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Oil Prices Rise Above $50 On Outages, OPEC Expectations

Tom Kool

Oil prices rose this week as markets are more optimistic about an extension of the OPEC output deal and falling gasoline inventories

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Friday, March 31, 2017

Oil prices rebounded at the end of the week on news that a growing number of OPEC countries are supporting an extension of their cuts for another six months. Kuwait is lending its weight to the cause and so are a half dozen other members. Of course, the official decision won’t come until May, but the markets are growing confident in an extension. Meanwhile, the EIA reported a solid drawdown in gasoline inventories even as crude stocks saw a slight uptick. The data is being interpreted as a sign of solid demand. Oil prices jumped to three-week highs on the news.

ConocoPhillips to sell $13.3 billion in oil sands. ConocoPhillips (NYSE: COP) announced a deal to sell most of its oil sands assets to Cenovus Energy (NYSE: CVE), a deal worth as much as $13.3 billion. The sale reflects a remarkable difference in opinion between the two companies. Conoco wants to offload highly costly oil sands that are much less competitive in a world of cheap oil. Cenovus is so optimistic about the assets that it was willing to take on a massive amount of debt to secure the deal. The stock markets appeared unanimous in their belief that Conoco got the better of this deal – Conoco’s stock jumped on the news while Cenovus’ sank more than 13 percent on Thursday.

Fracking techniques continue to improve. The WSJ reports that shale drillers such as EOG Resources (NYSE: EOG) continue to tweak their drilling techniques, finding ways to become more efficient. EOG is using software that gathers data while drilling a well, which can be used to make directional drilling much more precise. The upshot is that shale drillers could end up producing more oil at lower prices, and could do so for years to come. That would undermine the influence of OPEC over the long-term and make global supplies more flexible to marginal changes in prices and demand.

Oil traders warn of oversupply. Even as some argue that shale could be a long-term phenomenon, some of the world’s largest oil traders are cautioning against too much reliance on short-cycle projects in Texas. At the FT’s Commodities Global Summit, two executives from Mercuria Energy Group and Trafigura Group said that the market could see a supply crunch towards the end of the decade because of a shortage of investment today. That echoes a warning from the IEA in early March. “The low-hanging fruit on the short-cycle projects are being used now so I am more in this camp that says we are starting to see potential issues three or four years down the track,” co-head of group market risk and former head of crude trading at Trafigura Group Ltd., told the audience.

Related: Mysterious Outage In Libya Could Drive Oil Prices Higher

IEA: price rally not significant even with OPEC extension. The head of the IEA cautioned investors against expectations of a substantial price rally even if OPEC extends its cuts for another six months. Huge inventories will weigh on the market and new non-OPEC supply would come online if prices moved too high.

PetroChina to increase spending. One of China’s oil giants will increase spending for the first time in five years. PetroChina said it would increase spending by 11 percent this year in a bid to boost production. China’s state-owned oil companies have been hit hard by the oil price downturn, with a few of them posting record low levels of profit. China’s oil production has declined as a result of the downturn in spending, with output down more than 5 percent last year.

Russia to comply with OPEC agreement. Russia along with a handful of other non-OPEC countries, pledged to cut their output by nearly 600,000 bpd between January and June, with Russia accounting for about 300,000 bpd of cuts. Russia reiterated its intentions to meet those promises. "The decrease in production in January and February were ahead of tempo with regards our initial plans. Currently, in March we have already reached a reduction level of 200,000 barrels a day. We anticipate complying with the figure set forth in the agreement by the end of April," Russian energy minister Alexander Novak told CNBC. Meanwhile, the minister said that Russia’s long-term production profile will increasing come from the Arctic – Russia gets 17 percent of its output from the Arctic, but that figure will rise to 26 percent in 20 years.

Permian pipeline constraints. Output in the Permian Basin is rising so quickly that the region could bump against a shortage of pipeline capacity. As a result, the discount between Midland oil, a benchmark for oil from West Texas, and WTI, has widened. Permian production is expected to rise to 2.65 million barrels per day (mb/d) by the end of the year, but pipeline capacity might only reach 2.54 mb/d.

Related: What Gold Can Tell You About Oil Prices

2016 record year for renewables. The world saw the installation of 161 GW of renewable energy last year, according to new figures from the International Renewable Energy Agency (IRENA). Solar alone accounted for 71 GW of that total.

Venezuela political crisis deepens. The Venezuelan Supreme Court, effectively an arm of the Maduro government, moved to defang the National Assembly. Provoking both a national and international outcry, the move is being criticized as a decisive step towards a full-on dictatorship. The political and economic crisis has steadily worsened in the past two years, but things could come to a head this year.

By Tom Kool of Oilprice.com

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