Oil price rose on Tuesday after a Reuters survey found a ‘high’ OPEC deal compliance rate, indicating that OPEC has already cut output with 1 million bpd in January
Chart of the Week
• U.S. oil production is set to rise from an average of 8.9 million barrels per day (mb/d) in 2016 to 9.3 mb/d in 2018, according to estimates from the EIA.
• Output gains will come primarily from the Permian Basin, with some smaller additions from the Bakken, Eagle Ford and Niobrara Shales.
• Production in the Permian is set to rise from 2 mb/d last year to 2.3 mb/d in 2017 and 2.5 mb/d in 2018.
• Seadrill (NYSE: SDRL) saw its share price fall 18 percent premarket after it failed to reach a deal to restructure $8.2 billion in secured debt. The announcement pushes the firm one step closer to Chapter 11 bankruptcy.
• Royal Dutch Shell (NYSE: RDS.A) reached a deal to sell up to $4.7 billion in North Sea gas assets, plus some assets in Thailand.
• GE (NYSE: GE) sees offshore drilling activity picking up in 2018 and 2019. GE is still on course to merge its oil and gas services unit with Baker Hughes (NYSE: BHI).
Tuesday January 31, 2017
Oil prices rose on Tuesday after further evidence emerged that OPEC was making good on its promise to cut output. A Reuters survey found that OPEC cut output by over 1 mb/d in January, achieving an 82 percent compliance rate with the promised cuts. “This is very high, a good number,” an OPEC source told Reuters. The bullish news from OPEC outweighed the figures from Baker Hughes on Friday showing yet another week of strong gains in the U.S. rig count. Oil was up on Tuesday by more than 1 percent.
Oil industry hit by Trump’s immigration ban. Oilfield services giant Halliburton (NYSE: HAL) reportedly told its employees not to travel to the United States if they were nationals of the seven countries listed under the Trump administration’s temporary immigration ban. Confusion reigned across airports in the United States and around the world in recent days, and Halliburton told its employees that it would be “inadvisable” to travel to the U.S. during the restriction period. The oil and gas industry is highly globalized and multinational, much more so than many other industries, and the headquarters of many firms in places like Houston are staffed with foreign nationals that could be affected by tighter immigration policies. “Oil and gas is going to have the most heartburn from this,” Michael Webber, deputy director of the Energy Institute at University of Texas at Austin, told Bloomberg. The energy sector was among the hardest hit in a down day for Wall Street on Monday. Meanwhile, Iraq’s parliament moved to ban U.S. citizens from entering the country in response to being singled-out as one of the seven countries listed under Trump’s ban. The proposed ban on U.S. citizens entering Iraq, while not finalized, could hit ExxonMobil, which produces almost a half million barrels of oil per day in Iraq.
ExxonMobil reports earnings. The oil major reported earnings of $0.41 per share, missing consensus estimates of $0.70 per share, the largest disappointment in at least a decade. Most notably, Exxon decided to write down $2 billion worth of assets, notable because the company has stubbornly refused to write down assets during the past few years even as its peers took very large impairment charges. The practice raised the ire of the U.S. Securities and Exchange Commission. Nevertheless, Exxon still reported a profit of $1.68 billion, the ninth consecutive profitable quarter.Related: Fundamentals Be Damned – Oil Price Correction Likely
Trump wants U.S.-made steel in pipelines. As part of President Trump’s revival of the Keystone XL pipeline, he wants companies like TransCanada (NYSE: TRP) to use American-made pipelines, built with U.S. steel. He threatened to withhold the use of eminent domain that helps pipeline companies gain access to the private lands needed to construct their projects if they refuse to use U.S. material. “If we’re going to use our powers of eminent domain and all the other powers, then I want the pipe to be manufactured with United States steel,” Trump said. International oil and gas companies tend to oppose local content rules because they inflate the cost of construction.
U.S. Congress to repeal anti-corruption provision for payments to foreign governments.The Republican controlled Congress is moving to kill a rule that requires oil and gas companies to disclose their payments to foreign governments, arguing that it makes American companies less competitive. The provision is part of the 2010 Dodd-Frank financial overhaul, and is intended to cut down on corruption that can occur from major resource extraction projects in countries with spotty governance.
Congress to overturn methane rule. Republicans are close to repealing an Obama executive order that cracks down on methane emissions from oil and gas drilling on public lands. The Republicans argue the measures are a burden on the industry.
Oil majors cautious, smaller drillers moving ahead. The WSJ reports that the largest oil companies are approaching 2017 with a bit of caution, holding off on higher spending levels in order to repair their balance sheets. Meanwhile, smaller companies are stepping up drilling as oil prices rise.Related: OPEC May Be Powerless To Stop Lower For Longer
Dakota Access timeline unclear. A complex web of legal challenges and ongoing regulatory processes, combined with the Trump administration’s executive order, have confused the timeline for the Dakota Access Pipeline. A U.S. Justice Department official told a judge this week that the administration did not know when the final easement would be granted to Energy Transfer Partners (NYSE: ETP) to move forward.
Oil speculators continue to go long on oil. Another week, another increase in the net-long bets by hedge funds and other money managers. The combined positions by these investors are now at their most bullish in over a decade. This speaks to the optimism surrounding the OPEC deal, a tightening oil market, and expectations of rising prices. But it also leaves the market dangerously exposed to a reversal. Traders could unwind their positions if sentiment starts to sour, potentially opening up WTI and Brent to sudden losses.
BP to look at 3D printing. BP (NYSE: BP) said that it will study the impact that 3D printing could have on complex global supply chains. Freight travel accounts for about one-fifth of global oil consumption, and 3D printing could cut into that if the volume of global shipping declines because of 3D printing. The news comes after the oil major last week said that it is concerned about the long-term health of oil prices as demand begins to enter permanent decline. BP said that there are twice the volume of oil and gas reserves that the world will need through 2050, which means a lot of that won’t be produced. The implication is that the oil industry could race to produce as much as possible to monetize the value, which would keep prices permanently low.