giant has not decided for certain yet if it will proceed with such a sale, but it has plans to dispose of $3 to $5 billion in assets this year. Separately, Royal Dutch Shell (NYSE: RDS.A) is negotiating with potential buyers to sell off some North Sea assets, but also has not launched a formal sale process.

Petrobras raises $6.75 billion in new bonds. Embattled and indebted state-owned Brazilian oil company Petrobras successfully raised $6.75 billion in a new bond offering, although it came with a heavy price tag. About $5 billion in notes due in 2021 were sold with an 8.625 percent annual yield while the remaining $1.75 billion in debt due in 2026 sold with a yield of 9 percent. Still, the company needs the cash injection; it has $13.2 billion in debt falling due in 2016 and $28.5 billion maturing in 2017 and 2018.

France set for oil refinery strike. French workers could bring oil refineries to a halt as workers strike over changes to labor laws. The large CGT workers union will vote on Friday whether or not to strike. But truck shipments have already interrupted some fuel supplies around the country because of protests. French President Francois Hollande has supported the change in labor laws, reducing overtime pay and making it easier for workers to be fired from the job. Oil giant Total (NYSE: TOT) is the major refinery operator in the country.


Chevron to restart Gorgon LNG. Chevron (NYSE: CVX) is in the process of restarting its enormous Gorgon LNG export facility in Australia, after several weeks of disruption due to mechanical problems. The $54 billion LNG facility completed construction earlier this year.

source: Evan Kelly ,Oilprice.com

We start today's newsletter with this week’s key figures for the oil and gas industry from which we see that oil prices have retained their gains as investors are buoyed by the continued declines in U.S. production.

Spoiler:

Oil prices have jumped around quite a bit this week. Investors are buoyed by the noticeable declines in U.S. oil production. Fresh EIA data also pushed oil prices up. Weekly production figures were flat, but gasoline stocks fell sharply, a sign that demand from U.S. motorists is strong. But the report was decidedly mixed – crude oil stocks continue to climb, hitting yet another record of 521 million barrels last week. 

Spoiler:

U.S.-Canada methane emissions. The Obama administration announced steps to address methane emissions from oil and gas wells on March 10, an effort that will also be taken up by Canada. The announcement was timed to correspond with the first visit to the U.S. by new Canadian Prime Minister Justin Trudeau. 

Spoiler:

The initiative will seek to cut methane emissions by 40 to 45 percent below 2012 levels by 2025. It is important to note that the target is not new – the Obama administration has already announced such an objective.

Spoiler:

But the EPA will begin drawing up regulations on existing oil and gas wells, as opposed to just new wells drilled. It is unlikely that the agency will be able to complete the rule before the end of President Obama’s presidency, but the initiative would presumably be taken up if a Democrat wins the election. For Canada’s part, the effort will be a departure from the past. Former Conservative Prime Minister Stephen Harper was an ally of the energy industry and never sought to impose heavy regulation. 

Spoiler:

Oil hedging on the rise. Oil producers are locking in sales of future production after prices have surged by about 40 percent in recent weeks. Not trusting that prices will hold up over the medium-term, Reuters reports that more and more producers are securing hedges on future production to guarantee them a certain price. The flattening of the futures curve has led many producers to not necessarily trust the market one or two years out. Hedging production protects drillers from another possible downturn in prices. 

Spoiler:

Court decision on pipeline contracts. A bankruptcy judge ruled in favor of Sabine Oil & Gas in its attempt to remove itself from obligations to pay for pipeline capacity, a decision that could have wide-ranging implications for both the upstream and midstream sectors. Sabine was under contract to pay for pipeline space with a subsidiary of Cheniere Energy (NYSE: LNG) to send its oil and gas, a contract that requires fixed payments for a set amount of volume.

Spoiler:

But since Sabine’s production is falling and it can no longer ship enough oil and gas, it argued it should not have to pay the pipeline company. A Manhattan judge agreed. While the decision is not binding, it represents a threat to the midstream sector that has benefited from stable contracts that guarantee predictable payments from producers. The issue is not settled and could lead to more litigation. 

