Chevron's earnings disappoint, Libyan oil production rising
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Oil prices are falling on Friday in a volatile trading session after having see-sawed throughout the week on the usual headlines regarding OPEC compliance and U.S. production figures.

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Friday, January 27, 2017

Oil prices are set to close out the week slightly up after a bumpy ride, seesawing on the usual headlines regarding OPEC compliance and U.S. production figures, plus some influence from currency movements. Not much has changed in the market over the past week regarding fundamentals, although another week of EIA data continues to indicate rising activity in the U.S. shale patch, with production figures, crude stocks and gasoline stocks all on the rise. Oil production in the U.S., at least according to weekly surveys, is now just slightly below the 9 million barrel per day mark, a level that it has not hit since March of last year. 

Trump’s border tax? President Trump sent confusing signals on Thursday regarding the proposed 20 percent tariff on Mexican goods. The border tax would have enormous implications for the energy trade between the U.S. and Mexico, a relationship that has grown in recent years, much to the benefit of U.S. exporters. Problems with refineries in Mexico have led to a surge in imports of U.S. refined products. A growing economy has Mexico in need of U.S. natural gas as well. The border tax would disrupt much of this. The White House seemed to back off the plan after a public outcry, but it is unclear what avenue the administration will pursue. 

TransCanada submits Keystone XL application. President Trump revived the pipeline battles of the Obama administration, pushing Dakota Access towards the finish line and breathing new life into the defunct Keystone XL proposal. His executive orders sought to advance both projects, but it is too early to know what the outcome will be. TransCanada (NYSE: TRP) quickly
submitted a new permit application for the Keystone XL project, which the Trump administration has promised will receive an expedited environmental review. But the pipeline landscape in Canada looks different than it did two years ago. The Canadian government approved Kinder Morgan’s (NYSE: KMI) Trans Mountain Expansion and Enbridge’s (NYSE: ENB) Line 3 pipelines late last year, which combined would carry more oil than Keystone XL. 



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Iran oil tankers head to Europe. Iranian oil tankers are set to dock in Rotterdam next week, the first time the state-owned supertankers have arrived in Europe since sanctions were lifted a year ago. Iran has shipped oil to Europe over the past 12 months, but has done so with independent tanker companies because of residual uncertainty regarding international sanctions and shipping insurance. The latest development could allow Iran to step up its battle for market share in Europe. 

Saudi Aramco enlists Baker Hughes to audit oil reserves. In preparation for its planned IPO next year, Saudi Aramco
has asked a unit of Baker Hughes (NYSE: BHI) to audit its oil reserves. Saudi Arabia is thought to be in possession of around 265 billion barrels of oil, although the exact figure is subject to a great deal of speculation. Aramco is set to offer up a small slice of the company in a public offering in 2018, which will generate revenues that the government hopes will help the Saudi economy diversify for the long-term. 

Chevron earnings disappoint. Chevron (NYSE: CVX) was the first oil major to report fourth quarter earnings, reporting a profit of $415 million, or 22 cents per share. Analysts had expected earnings of 64 cents per share. Still the figures were up from a $588 million loss a year earlier. Chevron’s peers report next week. 

U.S. to start SPR sales. The U.S. is set to
sell off roughly $375 million worth of oil from its strategic petroleum reserve, part of a Congressional authorization to sell off 190 million barrels between 2017 and 2025. The Department of Energy awarded the first contracts this week and sales could begin this month. The logic behind the authorization is that the revenue generated from the sales will help pay for infrastructure upgrades for the SPR. But several years of low oil prices have convinced American policymakers that the U.S. no longer needs to hold 700 million barrels in its SPR. Critics argue that the SPR is a crucial element of U.S. energy security, and warn that refilling the SPR in the years ahead could cost the U.S. Treasury if oil prices rise. 

U.S. to streamline permitting for energy development on Indian lands. Native Americans sit on just 2 percent of the land surface in the U.S., but by some estimates could hold one fifth of its oil and gas reserves. Some Indian tribes are opposed to drilling on their lands, but others are looking for economic opportunities and are working with the Trump administration on
streamlining permitting and even considering privatization. The Republican-controlled Congress looks poised to take up the issue. 

