Oil Rises As Market Regains Faith In OPEC Deal

Blog Post created by sksingh on Dec 19, 2016

Oil prices, last week, ended largely where they started with the strong gains from the non-OPEC deal having worn off as the week progressed. The credibility in the collective cuts from OPEC was duly strengthened with the non-OPEC deal, with an expected 1.8 million barrels per day slated to be pulled off the market in early 2017. However, on Wednesday, the U.S. Federal Reserve poured cold water on the party with its interest rate hike – the strong dollar did a number on commodity prices. Markets regained faith in OPEC’s compliance to the deal, as oil prices closed the week in the green.


Libya and Nigeria set to boost oil exports.  In order to bring disrupted oil production back onto the market, a key oil export terminal as well as a pipeline in Libya are about to come back online,. Production in Libya has been doubled from 300,000 to 600,000 bpd since September. More capacity is speculated to come online as the political situation improves. Separately, the Nigerian government signed a deal with ExxonMobil, Royal Dutch Shell, Eni and Chevron to resolve a dispute over back payments of $5 billion on JVs. The deal could pave the way to more investment and lead to a resurgence in Nigeria’s output, which is down to 1.8 mb/d from a peak last year of 2.2 mb/d. If the two OPEC countries, Libya and Nigeria, restore capacity, it could threaten the efficacy of the OPEC deal.


IEA: Oil demand in 2017 to slow. The IEA has released a statement that global oil demand growth will slow to just 1.3 mb/d next year, down from 1.4 mb/d this year and 1.9 mb/d in 2015. The growth rate will be the smallest since 2014 and as a result, it would pose as a threat to a market on the mend. Other analysts put the 2017 growth rate much lower – Citigroup thinks demand will only expand by an unimpressive 1.1 mb/d.


Goldman Sachs increases oil price forecast. A revised oil price forecast for 2017 was issued by Goldman Sachs, to reflect the effects of the non-OPEC agreement and greater confidence in the compliance of OPEC members to their historic deal. The investment banks expect WTI to average $57.50 in the second quarter of next year, up from its previous estimate of $55. Brent will average $59 instead of $56.50. The assumption being made here is an 84 percent compliance rate from OPEC, which will lead to cuts of 1.6 mb/d from the cartel instead of the announced 1.8 mb/d.


Pioneer expects $70 oil. Pioneer Natural Resources is a lot more optimistic with it’s forecast as compared to Goldman Sachs.. The Texas shale driller sees WTI rising to $70 per barrel by the end of 2017 as the world quickly draws down on storage levels. A statement was made by the COO to Bloomberg that his company has hedged 85 percent of its production through 2017, but has declined to hedge much for 2018 as it plans on profiting from much higher prices.


WTI faces pressure from inventories at Cushing. While U.S. oil inventories are slowly coming down, they remain near record highs at the key oil hub of Cushing, OK. Part of that is a seasonal phenomenon as Gulf Coast refiners put extra product in storage in Cushing for tax reasons. But also refiners process less in winter months. Another reasons is that production is booming in Texas, keeping pressure on storage tanks. The inventories are pushing the market into a deeper contango than what has been seen in recent weeks, and also putting pressure on the WTI-Brent differential.


Statoil to sell off Canadian oil sands. Statoil announced its decision to sell off its oil sands assets to Athabasca Oil Corp. in a deal that could be worth up to $832 million. After having spent nearly a decade in Alberta’s oil sands, it will exit the play with a loss of at least $500 million. Apparently, this deal is in accordance with Statoil’s strategy of portfolio optimization to enhance financial flexibility and focus capital on core activities globally.


Chesapeake Energy’s “Prop-a-geddon.” Chesapeake Energy is conducting the largest frac job in the history of the Haynesville shale in Louisiana, a process the company is calling “prop-a-geddon.” The natural gas well the company is drilling is an experiment in economies of scale, drilling a well that is 2 miles deep and runs 2 miles horizontally, using 51 million pounds of sand. The monster frac job, Chesapeake believes, is a world record. Shale companies have been figuring out ways to use more frac sand, or drill longer laterals, to improve well economics, but Chesapeake is arguably pushing the bounds further than anyone. Chesapeake hopes it can cut costs by 75 percent compared to the average well. The WSJ reports that the experiment is integral to the turnaround of a deeply indebted company.


Trump selects Rep. Ryan Zinke (R-MT) for Interior. The Republican Congressman was chosen to lead the Interior Department, a former Navy SEAL. He is a supporter of oil and gas drilling, as expected, but he has also shown a bit of an independent streak, bucking his party on matters of public lands. While many Republicans want to privatize public lands to accelerate industry development, Zinke has fought to keep public lands public, offering a small sliver of hope for environmentalists fearing an onslaught from the Trump administration. Still, Zinke will likely oversee greater drilling opportunities on public lands.