Spoiler:

Shale drillers find more ways to boost production. Much has been written about the efficiency gains that shale drillers managed to deploy over the past year and a half to keep production up during the downturn in prices. But Reuters reports that drillers are finding even more ways to squeeze oil and gas from an average shale well. By “choking” off production at the start of operations, companies can smooth out the production curve, saving some output for later while potentially boosting overall production.

Also, later on in the life of a shale well, companies are increasingly deploying “artificial lift” techniques, which involve chemicals and electrical pumps that can provide a jolt to production at a time when it is normally in decline. Artificial lift can allow wells to reach 50 to 75 percent of their initial production rate. The implications of these strategies are profound: shale production is not falling as fast as many analysts and industry watchers had predicted. While good for individual companies, it could prolong the market adjustment period. 

BP cuts rigs in Prudhoe Bay. Oil giant BP (NYSE: BP) said that it would cut its rig count in Alaska’s Prudhoe Bay, where it has long been active.

The company will reduce its rigs from five to two, which could lead to lower production and the loss of more than 200 jobs. BP’s Alaska unit posted a $194 million loss in 2015 and is hoping to slash its expenditures. The state of Alaska has taken a huge hit from the downturn in oil prices as a range of companies reduce or pull out from the region, a list that includes Royal Dutch Shell (NYSE: RDS.A), ConocoPhillips (NYSE: COP), and Apache (NYSE: APA). 

Saudi Arabia seeks $8 billion loan. With a growing budget deficit, Saudi Arabia is looking to raise $8 billion from international banks as well as from the bond market, the first foreign borrowing in more than a decade. The Saudi government will select its lenders within the next two weeks. 

Global rig count down. Investors and energy analysts pay a lot of attention to the U.S. rig count, but few are watching the plunging number of rigs deployed around the world. A new report from Houston-based Simmons & Co.

International finds that the international rig count is down by 30 to 43 percent since 2014. State-owned oil companies in the Middle East have kept up drilling and exploration, but Africa and Latin America have been especially hit hard by low oil prices, leading to a precipitous fall in their rig counts. The report concludes that there could be “grievous consequences” in terms of inadequate oil supply in the future as global exploration dries up. 

ECB cuts rates. The European Central Bank took aggressive action on March 10 to boost the European economy. The ECB cut interest rates to 0.00 percent, cut its deposit rate to negative 0.4 percent, and expanded its asset purchasing program to 80 billion euros per month, beginning in April. The effort may provide some stimulus to the economy and weaken the euro. There are concerns that the aggressive monetary expansion will hurt European banks, which are already suffering. 

U.S. solar industry skyrockets. The U.S. solar market is set to explode in 2016. According to a report from GTM Research, the solar market will expand by a staggering 119 percent this year, with installations jumping from a record 7.2 GW in 2015 to a projected 16 GW of new installations over the course of 2016.

Utility-scale solar will make up the bulk of the new capacity, as large projects were already in the works to be completed before the expiration of federal tax credits. Those tax credits were recently extended until the end of the decade, however. Solar could capture the largest share of new electricity generation capacity in the United States this year. 

In our Numbers Report, we take a look at some of the most important metrics and indicators in the world of energy from the past week. Find out more by clicking here. 


source: Evan Kelly Editor, Oilprice.com

Oil prices have ticked up a bit over the last week on several pieces of bullish news. Crude inventories in Cushing dipped a bit, as did total U.S. oil production. Rig counts are still falling, but at a much slower rate than in recent weeks. Saudi Arabia increased its price for oil it is exporting to Asia, an indication that rising demand could provide a lift to global prices as 2015 continues to unfold. On April 7, oil prices were up again after taking a bit of a breather. The day before marked extraordinary price gains for both WTI and Brent. WTI is now solidly above the psychological threshold of $50 per barrel, trading at $53. Brent, jumping up above $58 per barrel, is closing in on the next threshold of $60 per barrel. 

