Oil Prices Steady After Rising 40% In Recent Weeks

We start by looking at this week’s key figures for the oil and gas industry from which we see that oil prices have retained their gains as investors are buoyed by the continued declines in U.S. production.

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Friday, March 11, 2015

Oil prices have jumped around quite a bit this week. Investors are buoyed by the noticeable declines in U.S. oil production. Fresh EIA data also pushed oil prices up. Weekly production figures were flat, but gasoline stocks fell sharply, a sign that demand from U.S. motorists is strong. But the report was decidedly mixed – crude oil stocks continue to climb, hitting yet another record of 521 million barrels last week.

U.S.-Canada methane emissions. The Obama administration announced steps to address methane emissions from oil and gas wells on March 10, an effort that will also be taken up by Canada. The announcement was timed to correspond with the first visit to the U.S. by new Canadian Prime Minister Justin Trudeau.

The initiative will seek to cut methane emissions by 40 to 45 percent below 2012 levels by 2025. It is important to note that the target is not new – the Obama administration has already announced such an objective. But the EPA will begin drawing up regulations on existing oil and gas wells, as opposed to just new wells drilled. It is unlikely that the agency will be able to complete the rule before the end of President Obama’s presidency, but the initiative would presumably be taken up if a Democrat wins the election. For Canada’s part, the effort will be a departure from the past. Former Conservative Prime Minister Stephen Harper was an ally of the energy industry and never sought to impose heavy regulation.

Oil hedging on the rise. Oil producers are locking in sales of future production after prices have surged by about 40 percent in recent weeks. Not trusting that prices will hold up over the medium-term, Reuters reports that more and more producers are securing hedges on future production to guarantee them a certain price. The flattening of the futures curve has led many producers to not necessarily trust the market one or two years out. Hedging production protects drillers from another possible downturn in prices.

Court decision on pipeline contracts. A bankruptcy judge ruled in favor of Sabine Oil & Gas in its attempt to remove itself from obligations to pay for pipeline capacity, a decision that could have wide-ranging implications for both the upstream and midstream sectors. Sabine was under contract to pay for pipeline space with a subsidiary of Cheniere Energy (NYSE: LNG) to send its oil and gas, a contract that requires fixed payments for a set amount of volume. But since Sabine’s production is falling and it can no longer ship enough oil and gas, it argued it should not have to pay the pipeline company. A Manhattan judge agreed. While the decision is not binding, it represents a threat to the midstream sector that has benefited from stable contracts that guarantee predictable payments from producers. The issue is not settled and could lead to more litigation.

Shale drillers find more ways to boost production. Much has been written about the efficiency gains that shale drillers managed to deploy over the past year and a half to keep production up during the downturn in prices. But Reuters reports that drillers are finding even more ways to squeeze oil and gas from an average shale well. By “choking” off production at the start of operations, companies can smooth out the production curve, saving some output for later while potentially boosting overall production. Also, later on in the life of a shale well, companies are increasingly deploying “artificial lift” techniques, which involve chemicals and electrical pumps that can provide a jolt to production at a time when it is normally in decline. Artificial lift can allow wells to reach 50 to 75 percent of their initial production rate. The implications of these strategies are profound: shale production is not falling as fast as many analysts and industry watchers had predicted. While good for individual companies, it could prolong the market adjustment period.

BP cuts rigs in Prudhoe Bay. Oil giant BP (NYSE: BP) said that it would cut its rig count in Alaska’s Prudhoe Bay, where it has long been active. The company will reduce its rigs from five to two, which could lead to lower production and the loss of more than 200 jobs. BP’s Alaska unit posted a $194 million loss in 2015 and is hoping to slash its expenditures. The state of Alaska has taken a huge hit from the downturn in oil prices as a range of companies reduce or pull out from the region, a list that includes Royal Dutch Shell (NYSE: RDS.A), ConocoPhillips (NYSE: COP), and Apache (NYSE: APA).

Saudi Arabia seeks $8 billion loan. With a growing budget deficit, Saudi Arabia is looking to raise $8 billion from international banks as well as from the bond market, the first foreign borrowing in more than a decade. The Saudi government will select its lenders within the next two weeks.

Global rig count down. Investors and energy analysts pay a lot of attention to the U.S. rig count, but few are watching the plunging number of rigs deployed around the world. A new report from Houston-based Simmons & Co. International finds that the international rig count is down by 30 to 43 percent since 2014. State-owned oil companies in the Middle East have kept up drilling and exploration, but Africa and Latin America have been especially hit hard by low oil prices, leading to a precipitous fall in their rig counts. The report concludes that there could be “grievous consequences” in terms of inadequate oil supply in the future as global exploration dries up.

ECB cuts rates. The European Central Bank took aggressive action on March 10 to boost the European economy. The ECB cut interest rates to 0.00 percent, cut its deposit rate to negative 0.4 percent, and expanded its asset purchasing program to 80 billion euros per month, beginning in April. The effort may provide some stimulus to the economy and weaken the euro. There are concerns that the aggressive monetary expansion will hurt European banks, which are already suffering.

U.S. solar industry skyrockets. The U.S. solar market is set to explode in 2016. According to a report from GTM Research, the solar market will expand by a staggering 119 percent this year, with installations jumping from a record 7.2 GW in 2015 to a projected 16 GW of new installations over the course of 2016. Utility-scale solar will make up the bulk of the new capacity, as large projects were already in the works to be completed before the expiration of federal tax credits. Those tax credits were recently extended until the end of the decade, however. Solar could capture the largest share of new electricity generation capacity in the United States this year.

By Evan Kelly of Oilprice.com: