Oil prices retreated somewhat towards the end of the week to close the week flat on the news of a falling oil rig count.
Important Note for Energy Investors: The World Economic Forum, the Institute of Electrical and Electronics Engineers, the MIT Technology Review, prestigious national laboratories, and a slew of other experts are buzzing about this new element that will transform the energy industry. Early investors are already reaping the benefits. Are you in?
Friday, December 15, 2017
Oil prices fell back from their highs earlier this week after the Forties outage, as the IEA dashed hopes of continued bullish momentum when it reported that the global supply surplus could return in 2018.
Inventory surplus shrinks. OPEC said that the global surplus in oil inventories dropped to 130 million barrels above the five-year average in November, down sharply from 154 million barrels the month before. “We are beginning to see a return to stable markets,” OPEC Secretary-General Mohammad Barkindo said. “Something that has eluded us for several years.” There are growing expectations that OPEC will need to offer details of an exit strategy at its June 2018 meeting.
IEA: Inventory surplus to return. The IEA published a bearish report this week. The headline conclusion was that U.S. shale would grow so sharply that it would help bring back inventory builds in 2018. The Paris-based energy agency predicted that non-OPEC supply would grow by 1.6 mb/d, overwhelming demand growth of just 1.3 mb/d. That would put an end to the strong inventory drawdowns that we have seen this year, and the agency predicted that inventories would rise by a rate of 200,000 bpd in the first half of 2016. The report undercuts the notion that the oil market will reach balance at some point in mid- to late-2018. Meanwhile, OPEC predicts strong inventory declines in the second half of 2018 – a notable difference from the IEA. “Both cannot be right,” Ole Sloth Hansen, head of commodity strategy at Saxo Bank A/S in Copenhagen, told Bloomberg. “Whichever way the pendulum swings will have a significant impact on the market.”
Global finance curtailing fossil fuel investments. A growing number of large financial institutions have pledged to end their support for fossil fuels. The World Bank said earlier this week that it would no longer finance coal plants beginning in 2019. But other examples continue to pop up. BNP Paribas said in October that it would no longer lend to shale and oil sands projects. Dutch lender ING said it would cut off finance for upstream oil and gas by 2019. French insurer AXA said it would no longer insure oil sands or coal projects.
CNPC to take over Iran gas project. If French oil company Total (NYSE: TOT) exits the giant South Pars natural gas project in Iran due to U.S. sanctions, CNPC is poised to fill the void, according to Reuters. The $1 billion contract that Total signed with Iran included a provision to allow CNPC to take over Total’s stake if the oil company left. CNPC has a 30 percent stake, while Total is the operator with 50.1 percent.
Asian buyers wary of Eagle Ford shale. Bloomberg reports that some Asian refiners that have scooped up crude cargoes from the U.S. are learning that not all barrels from U.S. shale are the same. In fact, at least three Asian refiners that bought oil from the Eagle Ford shale said they wouldn’t follow up with more purchases because of a lack of consistency in quality. Two sources told Bloomberg that the Eagle Ford cargoes had more liquid petroleum gas and naptha than they expected. “Unlike Middle Eastern or West African crudes, which originate from one single large and stable reservoir, shale crudes are often extracted from multiple layers and can originate from different parts of a basin which have varying geological characteristics,” Virendra Chauhan, an analyst at industry consultant Energy Aspects Ltd., told Bloomberg. To be sure, U.S. oil exports are not going to drop anytime soon, but large refiners around the world are learning that U.S. shale doesn’t always meet their specifications.
Big Finance not shying away from shale. Hedge funds and private equity are pouring money into the shale patch despite a growing chorus of investors demanding higher returns from shale companies, according to Reuters. The pressure from investors raised questions about Wall Street’s commitment to the shale industry, but Reuters says that the flow of money has continued to flood in unabated.