Despite the price gains, things are not looking good for the crude-by-rail industry. A series of oil train derailments and explosions struck the rail industry earlier this year. But now fresh data from the Association of American Railroads strikes another blow: the fall in oil prices is starting to cut into the volume of shipments on the railways. As drilling activity falls in places like North Dakota, which accounts for the lion’s share of oil train shipments, fewer and fewer trains are making their trips across the country. Rail shipments fell by 7% in March from a year earlier. 

Piling on the pressure, the National Transportation Safety Board published the results of an investigation into train derailments on April 6. The NTSB issued four recommendations to upgrade rail safety including a swift transition towards reinforced railcars. “We can’t wait a decade for safer rail cars,” NTSB Chairman Christopher A. Hart said in a statement. “Crude oil rail traffic is increasing exponentially.” He called on the industry to move quicker. Crucially he also singled out the CPC-1232 design as flawed, which was previously thought to be an upgrade over the flimsier DOT-111. The NTSB called for upgrades to take place over a five-year period, an “aggressive schedule,” as the agency put it. 

It is possible that crude oil by train has reached a peak, at least for the foreseeable future. Moving oil on trains adds a $6 to $12 premium to the cost of a barrel of oil, according to a Wall Street Journal analysis. Refiners can stomach that cost when WTI trades at a discount to Brent, but the spread is narrowing. Forthcoming regulations could increase costs on the rail industry further. At the same time, oil prices have fallen to low levels, and if they stay low, production in North Dakota will be shut in. Meanwhile, pipeline infrastructure could slowly but surely begin to catch up, obviating the need for the army of oil trains. Shipments could easily rebound if prices rise and the spread between WTI and Brent widens again, but for now, oil-by-rail is entering a down period. 

Russia is also continuing to show signs of pain from low oil prices. Reuters confirmed that Russian President Vladimir Putin’s signature natural gas pipeline to China will be delayed. The news agency reported several weeks ago that a Russian official close to the matter hinted that Gazprom’s “Power of Siberia” project could be delayed as Russia focuses on a western project called Altai. Altai is set to be completed by 2019, sending 30 billion cubic feet (bcm) of natural gas to western China. However, the much grander “Power of Siberia” project that will connect gas fields in eastern Russia to eastern China will now be delayed by three years, pushing its completion date back to 2022, a Gazprom spokesperson confirmed. 

Separately, state-owned oil firm Rosneft is delaying another massive project. The combination of sanctions and low prices for liquefied natural gas (LNG) has upended the economics of the Sakhalin LNG expansion. Sakhalin, an island off the Pacific Coast of Russia, is the site of a large LNG facility that Rosneft was developing in conjunction with ExxonMobil (NYSE: XOM). The project, which consists of 5 million-toe-per-year liquefaction capacity, was originally set to come online in 2018, but will now be delayed by at least two years at least, or more likely it will “be postponed for three to five years because of lack of funds and low fuel prices,” a Rosneft source told Reuters. Officially, Rosneft insists that nothing is delayed. But with a major Arctic oil project already delayed, and now with the natural gas pipeline to China and Sakhalin also facing significant delays, it appears that sanctions and low oil prices are inflicting serious damage on Russia’s long-term energy picture. 

The oil markets reacted immediately and a bit rashly when it sold off crude due to the framework deal that the West and Iran arrived at last week. But energy analysts and market watchers chimed in and reiterated that there are many months before the 1.5 million barrels per day that Iran wants to add to market will actually be able to leave Iranian ports. In all likelihood, that means that even if a deal can be reached, Iranian oil will only begin flowing at some point in 2016 at the earliest. 

Meanwhile, although the U.S. and Iran are beginning to thaw relations, Iran’s relationship with Saudi Arabia is descending to a point of crisis. Already rivals in the Middle East, the conflict in Yemen is pushing the two sides into outright hostilities. Iran and Saudi Arabia are fighting a proxy war over control of Yemen, but now Iran is stepping up the pressure. The Iranian media is calling for an international boycott of Saudi oil due to the Arab kingdom’s attack on Houthi rebels in Yemen. As the world’s most important oil producer, there is little chance that any country other than Iran pursues such a course of action, but the call highlights how bad things have become between the two OPEC members. 

