Oil prices have moved little since they jumped from the mid-$40s to the mid-$50s in late November. Last week was no exception. OPEC hints about extending the price cuts beyond mid-year supported prices last week despite several indicators which suggested that the surplus may continue and it may be difficult to rebalance the markets in the short term.
“Fossil fuels may lose 10 percent of market share to PV and EVs within a single decade. This may not sound much but it can be the beginning of the end once demand starts to decline.”
Carbon Tracker Initiative
Oil prices rebounded last week as the IEA confirmed that the ten OPEC members obligated to cut oil production are making good progress and obtained 91 percent of their goal by the end of January. The agency also reported that OECD crude stocks fell by nearly 800,000 b/d in the 4th quarter of 2016 although stocks continued to grow in China and other emerging economies. If OPEC and the other production cutters can maintain this level of cuts for the next five months, the IEA says that global stockpiles should drop by about 600,000 b/d during the first half of this year. This was the kind of news that many oil speculators wanted to hear. Hedge fund bets on higher oil prices have surged in recent weeks as many markets participants say they are expecting higher oil prices later this year.
“Oilfield service companies have pressed fresh (green) blood into service amidst a vigorous ramp up in activity, and failure/HSE rates have already felt the negative impact. Not only is labor a bottleneck, it is shaping up to be the primary bottleneck in the early stages of the [North American] recovery…E&P’s will throw enough money at the North American labor problem to bring the sector back to equilibrium, sacrificing capital efficiency to hit production targets.”
James West, a senior managing director at Evercore ISI
With the advent of the Trump administration and Republican control of the Congress, the world oil situation seems likely to become more uncertain than usual. In the last two weeks, the new President has signed numerous executive orders that will have an impact on the oil industry in coming years. The President and the Republicans in Congress will soon have done everything they can to launch a new oil boom by reducing environmental and financial regulations; permitting whatever pipelines the oil industry wants to build; and opening federally-controlled property and offshore areas for drilling. Republicans have long held that America would be energy independent were it not for the restrictions unfairly placed on the industry. While these measures may eventually spur more drilling, for the time being, however, oil prices and the demand for oil will still determine investment decisions. Some are questioning whether the Keystone XL will be built in the near future given the relatively low oil prices and the shale oil boom that have become important since the pipeline was planned.
“The blunt reality for the Trump administration is that there is no way to make pipeline approvals conditional on the use of U.S. steel without undermining the goal of fair market access for U.S. exporters.”
John Kemp, Reuters energy columnist
Prices moved slightly higher last week as the markets continued to watch the decline in oil production by most OPEC members and a few other exporters interested in seeing oil move higher. The evidence continues to accumulate that progress is being made in achieving OPEC’s 1.8 million b/d cut. In addition to a number of OPEC luminaries who assured the world that the cuts are happening and that the markets would be balanced shortly, tanker-tracker Petro-Logistics said that its information indicates that OPEC will reduce its supply by 900,000 b/d in January. This number does not include 11 non-OPEC members that are also supposed to be cutting production 600,000 b/d. The CEO of Petro-Logistics which has been monitoring tanker movements for 30 years said this suggests “a high level of compliance thus far.”
“The basic feature of the petroleum industry … that matters most is that it is not self-adjusting.” The industry has “an inherent tendency to extreme crises” and “hectic prosperity is followed all too swiftly by complete collapse.”
Paul Frankel, economist, “Essentials of Petroleum,” 1946 (from energy columnist John Kemp)
Three themes dominated the oil news last week. 1. Will OPEC with Russian help succeed in cutting production enough to rebalance the oil markets and move prices significantly higher? 2. Will the US oil industry rebound so vigorously as to offset the OPEC cuts? 3. And finally what will the be the impact of all the new energy policies the Trump administration is beginning to implement?
“We must break from the recent past [and] re-examine the regulatory onslaught of the last few years that has proposed or imposed some 145 regulations and other executive actions on our industry, and instead work to implement smart energy regulations.”
Jack Gerard, President, American Petroleum Institute