Saudi Aramco to regain market share after OPEC deal. Saudi Aramco’s CEO Amin Nasser said that his company would regain lost market share once the OPEC deal expires. “We had to cut our allocations to certain markets based on the (OPEC) agreement ... hopefully we will regain these markets as soon as this deal ends,” he said in a Reuters interview. He also said that Aramco would pursue a large expansion in the downstream sector, with India as one particular place where Aramco wants to expand.
Elliot Management pushes changes at Hess Corp. Elliot Management, which owns a 6.7 percent stake in Hess Corp. (NYSE: HES), is trying to push out Hess’ CEO John B. Hess. Elliot is also pushing for a dividend cut in exchange for higher share buybacks. The push by the activist investor comes as Hess’ stock has underperformed. “As long-term shareholders in Hess, we are frustrated by the company’s continuing underperformance,” Elliott portfolio manager John Pike said in a statement to The Wall Street Journal. “Shareholders are getting impatient because the changes needed to remedy Hess’s severe undervaluation are substantial and need to be announced without delay.”
GOP tax bill to include renewables, EV tax credits. The tax proposals that worked their way through the U.S. Congress in recent weeks eliminated tax credits for wind, solar and electric vehicles, but as both chambers work to reconcile their differences, the compromise legislation will reportedly leave those tax credits unchanged. That includes the $7,500 rebate for EVs, and the 2.3-cent-per-kilowatt-hour tax credit for wind and solar.
BP to invest $200 million in renewables. In the latest example of an oil major stepping up stakes in renewables, BP (NYSE: BP) announced an investment of $200 million into Lightsource, a UK-based solar developer. The move marks a return to the renewables sector for BP after it closed the door on solar investments in 2011. BP says it has learned from its poor investment in low margin solar panel manufacturing from years ago. The investment gives the British oil giant a 43 percent stake in Lightsource. The move is significant because it is the latest example of large oil companies diversifying into the increasingly attractive renewables sector amid questions surrounding the long-term health of the oil business.
Ineos shuts down Scotland refinery on Forties outage. The shutdown of the Forties pipeline system in the North Sea has left the Grangemouth refinery in Scotland without any crude to process. Ineos, which owns both, said that it would shut down the refinery and possibly move up its maintenance schedule.
Goldman: Big Oil is back. Goldman Sachs predicts that the oil majors are set for huge gains in 2018 after years of underperforming. The investment bank says they will be flush with cash that will be used to send to shareholders in the form of higher dividends and share buybacks. Plus, consolidation in the industry, combined with the oil majors’ unrivaled ability to pursue risky projects, means that they will stand out. “It’s a very exciting time,” Michele Della Vigna, Goldman’s head of energy industry research, said in an interview with Bloomberg TV. “We’re back to a concentrated market like we had in the 90s,” with the oil majors earning higher returns than their smaller peers, he said.
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.
Thanks for reading and we’ll see you next week.
Tom Kool Editor, Oilprice.com
P.S. – Well-publicized, obvious trades can be a value trap, but when these trades come up in an extremely fast growing market like Lithium, the stock could be a buy. Martin Tillier, this week, explains why the clear rationale makes sense and why you should own this particular lithium stock. Claim your risk-free 30 day trial on Oil & Energy Insider and find out which lithium stock Martin has his eyes on
What's in Oil & Energy Premium this week:
• Tread Lightly In December’s Energy Markets
• The Best Long-Term Buy In Lithium
• Brent Soars As Canadian Crude Crashes
• Are Markets Turning Bearish On Crude?
• Global Energy Advisory - 15th December 2017
Are Markets Turning Bearish On Crude?
Volatility dominated the crude oil futures markets this week as traders were hit with both potentially bullish and potentially bearish news. Traders reacted according, first driving prices higher than lower. The price action suggests that this week’s close will determine the near-term direction of the market.
The week started with Brent crude oil futures spiking to its highest level in 2 ½ years on Monday on news that a major pipeline in the U.K.’s North Sea will shut down for repairs.
According to reports, the Forties pipeline system will close for several weeks while its operator, INEOS, repairs a crack in a pipe discovered last week. The pipeline is responsible for about 450,000 barrels a day of Forties crude from offshore fields in the North Sea to a processing plant in Scotland.