In Libya, which has received less attention in recent weeks despite simmering violence and political instability, the elected Libyan government is seeking to open an international bank account to control the flow of oil revenues. The move would avoid the Islamist government in Tripoli. The international account will be opened in the United Arab Emirates. With access to funds outside of Islamist control, the recognized Libyan government can avoid a cash crunch. Nevertheless, the critical point of control occurs at the oil field and the export terminal, and some of Libya’s most important assets and pieces of infrastructure are still being fought over.

source;Evan Kelly, Oilprice.com

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.

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.

In our Executive Report (below), we take a look at the growing opportunity for investors in the shipping industry. Global environmental restrictions on the emissions from container ships are forcing the sector to move into a new era. Instead of heavy fuel oil, the container ships will increasingly run on LNG for fuel, allowing them to cut costs and more than meet tighter environmental standards. This presents new opportunities for ship builders, shippers, and even the upstream natural gas sector as its market expands. Find out more below.

 source: James Stafford, Oilprice.com

The major news out of Washington this week was the address to a joint session of Congress by Israeli Prime Minister Benjamin Netanyahu. The speech became extraordinarily divisive and controversial, both because it took place so close to an election in Israel, and because the invitation to Netanyahu was given behind the back of the White House. Furthermore, Netanyahu’s harsh remarks regarding the Obama administration’s ongoing negotiations with Iran over its nuclear program were met with pushback from America’s executive branch.

 Netanyahu called the emerging accord between the U.S. and Iran a “bad deal,” while the White House said Netanyahu offered “nothing new.” Netanyahu may have hardened Republicans against a compromise with Iran while the chances that sanctions could remain in place may have increased. On the other hand, both Secretary of State John Kerry and Iranian negotiators dismissed Netanyahu’s speech, and reiterated the progress they have made in hammering out a deal. An end of March deadline is quickly approaching, and perhaps as much as 1 million barrels per day of Iranian crude hang in the balance.

The other major piece of news out of Washington this week was the U.S. Senate’s failed attempt at overriding President Obama’s veto of legislation approving the Keystone XL pipeline. Coming up a few votes short, Congress has nearly exhausted all of its options, and the ball remains in the White House’s court to ultimately decide the fate of the much-maligned project. While several Republican legislators vowed to try to find a legislative vehicle in which they can insert language approving the pipeline, Washington will likely put the issue on hold for now and merely wait for final word from the President.

On the other side of the world the National People’s Congress got underway in Beijing; one of the most important annual political functions in China. The Chinese government lowered its growth target for 2015 down to 7%, significantly lower than last year’s rate of about 7.4%, which in turn, was the slowest rate of growth in 25 years.
 
Li Keqiang, China’s Premier, acknowledged that China’s growth is slowing, but also signaled that the government is willing to accept this “medium-high-level growth rate.” The more modest economic performance is showing up in the commodity markets. There is some evidence that China could be reaching “peak coal,” a monumental milestone if current trends continue. China actually saw its coal consumption drop just a bit in 2014, evidence that the country could move to a cleaner future quicker than expected. That has led to a decline in coal prices, forcing mining companies around the world to cut back on production and shut in mines. Lower demand for oil will also keep prices from rebounding too quickly.

Nevertheless, it is not as if the Middle Kingdom’s appetite for commodities is quenched. China announced plans to stock up on all sorts of commodities this year, seizing the opportunities in the current low-price environment. Oil, iron ore, copper, corn, wheat, soybeans and more are likely to be on the menu. China also has plans to build up a 90-day supply of oil in a strategic petroleum reserve, and it has ramped up its purchasing efforts over the last year. If China gobbles up oil at a faster rate in 2015, it could provide some support to oil prices.

Libya has been in the news over the last few weeks, and not for positive reasons. The OPEC-member is seeing its institutions crumble amid civil war, and the bad news keeps on coming. This week Libya declared a force majeure on contracts related to 11 oil fields due to attacks on infrastructure from the Islamic State.

