Chart of the Week
• At the end of March, U.S. natural gas storage levels stood at 2,051 billion cubic feet (Bcf), or about 15 percent above the five-year average.
• Storage levels tracked average levels for most of the winter, but mild weather in February and March caused inventory drawdowns to slow.
• But that pales in comparison to the same period a year ago, when inventories stood near an all-time high, pushing prices below $2/MMBtu.
• Gas markets today are a bit more balanced, although slightly elevated storage levels could keep prices from rising to $4/MMBtu.
• Saudi Aramco says that the company should be valued at $2 trillion ahead of its IPO, but independent analysts see the company’s value maxing out at $1.5 trillion at best.
• U.S. East Coast refiners Phillips 66 (NYSE: PSX) and Monroe Energy (NYSE: DAL) are hoping to buy crude oil from Texas, moving the oil by ship. The development is a stark change from years past when East Coast refiners bought large volumes of oil from North Dakota, oil that was moved by rail.
• Chevron (NYSE: CVX) has agreed to sell three natural gas fields in Bangladesh for $2 billion to Chinese from Himalaya Energy.
Tuesday April 25, 2017
WTI and Brent stabilized on Tuesday after a week of steep losses. Market sentiment has shifted notably in a bearish direction over the past six trading days. The realization that the OPEC deal, nearing the end of its fourth month, is falling short on balancing the market is weighing on crude prices. Stephen Schork of the Schork report put it more bluntly on Tuesday: “OPEC has failed miserably in its endeavour to balance the oil market.” The flip side is that because the market still seems woefully oversupplied, extending the OPEC cuts seems like more of a sure bet. OPEC’s monitoring committee formally recommended an extension, although no final decision has been made.
Russia non-committal so far. Russia still needs to come on board with the OPEC extension, and at this point, Russia is likely the most pivotal participant in determining whether or not the cuts are extended for another six months. But Russian officials said they wouldn’t commit until the official meeting at the end of May. The problem for Russia is that the initial agreement corresponded with winter months in Russia, when output typically falls. That made agreeing to the cuts easy. But the six-month extension will overlap with the Russian summer, which usually sees an uptick in production. Moreover, Russian oil companies have a handful of fields that they intend to bring online in the second half of the year. In other words, the extension will be much harder to agree to than the initial agreement.
OPEC cuts causing North Sea oil to head to Asia. OPEC’s lower production has led to a smaller premium for Brent oil over Middle Eastern grades. Heavy crude from the Middle East, now in lower supplies, has become scarcer, allowing oil from the North Sea to find its way to Asia. “Crude is trading like a game of musical chairs,” Richard Fullarton, founder of London-based commodity hedge fund, Matilda Capital Management, told Bloomberg. “If OPEC extends cuts then more Brent and WTI will head to the east.” Meanwhile, Russia is also grabbing Asian market share from Saudi Arabia, reclaiming the number one spot for supplier to China.
Oil could hit low-$60s, but not $70. One of the world’s largest oil traders, Vitol, said that it foresees oil moving up into the low-$60s per barrel this year, but not any higher.
Exxon sought waiver to return to Russia; Trump says no. ExxonMobil (NYSE:XOM) asked the U.S. government for a waiver to get around U.S. sanctions on Russia, which forced the oil major to abandon a large oil discovery in the Russian Arctic in 2014. But that was asking too much. Given the speculation regarding President Trump’s ties to Russia and the fact that former Exxon CEO Rex Tillerson leads the State Department, a waiver would have ignited a political firestorm. The White House rejected Exxon’s request.
Improvement in Saudi budget leads to return of perks, less austerity. Saudi Arabia’s austerity program, which eliminated some notorious perks for government employees, is being pared back amid better-than-expected public finances. The budget deficit is smaller than anticipated, and the swift return of government largesse comes as the Saudi leadership is concerned about grumblings from the public from the austerity program.
Tesla to double superchargers. Tesla (NYSE: TSLA) has announced plans to double the number of superchargers for its electric vehicles from 5,000 to 10,000 across the U.S. That figure is 37 percent more than the company previously promised. Expanding the network of recharging stations is crucial in the company’s efforts to sell more EVs. It will also be timely with the release of the $35,000 mass market Model 3, slated for the second half of this year. Tesla aims to manufacture 500,000 EVs annually by next year. Tesla is also in a race against the clock with its shareholders – rising debt and an eye-watering cash burn rate, Tesla is under pressure to boost revenues.
Trump to open up new offshore drilling areas. President Trump is expected to sign an executive order on Friday that will move to open up new offshore acreage for drilling, areas that were put off limits by the Obama administration. The executive order could open up areas of the Atlantic, Gulf of Mexico and even the Arctic. However, the process could be drawn out and will be subjected to legal scrutiny, so it is unclear when or if the executive order will lead to action.
Schlumberger sees poor offshore demand, but higher onshore demand. Schlumberger’s (NYSE: SLB) share price was off more than 2 percent after reporting lower than expected revenues on Friday. Schlumberger said that offshore drilling activity in the Gulf of Mexico was poor in the first quarter, but that the company is seeing an uptick in demand for onshore rigs and services. Higher shale drilling allowed Schlumberger to report its first quarterly increase in revenue in over two years. Schlumberger CEO Dave Lesar told investors on a conference call that North America drilling activity “increased rapidly during the first quarter, which was highlighted by our U.S. land revenue growth of nearly 30%, outperforming the sequential average U.S. land rig count growth of 27%.” Separately, Baker Hughes (NYSE: BHI) also saw weak demand from the Gulf of Mexico, leading to a 15 percent drop in revenues.
Tony Hayward to depart Genel Energy. Former BP boss Tony Hayward is set to leave the small E&P Genel Energy (LON: GENL), a company that has been drilling in Kurdistan. The departure comes after several disappointing years that have seen poor drilling results and multiple downward revisions of Genel’s proved oil reserves in the semi-autonomous region of Iraq. Hayward co-founded Genel in 2011, calling Kurdistan “undoubtedly one of the last great oil and gas frontiers.” Genel was once valued at £3.1 billion, but the poor performance has seen the company’s value plunge to just £215 million.
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