Oil Price
By Tom Kool
Mar 14, 2017
Oil prices were hit hard on Tuesday by a bearish EIA
report and continued uncertainty over a possible OPEC deal extension. Natural
gas also saw losses as warm weather and rising shale output worsened the supply
glut.
• In February, a historic event took place in the
natural gas markets. For the week ending on February 24, natural gas storage
levels rose – the first time it has done so in winter since data collection
began.
• Net “injections” typically do not begin until April
when temperatures rise and demand falls.
• The highly unusual increase in storage in the depths
of winter caused natural gas prices to crash. The market is once again
oversupplied after a winter of weak demand and much fewer “heating degree days”
than average.
Market Movers
• Enbridge (NYSE: ENB) says that Canada’s oil market
only needs two major pipelines, including the company’s Line 3 expansion that
will run from Alberta to Wisconsin. However, Kinder Morgan’s (NYSE: KMI) Trans
Mountain Expansion and TransCanada’s (NYSE: TRP) Keystone XL are also on the
drawing board.
• Gazprom (OTCPK: OGZPY) appears poised to compromise
with EU anti-trust regulators, agreeing to reform its pricing practices that
often involves long-term contracts linked to political relations with Russia.
• Rumors are surfacing about an ExxonMobil (NYSE: XOM)
takeover of BP (NYSE: BP). If it occurred, it would likely be the largest
takeover of all-time
Tuesday March 14, 2017
Oil prices bounced around at their new lower levels to
start off the week, with WTI moving around the $48-$49 per barrel range, and
Brent at $51-$52. Fears of oversupply are now back at the forefront of the
market’s concerns as the OPEC cuts fail to clear record high inventories and
oil prices continue to fall. “Apart from the survey-based production figures,
there is little to suggest as yet that this market tightening has already
begun,” Commerzbank said this week. Stuart Ive of OM Financial echoed this
concern: “Unless there are positive signs from non-OPEC producers on production
cuts or there is a significant supply outage, the relentless pursuit of the
U.S. shale production will cut into OPEC’s plans,” he told the WSJ.
EIA: U.S. shale production to surge
in April. In its latest Drilling
Productivity Report, the EIA predicts that shale output will jump by 109,000
bpd in April, a significant increase from March. The gains will be led by the
Permian Basin (+79,000 bpd), with smaller contributions coming from the Eagle
Ford (+28,000 bpd) and the Niobrara (+11,000 bpd). The gains will surely weigh
on a market that is growing increasingly concerned about the swift comeback of
U.S. shale.
Natural gas production to rise
quickly, prices could fall. In
the same DPR report, the EIA said that natural gas production will jump to 49.6
billion cubic feet per day in April, hitting a new record high. It would mark
the fourth consecutive month of production increases. These figures will
prevent any meaningful rebound in natural gas prices. A separate and more
damning report from Tudor Pickering Holt & Co. projects a 25 percent
increase in gas production from the Permian basin, largely due to a rise in
output of associated gas from the wave of oil drilling. The increase in
production could send natural gas prices below $2/MMBtu, Tudor Pickering says.
Hedge funds slash bullish bets. Hedge funds and other money managers cut their
net-long positions on WTI and Brent last week to a one-month low. Aside from a
few exceptions, speculators have built up bullish bets on crude nearly every
week since the OPEC deal was announced in late November. Now, with the market
still oversupplied and U.S. inventories swelling, bearish sentiment is back.
"This report is just the beginning," John Kilduff, a partner at Again
Capital LLC, said in response to the horrific EIA report last week. "The
volume and breadth of the decline this week show that there was massive
liquidation. Next week’s report will be the blockbuster." If EIA data
reveals another week of large crude oil inventory gains, WTI and Brent could fall
further as investors bail out on their net-long positions.
Goldman Sachs urges “patience,”
remains bullish on crude. After
a sharp selloff in commodities last week – led by the 9 percent drop in crude
oil – investment bank Goldman Sachs says “the market needs a little patience’s
to wait for the fundamentals to materialize from the OPEC cuts.” Goldman
reiterated its relatively bullish projection for crude oil prices. In fact, the
bank says that at $48 per barrel, going long on crude oil at this price level
is “our trop trade recommendation.”
Russia says oil price war still
possible. Russia’s Rosneft said
that the rapid rise in U.S. shale oil production could undermine OPEC’s
commitment to its deal to cut output. As OPEC loses market share without the benefit
of higher prices, the willingness to extend those cuts through the end of the
year could evaporate. In that case, Rosneft cautions, another price war could
take place in which all parties fight for market share. This prediction stands
in stark contrast to the growing whispers of support for an extension from
within OPEC. Kuwait became the first country this week to officially endorse a
six-month extension of the deal in an effort to balance the market.
Efficiency keeps oil prices low. Oil companies boasted about their lower breakeven
prices at the CERAWeek energy conference in Houston last week, a trend that
could keep oil prices from rising again in the near- to medium-term.
"Everyone is driving break-even prices down," Deborah Byers, head of
U.S. oil and gas at consultants Ernst & Young LLP in Houston, told
Bloomberg. "It isn’t just shale companies; it’s everyone, from deep-water
to conventional." Statoil (NYSE: STO) trumpeted its extraordinary
improvement in its cost structure – the Norwegian oil company’s breakeven price
declined from $70 per barrel to “well below” $30 per barrel. But even amidst
this optimism, a handful of shale companies also suggested that oil prices
could fall again because of the strong resurgence of U.S. shale output.
Libyan output down to 602,900 bpd. Violence continues to knock some Libyan production
offline, with output down nearly 100,000 bpd from the 700,000 bpd level in
February. The reversal in Libya’s fortunes presents one of the few bullish
stories in the oil market right now.
Nigeria could lose OPEC exemption. If OPEC decides to extend its production cuts for
another six months, Nigeria may lose its exemption status. Violence could
continue to dissipate, allowing Nigerian output to rise further in the coming
months. That would mean that Nigeria no longer has a rationale to be excluded
from the caps on output, OPEC officials say….
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