Estimates are shaky, but oil officials say the country is pumping around 500,000 barrels per day (bpd). That is not only down from the 1.6 million-barrel-per-day peak in the pre-Gaddafi era, but it is also sharply down from levels seen just a few months ago. We reported on the IS attacks last month on the Mabruk oil field, which is a joint venture between Libya’s National Oil Company and Total SA (NYSE: TOT). The 30,000 to 40,000 bpd field was attacked again on March 3, and IS militants destroyed oil tanks and damaged the control room, according to the Wall Street Journal. Libya’s oil workers have taken heroic efforts to keep oil production and exports flowing – as the only major source of export revenues – but the country’s fight against IS militants appears to be taking a turn for the worse.

On a more positive note, Russia’s Gazprom announced on March 5 that it had received a $15 million payment from Ukraine for natural gas, avoiding a cut in deliveries for the time being. The standoff had threatened to cut supplies of natural gas to Ukraine and the rest of Europe, but the payment will cover an estimated five days’ worth of supplies. Still, it is unclear how Ukraine will be able to come up with enough money to cover what Gazprom says is a debt of at least $2.4 billion.

On the corporate front, there is one oil company whose fourth quarter earnings figures stand out from the pack: Canadian Natural Resources (NYSE: CNQ), a major producer of oil sands in Alberta. Instead of seeing profits decline, Canadian Natural saw its profits nearly triple in the fourth quarter from a year before. That is because it more than offset the decline in prices with a massive ramp up in production. Canadian Natural’s output was up almost 30% for the year. Still, spending reductions and cost trimming are slated for the company this year.



Growth in the global natural gas trade is expected to continue to climb rapidly. Worldwide trade in liquefied natural gas (LNG) is expected to reach $120 billion this year, making it the second most valuable commodity, according to Goldman Sachs. The $120 billion figure will allow LNG to overtake iron ore in terms of the value traded. The strong growth is the result of major supply expansions that are expected to come online this year and next. More liquefaction capacity will mean an erosion of the practice of linking the price of LNG to the price of oil under long-term contracts. In its place will be an increasing reliance on the spot market, giving greater leverage to buyers. Over the next ten years, LNG is expected to see a 5.1% growth rate.

In our Executive Report (below) we look at the growing opportunity for the use of drones in a wide array of oil and gas applications. Drones, while having been heavily incorporated into military campaigns, are finding a receptive audience in the commercial sector. Drones may be able to cut down on costs for surveying, monitoring infrastructure, and detecting safety problems before they occur. And the U.S. government just cracked open the door to their use in a recent regulatory proposal. Find out more below.

Source:James Stafford, Oilprice.com

Whether it is to cripple the will of Putin and end his support of the Syria regime (thus handing the much desired gas-pipeline traversing territory over to Qatari and/or Saudi interests), a hypothesis first presented here in September and subsequently validated by the NYT, or much more simply, just to destroy any and all marginal producers so that Saudi Arabia is once again the world's most important and price-setting producer and exporter of oil, one thing is clear: the Saudis will not relent from pumping more oil into the market than there is (declining) demand for, until its biggest threat and competitor - the US shale patch - which recently had become the marginal oil producer, as well as its investors - mostly junk bond holders gambling with other people's money - are crushed, driven before the Saudi royal family, and the lamentation of their women is heard across the globe.

That much is known.

But what neither the Saudis, nor the US shale companies, and certainly not their investors who lately seem to get their investment advice from the no longer Nielsen-rated Financial Comedy Channel, know is even if every last US shale company is Friendo'ed, there is an even more insidious group of drillers and oil extractors behind them, backed by an even greater monetary bubble and an even more clueless group of sources of cash, just waiting to step in and become the next marginal oil producer.

China.

According to Global Times, the slump in oil prices "has triggered a flurry of Chinese investment in oil wells, in a bid to get a high return from the black gold."