INEOS’ decision to close the Forties pipeline came as a surprise and helped drive Brent crude prices higher than initially expected. Many crude oil traders had expected INEOS to keep the pipeline running at reduced rates while it repaired the crack.
“Despite reducing the pressure the crack has extended, and as a consequence the Incident Management Team has now decided that a controlled shutdown of the pipeline is the safest way to proceed,” INEOS said in a statement on Monday.
West Texas Intermediate crude oil also rose on the news, but the spread widened between Brent and WTI. Although investors thought the news would drive prices higher over the near-term, the rally was over within a day due to increasing concerns over rising U.S. production.
On Wednesday, U.S. West Texas Intermediate and international-benchmark Brent crude oil declined for a second day as a drawdown in U.S. crude stockpiles was offset by a larger-than-forecast rise in gasoline stocks and as U.S. crude oil production continued to climb to record highs.
According to the U.S. Energy Information Administration, U.S. crude inventories dropped 5.1 million barrels the week-ending December 8, more than the estimated 3.8 million barrel draw. However, this potentially bullish news was offset by a 5.7 million barrel jump in gasoline stocks, which was more than double analysts’ expectations for a 2.5 million-barrel gain.
U.S. production also hit another record high at 9.78 million barrels per day (bpd), EIA data showed. The U.S. peak, when records were only kept on a monthly basis, is 10.04 million bpd, set in November 1970.
On Thursday, prices retreated early in the session before recovering into the close and continuing the rally early Friday.
The sell-off on Thursday was triggered by bearish reports from OPEC and the International Energy Agency (IEA).
The IEA raised its U.S. crude output growth forecast for 2018, saying it would climb by 870,000 barrels per day (bpd) compared with its November forecast of 790,000 bpd.
The IEA also said it expects the oil market to have a surplus of 200,000 bpd in the first half of next year before reverting to a deficit of about 200,000 bpd in the second half. This would mean 2018 overall would show “a closely balanced market.”
OPEC also revised its estimate for U.S. oil output growth for 2018 to 1.05 million bpd, while the U.S. Energy Information Administration increased its growth forecast to 780,000 bpd.
If we assume that the Forties shutdown is providing a floor for the market then we have to assume that rising U.S. production is providing a cap. However, this may not be the case if the hedge funds start liquidating their long positions.
The market may have priced in the possible loss of 450,000 barrels per day of Forties crude, however, I don’t think investors have priced in the possible impact of further increases in U.S. production. WTI prices haven’t moved much in a month. This may change if the hedge funds decide they want to keep their money out of a sideways market and put it to work in another market that is trending.
It looks like the battle between short-term bullishness (the Forties event) and the long-term bearishness (rising U.S. production) may hold the WTI and Brent crude oil in a range. However, the weekly close may actually tell us how investors really feel about the market.
After posting a 2 ½ year high earlier in the week, Brent crude oil is trading lower as of Friday. A lower close for the week could send a bearish signal to traders. This type of price action tends to indicate the selling is greater than the buying at current price levels and this often leads to a 2 to 3 week correction.
Weekly Brent Crude Oil Technical Analysis
March Brent crude oil hit a high this week at $64.92. As of Friday, it was trading $62.74. A close below $63.03 will produce a potentially bearish closing price reversal top.
If this chart pattern forms and there is a confirmation next week then we could see the start of a 2 to 3 week correction with $57.60 the initial target.
Weekly West Texas Intermediate Crude Oil Technical AnalysisWeekly West Texas Intermediate Crude Oil Technical Analysis
February WTI crude oil did not make a new high this week, therefore, it is not in a position to post a closing price reversal top. However, it is in a position to close lower for the third straight week.
The key support is a long-term Fibonacci level at $55.94. A sustained move under this level will signal the presence of sellers. If sellers come in to drive the market through this level then look for a minimum decline into an uptrending Gann angle at $54.92, followed by a 50% level at $54.46.