Chart of the Week
• U.S. imports of oil from Iraq and Saudi Arabia are up sharply since last year. Combined, imports from these two countries are at the highest level since 2012.
• However, this probably won’t last. OPEC production cuts could reduce oil flows, and changes in benchmark prices have made oil from the Middle East less attractive to U.S. refiners at the moment.
• But the recent spike in imports from Saudi Arabia and Iraq likely contributed to the surge in the levels of oil storage in the U.S., a temporary phenomenon that could have made the oil market appear more oversupplied than it necessarily is.
• Seadrill (NYSE: SDRL) fell 12 percent in premarket trading on news that Chapter 11 bankruptcy is possible. Revenues for the fourth quarter of 2016 fell 30 percent year-on-year.
• EOG Resources (NYSE: EOG) saw its share price jump 2 percent on Monday after reporting a smaller than expected fourth quarter loss. Revenues also climbed 33 percent from a year earlier.
• South Africa-based Sasol (NYSE: SSL) discovered oil off the coast of Mozambique. The East African nation has seen a lot of natural gas exploration. Sasol plans on developing its oil wells, which will be Mozambique’s first.
Tuesday February 28, 2017
Oil prices faltered on Tuesday on slow but steady gains in U.S. output. The failure to break out of a narrow trading range on the upside has exposed crude to some losses. “Having failed on a couple of occasions to break higher it is only natural to see it correct lower. I’m looking for a retracement to $55 on Brent and $52.70 on WTI,” Saxo Bank head of commodity strategy Ole Hansen told CNBC.
31 oil analysts say oil stays below $60. A Reuters survey of 31 analysts and economists resulted in an average prediction for Brent crude prices in 2017 of $57.52 per barrel, a drop off from its previous survey. The analysts see oil staying below $60 per barrel even if OPEC extended its cuts through the end of the year. “OPEC will extend its deal to limit cumulative supply, probably adjusting the numbers in order to take into account developments about global stock levels and production from non-participating countries,” Intesa SanPaolo analyst Daniela Corsini told Reuters. “We expect crude markets will be in deficit in the first three quarters of 2017 and then they could swing into a small surplus in the fourth quarter amid rising non-OPEC supply,” Corsini added.
Saudi Arabia wants $60 oil. Five OPEC sources told Reuters that Saudi Arabia wants oil prices to rise to $60 per barrel this year. That price level is optimal for OPEC, top officials in Saudi Arabia believe, because it will not lead to extraordinary increases in U.S. shale production but would still provide enough revenue for oil producers.
Investors betting on rising prices, but downside risk remains. Hedge funds and other money managers continue to ratchet up their bullish bets on crude oil, taking net-long positions to another record high. Meanwhile, oil producers have been increasing their hedges, fearing another downturn. “I’m looking for prices to rise this year, but not above $60, and the reason for the ceiling is the tremendous resilience of U.S. shale,” Tamar Essner, an energy analyst at Nasdaq Inc., told Bloomberg. “The market is very one-sided right now, which makes me nervous because that often precedes a reversal.”
OPEC compliance to improve as Iraq and UAE pledge more cuts. OPEC already achieved close to a 90 percent compliance rate with its oil production cut, and compliance could increase as Iraq and UAE promise to accelerate their reductions. The two OPEC members were the main laggards in what was an otherwise impressive rate of compliance. But top officials from the two countries recently made statements pledging more cuts in the coming months.
Shell abandons oil sands. Royal Dutch Shell (NYSE: RDS.A) became the third oil major in less than a week to scale back ambitions in Canada’s oil sands. Last week, ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP) de-booked billions of barrels of oil reserves in Canada, admitting that they were not viable in today’s market. On Monday, Shell’s CEO Ben van Beurden said that it would not pursue costly new projects in the oil sands as it tries to fix its balance sheet. “All of those are reasons we are unlikely to develop new oil-sands projects,” Van Beurden said in an interview. “There are no plans for growth capital to be invested in oil sands.”
Saudi officials, distrustful of U.S., tour Asia. Saudi Arabia’s King Salman, and a large entourage, are taking a month-long tour through Asia, hoping to bolster partnerships and increase investments in the region. The tour comes as the Saudi government is rapidly losing trust in the U.S. government as a stable ally. Saudi Arabia agreed to invest $7 billion in a petrochemical complex in Malaysia as it kicked off its tour this week. Relations between the U.S. and Saudi Arabia soured under the Obama administration, and while Saudi officials hope for an improvement, they are uncertain of what the Trump administration will bring. As a result, the top OPEC member is looking east for new relationships.
Investors bullish on commodities. Hedge funds continue to step up their exposure to commodities, betting on rising prices and higher inflation. “After two years of scaling back exposure to commodities, the fund community finally appears to be growing interested in the sector again,” Citigroup analysts said in a research note. “Higher inflation expectations, particularly on the back of President Trump’s election, have bolstered the case for commodities as an inflation hedge or a bullish inflation wager,” they added.
Eni denies wrongdoing in Nigeria, wants to move forward on development. Eni’s (NYSE: E) CEO Claudio Descalzi denied corruption charges related to its $1.3 billion oil deal back in 2011, an acquisition of an exploration block that Eni believes holds 9 billion barrels of oil. An Italian prosecutor filed charges against Descalzi, alleging that Eni and its partner, Royal Dutch Shell (NYSE: RDS.A), bribed Nigerian officials.
Jefferies has “Buy” rating for Chevron. Chevron (NYSE: CVX) is set to see free cash flow rise significantly this year and next as it hits multiple inflection points, Jeffries says, upping its price target from $141/share to $147/share.