Cutting to the chase: once the US funding for local shale runs out, as companies - some already levered 5x, 6x, or more can no longer even remotely service their debt and not even Fed's ZIRP is enough of an impetus for yield chasers to throw more good (other people's) money after bad - start filing for bankruptcy en masse, who will step in continue the extraction? Why China of course: Global House Buyer, a Beijing-based services provider to Chinese overseas investors, said on Saturday that the company now has presented an investment opportunity in oil wells in Texas, US, to Chinese investors.

Related: China Ramps Up Emissions Efforts With New Carbon Market

According to the company, the project, involving six oil wells in an area of 2,240 acres, is located in Crockett County in Texas. Cooperating with local developers, the project is expected to attract a total of $4 million investment at the first stage, with the minimum investment of $100,000 each.

The annual return could reach more than 12 percent, the company said.

Or, if Chinese sources of funding rush in to maintain oil supply at its current levels, or even boost it, into a world where demand is plunging (and, poetically, driven by a plunge in demand out of China itself), that annual return could reach 0, -12% or, most likely -100% as yet another series of investors with hot central bank money is wiped out.

Of course, nobody ever anticipates lower prices: "The return is based on our prediction of future oil prices," Liu Bin, general manager responsible for the US investment at Global House Buyer, told the Global Times on Saturday. Liu predicts that the current oil price still has room to rise, which will generate higher profits for the project.

What Liu seems to be unaware is that the current low price of oil which enables him to find investment opportunities in the Texas shale is precisely due to supply and demand being where they are, and unless supply collapses to keep up with dropping demand, oil prices will never go up.

But why bother with the details. For now Liu, and many of his competitors, is merely eager to demonstrate his ability to generate 12% returns on the back of a surging price driven by... his incremental pumping?

According to Liu, the oil wells have been in operation since 2012. Currently, the total output per day is about 170,000 barrels, and they still have more than 10 years of drilling capacity with a stable output.

"Investing in the oil wells could be read as another sort of real estate investment," Shi Ruixue, CEO of Global House Buyer, said.

Because the Chinese clearly have a tremendous sense for undervalued real estate investments. "Investing in oil well is a market-oriented activity, and it is understandable why investors are flocking to the oil sector, as the oil prices are still at a low level, Han Xiaoping, chief information officer at energy portal china5e.com, told the Global Times on Sunday."

Related: This New Project Changes The Global Oil Market

And now comes the Friday humor:

"Chinese investors have gained more experience about risks after the financial crisis in 2009. It is a good timing to invest in oil projects as the prices are still low. But if the prices move further down, it will pose risks to oil investment," Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University, told the Global Times on Sunday.

He Shaohua, a potential investor who has invested in housing projects in the US, told the Global Times that he planned to invest $100,000 in the oil wells, as it is good to diversify his investment.

In other words, just as US junk bond investors in energy companies swear to never repeat their mistake again, at least those who still have "other people's money" to invest, here comes the next patsy, one who has just as deep pockets if not deeper, and who will assure that the US pumping action does not stop for a very, very long time.

We hope we don't need to explain happens to the price of oil as China storms in to restart the deserted US shale rigs.

However, one thing we can't wait to find out, is just how will China react when it learns that just as it was preparing to celebrate, that it will need to deal with yet another marginal source of production (and funding), one who will surely engage in output competition for the next 12-24 months, until the latest batch of hot money, just off the central bank printer, runs out.

Source By. Zerohedge, Oilprice.com

source: James Stafford, Oilprice.com

Oil Prices are flirting with a rebound, poised to jump the most in four years for the week ending on February 6. The markets do not know what to make of the current pricing situation, as volatility is also at a multi-year high. But major capital expenditure cuts from the big boys – billions of dollars are set to be slashed by ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A), Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), and BP (NYSE: BP) – are signaling that the bottom is coming into view. Rig counts also continue to slide at a rapid clip. Oil prices took a pause mid-week, erasing much of their 19% gain after the EIA reported that oil inventories were at an 80-year high. But WTI and Brent posted further gains to close out the week, providing some serious evidence that a rally could be in the making.

