Oil prices posted some solid gains this week, but with the market outlook remaining gloomy, a continuation of this upward trend looks unlikely to last long
Friday, July 14, 2017
Oil prices posted steady and solid gains this week, clawing back some of the most recent losses and moving back up into the upper-$40s per barrel. The concerns about oversupply have not gone away, so there are questions about how much more room oil has to run from here.
IEA: Saudi Arabia boosts production, undermining OPEC deal. The IEA said in its latest Oil Market Report that the higher production from OPEC is likely going to delay the rebalancing of the oil market. Saudi Arabia increased production by 120,000 bpd in June, and the sharp increase in output from Libya and Nigeria led to a decline in the group’s compliance rate to just 78 percent, down from 95 percent a month earlier. Meanwhile, Saudi Arabia is hoping to cut oil exports to the U.S. in a bid to drain American oil inventories, a strategy that could see the U.S. imports of Saudi crude dropping to just 800,000 bpd in August.
IEA: Oil demand stronger than expected. The news about higher OPEC production made more headlines, but oil traders took solace in another aspect of the latest IEA report: Oil demand is growing faster than previously expected. The agency said that demand would expand by 1.4 mb/d this year, or about 0.1 mb/d faster than it previously thought. But within that annual figure is a more “dramatic acceleration,” as the IEA put it. Demand grew at a meager 1 mb/d pace in the first quarter, but surged to a 1.5 mb/d annualized rate in the second quarter, giving the market momentum and offering a signal that stronger inventory declines are likely forthcoming.
Barclays: Oil prices not rebounding to $50. In a research note earlier this week, Barclays slashed its three-month oil price forecast from $57 to $49, the latest in a series of price downgrades at major investment banks. “The recent weakness reflects the market’s need to price in a lower [U.S.] shale break-even and absorb the unexpected return of around 300-400 [kbpd] of Libyan and Nigerian oil,” Barclays said in the report. “With inventories still quite high, government stockpiles available, DUCs standing ready, and cuts providing OPEC with additional spare capacity, there are plenty of plugs to fill any hole,” they added. Related: Is Wall Street Funding A Shale Failure?
Sub-$50 oil puts oil majors’ credit ratings at risk. If oil prices stay below $50 per barrel through 2018, it would threaten the credit ratings of even the largest oil companies, S&P Global said this week. “If oil prices persistently trend below our price assumptions ($50/bbl on average until the end of 2018), downgrade pressure for many ratings would increase without material and sufficient further cost and capex efficiencies, disposals, or other countermeasures against weak credit metrics for a sustained period,” S&P said in a report.
UK woos Saudi Aramco. The UK’s Financial Conduct Authority created a new category for listing state-owned oil companies, exempting them from certain rules that apply to others. The move is clearly intended to make a public listing of Saudi Aramco more attractive in London. The London Stock Exchange is competing with the New York Stock Exchange to capture a windfall of fees for what is expected to be a massive public offering.
Premier Oil makes Mexico oil discovery. Premier Oil PLC (LON: PMO), Talos Energy and Sierra Oil & Gas announced a major oil discovery in Mexican waters on Wednesday. The shallow water discovery was described as “world class,” with estimates reserves between 1.4 and 2 billion barrels, twice as much as previously thought. The discovery is the latest in a string of successful developments for Mexico’s oil sector, which is rapidly building momentum after liberalizing the sector just a few years ago.
Small shale companies rethinking drilling. The Houston Chronicle reports that smaller shale companies are having to rethink whether or not to drill now that oil seems stuck below $50 per barrel. For example, Green Century Resources, a Permian producer, was set on drilling a project a few weeks ago with oil at $50, but might scrap those plans with oil at $45. Related: Significant Draw In Crude Inventories Jolts Oil Price
Shale industry paying down debt. An EIA survey of 54 publicly-traded U.S. oil and gas companies shows that the industry is paying down debt while also investing with asset sales and equity issuance. That is a departure from the past when the industry relied much more heavily on debt. Between 2012 and 2015, these companies took on $55.3 billion in debt. But since the beginning of 2016, those companies have cut debt by $1.4 billion.
Goldman: shale companies not great investments, but a few have potential upside. Goldman Sachs said that many shale companies will struggle at today’s oil prices. But the investment bank does like a few companies, who are “productivity winners,” including: EOG Resources (NYSE: EOG), Pioneer Natural Resources (NYSE: PXD) and Cabot Oil & Gas (NYSE: COG). Goldman also says that Diamondback Energy (NASDAQ: FANG) and RSP Permian (NYSE: RSPP) are good picks for “productivity plus consolidation.”
OPEC sharply revises up its forecast for electric vehicles. OPEC just raised its forecast for EV adoption in 2040, expecting 266 million to be on the roads by that time instead of the 46 million it predicted in last year’s forecast. The quintupling of its EV projection comes after several oil majors also raised their expectations of EV market penetration. The trend highlights falling battery costs and the recognition that carmakers are set to roll out many more EV models in the near future.
By Tom Kool of Oilprice.com
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