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Oil Prices Fall Back as Rally Hits a Ceiling

Oil Prices Fall Back as Rally Hits a Ceiling

When looking at some of the key figures for oil and gas this week, we see that oil prices have hit the ceiling at $48, while the U.S. rig count keeps o on falling.

(Click to enlarge)

(Click to enlarge)

Chart of the Week

(Click to enlarge)

Related: Gazprom Wants to Turn Bahrain Into A Gas Hub

• A decade ago Fed Chair Alan Greenspan warned of the financial pressure that would grow in the U.S. because of a shortage of natural gas and the resulting rise in imported gas.

• But skyrocketing shale gas production caused the trajectory of imports to abruptly reverse course in 2007. Net imports continue to fall, hitting 2.6 billion cubic feet per day (Bcf/d) in 2015. That is roughly one-fifth of what the U.S. was importing ten years ago.

• In the meantime, exports are growing, as demand from Mexico increased. Also, the first LNG export terminal came online this year. LNG is only a small sliver of the export pie right now, dwarfed by pipeline exports to Canada and Mexico. But several more terminals are under construction.

Market Movers

Statoil (NYSE: STO) stopped production at its Gullfaks B platform in Norway after a helicopter crash led to the death of at least 11 workers, likely 13, last week. "This is one of the worst accidents in Norwegian oil history," said Arne Sigve Nylund, Statoil's head of production in Norway.
Enbridge Energy Partners (NYSE: EEP) is considering a sale of its U.S. natural gas business, a unit that saw revenues fall by 51 percent in the first quarter.
Anadarko (NYSE: APC) reported a quarterly loss of $1.03 billion. The results were worse than expected and the company’s share price fell by about 2 percent on the news. Anadarko said that it improved its financial position by $800 million by cutting its dividend and laying off workers.

Tuesday May 3, 2016

There are early signs that the three-month rally in oil prices, up from a low of $26 per barrel in February, might be reaching its limits for the time being. Oil prices retreated at the start of the week as OPEC reported higher production levels. Iraq saw oil exports rise slightly, and there are rumors that Saudi Arabia is ramping up production in the wake of the failed Doha agreement. "There are enough supply stories out there to slow or temper any gains," Energy Aspects analyst Richard Mallinson told Reuters.

Also, from a technical trading standpoint, oil is facing fierce resistance at $48 to $50 per barrel. The sharp run up in prices is now staring down a “textbook retracement,” Todd Gordon of TradingAnalysis.com said on CNBC. Backing that up is the fact that hedge funds and other money managers have amassed a huge pile of net-long bets on crude prices. Whenever positions increase by such a large amount, the chances that the pendulum swings back in the other direction rises. In other words, because oil prices have rallied so quickly, there is a good chance that they will correct and fall back again. Related: The Merger That Could Create a New Oil Major

Oil companies step up hedging. E&P companies are also not sure that the oil price rally is here to stay. When oil prices rose to $45 per barrel, a “flurry of dealing kicked off” according to Reuters, as companies scrambled to lock in prices for the rest of this year and next.

IEA sees oil prices past the bottom. For its part, the Paris-based International Energy Agency believes that the worst is over for oil prices. Provided that the global economy fares well, oil prices should continue their upward trajectory, although in fits and starts. "It may well be the case, but it will depend on how the global economy looks like. In a normal economic environment, we will see the price direction is rather upwards than downwards,” the IEA’s Executive Director Fatih Birol told reporters on the sidelines of the G7 energy ministers’ meeting. "We believe under normal conditions towards the end of this year, second half of this year but latest 2017, markets will rebalance." At the same time, the IEA has consistently warned that today’s cutbacks in investment could set the markets up for a shortage several years from now. Birol and the IEA have cautioned the industry not to slash investment too much. "What we would like to see is, after a big decline in 2015 and 2016, there will be a rebound in investments (in 2017), and bringing (investments) to the level of $600 billion once again," Birol said.

Oilprice.com recently interviewed the head of the IEA’s Oil Markets Division, Neil Atkinson. To read that interview, click here.

Gasoline demand up. U.S. gasoline demand jumped to its highest rate in 40 years in February as motorists take to the roads to take advantage of cheap prices at the pump. The EIA released monthly figures for February, which showed that the U.S. consumed 9.2 million barrels per day of finished motor gasoline, very high for this time of year. With summer months approaching, gasoline demand could continue to rise.

Demand from Chinese refineries could fall. China’s oil imports jumped in recent months as a cadre of small “teapot” oil refineries were given licenses to begin importing oil. That led to a surge in demand, which helped push up global demand and increase oil prices. But storage for the teapot refineries is running out, leading to long lines at sea of oil tankers waiting to unload their cargoes. "Everybody's storage is full and it takes time to digest the inventories, maybe 2-3 months,” Zhang Liucheng, vice president for trading and marketing at Dongming Petrochemical, the largest teapot refiner in China, told Reuters. Slowing Chinese demand could put downward pressure on crude prices.


The Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI) merger fell apart. The deal, originally valued at $35 billion but would have more recently been worth $28 billion, came under scrutiny from antitrust regulators in Europe and the United States. The two companies announced the termination of the merger on May 1. Halliburton is required to pay a $3.5 billion breakup fee to Baker Hughes, cash that Baker Hughes already said it would use to improve its balance sheet. Baker Hughes announced $500 million in cuts to its costs, as well as $1.5 billion in share repurchases and paying down $1 billion in debt. Related: Why Iran’s Shale Oil Discovery Won’t Add To The Glut

Colorado Supreme Court shoots down local fracking bans. In recent years, several towns and cities in Colorado implemented local bans on hydraulic fracturing. The industry pushed back, suing to overturn them. The state Supreme Court handed drillers a victory by ruling that municipalities cannot pass fracking bans as they are “preempted by state law and, therefore…invalid and unenforceable.” The Colorado Oil & Gas Association hailed the victory as a win for industry and for the state’s economy.

Two more oil and gas companies go bankrupt. Ultra Petroleum Corp. and Midstates Petroleum Co. filed for bankruptcy in recent days, putting about $5.8 billion in combined debt into the bankruptcy process. The casualty list continues to grow – 67 oil and gas E&P companies have filed for Chapter 11 bankruptcy protection since the beginning of 2015.

Iraq political situation deteriorates. Protestors broke through the heavily fortified Green Zone in Baghdad over the weekend, storming into the parliament building. By many accounts the protests were peaceful, and the protestors dispersed on the orders of a powerful Shiite cleric. But the events illustrated the very fragile political situation in Iraq, as the Prime Minister desperately tries to hold onto his position. Oil production is not expected to be affected, but low prices and a shortage of government revenues are expected to sap investment this year, halting the country’s impressive ramp up in output over the past several years.

By Evan Kelly of Oilprice.com

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