Adding fuel to the fire was violence in Libya, a country that last year helped contribute to the historic collapse in oil prices. Oil production in the North African country has broken down, falling from 900,000 barrels per day down to 325,000 barrels per day over the last three months. Militias have attacked airports and a major oil export terminal, igniting oil storage facilities that Libyan officials struggled to put out. The violence is cutting off significant volumes of production from several international oil companies – Total (NYSE: TOT), ConocoPhillips (NYSE: COP), Marathon Oil (NYSE: MRO), and Hess Corp. (NYSE: HES). Total has shuttered a 40,000 barrel-per-day oil field in Libya, and ConocoPhillips says its Libyan production fell to just 8,000 barrels per day in 2014, compared to an average of 30,000 barrels per day the year before. The violence has blocked exports from Libya’s enormous Sidra port. The loss of more than a half of a million barrels per day from this war-torn OPEC country is taking a non-trivial volume of supply off the market.

Meanwhile, tensions are rising in Eastern Europe after reports surfaced that the U.S. is considering arming Ukraine in its fight against Russian-backed separatists. Rushing to attempt to reach a diplomatic solution, German Chancellor Angela Merkel and French President Francois Hollande flew to Kiev on February 5 to discuss the situation with Ukrainian President Petro Poroshenko. The duo then moved on to Moscow to huddle with Russian President Vladimir Putin to try and diffuse the situation after rejecting a Russian proposal to grant more autonomy to rebels in eastern Ukraine. There was no immediate breakthrough, but Merkel and Hollande hoped to push diplomatic progress forward. The diplomatic campaign suggested there was a divide between the U.S. on the one hand, and European countries on the other in terms of how to deal with a recalcitrant Russia. France and Germany oppose American weapons heading to Ukraine. The standoff raises the prospect of more violence in Ukraine and a deterioration of already terrible relations between east and west.    

Geopolitical crises may be contributing to a rise in oil prices in recent days, but prices are still below $60 per barrel. And that is not enough to entice oil companies to continue drilling in high cost areas. Oil explorers are scrolling through their list of projects and are coming to the conclusion that oil in the Arctic is some of the most expensive out there, as the region suffers from remote and unpredictable drilling conditions as well as a lack of infrastructure. Chevron and ExxonMobil have already withdrawn their Arctic plans, but Statoil (NYSE: STO), an Arctic veteran, became the latest company to suspend their Arctic drilling campaign, at least for the time being. Even Russia’s Rosneft has pulled back from the far north. The Financial Times wrote that Arctic drilling is entering a “deep freeze,” a chill that may not thaw out for years.

While the oil business in the far north is facing a cold spell, economic activity across the U.S. is heating up. The U.S. Department of Labor reported very robust employment numbers on February 6, reporting that employers added more than 257,000 jobs in January and also included an upward revision in jobs figures for the months of November and December. The U.S. economy appears in full recovery mode, in doubt pushed on from low gasoline prices. However, in turn, the economic jolt should lead to higher demand for fuels, giving added support to the rise in oil prices.

Although prices are rising, the oil industry is not out of the woods yet. Saudi Arabia did indeed raise prices for its oil being exported to the United States, but it also slashed its prices by almost $1 per barrel to oil heading to Asia. The move suggests that the de-facto OPEC leader is playing the long game and is still fighting for market share. Other OPEC members have increased their exports to Asia, and China in particular has increased its imports to take advantage of soft prices. But Saudi Arabia, learning the lessons of the 1980’s when it lost market share, is stubbornly fighting for every sale. That muddies the picture as far as the oil rally goes, so stay tuned.

Also, in this week’s special report (below), we look at an exciting way to profit off of cheap oil. The oil tanker sector is seeing a surge in interest as low-cost oil is flowing at a higher rate than ever before. Drillers may be hurting from the oil bust, but companies moving oil around the world are doing just find. Please see below to find out how best to play this growing market.

That’s it from us this week. We hope you enjoy the report below and have a great weekend.

source:James Stafford, Oilprice.com