Libyan oil production rising. Libya’s oil production topped 620,000 bpd in December, and by some estimates is already up to 700,000 bpd, more than double mid-2016 levels. According to
S&P Global Platts, the North African OPEC member is targeting output of 1.25 million barrels per day by the end of 2017. Those figures should be taken with a grain of salt, given that the war-torn country has been producing well below its potential for more than five years. But the recent surge in output is raising optimism in Libya that it can achieve its goals. The addition of 630,000 bpd over the course of the year would offset much of the cuts made by other OPEC members, a downside risk for the market. 

Dispute over global supply balance. Several prominent oil market analysts expect inventories to draw down in the first half of this year because of OPEC production cuts. Barclays, for example, estimates oil inventories will fall by 900,000 bpd in the first quarter, helping to tighten the market. But the
EIA has a much more bearish view of the situation, expecting inventories to increase throughout this year by 300,000 bpd, only starting to draw down in the second half of 2018. As such, the agency expects oil prices to remain below $60 per barrel over the next two years. 

In our Numbers Report, we take a look at some of the most important metrics and indicators in the world of energy from the past week. Find out more by clicking here. 

Thanks for reading and we’ll see you next week. 

Best Regards,
Evan Kelly


P.S. – Veteran energy trader Martin Tillier admits that while fundamental analysis usually outweighs technical analysis, there is a very strong case for a correction in crude. Martin sees increased global demand figures along with OPEC cuts as bullish long-term fundamentals, but finds short term technicals more decisive in the near term. Find out why Martin has turned bearish on crude futures by claiming your risk free 30 day trial on
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What's in Oil & Energy Premium this week:
Inside Investor
• Trump’s Infrastructure Push Is Set To Benefit These Companies
Inside Opportunities:
• Bullish Fundamentals Can’t Prevent A Correction In Oil 
Executive Report:
• EIA: No Drawdown In Oil Inventories Until Mid-2018
Inside Markets:
• The Waiting Game Is On – When To Expect A Breakout? 
Inside Intelligence:
• Global Energy Advisory - 27th January 2017
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Global Energy Advisory - 27th January 2017

Politics, Geopolitics & Conflict

•    The two-day Syria peace talks in the Kazakh capital of Astana yielded no firm agreement on how stakeholders in the conflict and their backers will proceed from now on, but they did send a signal that all parties seem to be willing to reach an agreement. The talks were attended by representatives of the elected Syrian government, rebel groups, and Russia, Iran, and Turkey--the latter three brokering the agreement. Both Syrian sides in the conflict, according to media reports, expressed reservations to the agreement on the grounds that it had not been brokered by the Syrians themselves. The geopolitical implications of this latest development seem to be that Russia and Iran are expanding their influence in the Middle East and Turkey is not against it: Syria’s southern neighbor has pledged to make sure it only supports non-terrorist anti-Assad groups. The Astana talks are no replacement from the Geneva peace process, which is led by the UN and the U.S. No specific details on the peace process were given after the talks, aside from an announcement that Russia, Iran, and Turkey will set up a mechanism to ensure the ceasefire agreed in December is enforced.

•    President Trump has approved two highly controversial pipeline projects – Keystone XL and Dakota Access – that were suspended by the previous administration due to a public outcry against the potential of an adverse impact on the environment. The move demonstrates Trump is staying true to his word to revive the energy industry but it raises questions about how long he will be able to keep it up as opposition is unlikely to subside, especially now that there are arguments neither of the projects will create the promised large numbers of new jobs. 

•    Angolan banks have sounded the alarm bell, asking the government for a bailout to avoid an all-out banking crisis. Angolan lenders have suffered from the substantial drop in oil export revenues, which constitute the majority of Angola’s foreign exchange income. The chairman of the Association of Angolan Banks said that local lenders have a liquidity problem that, if left unaddressed, could compromise the credibility of the country’s entire banking system. The news comes on top of continuing controversy at state-owned oil company Sonangol, stemming from the appointment of President Duarte’s daughter Isabella as CEO. The appointment has been challenged by a group of local lawyers, alleging it is a demonstration of nepotism and a violation of the law. Angola overtook Nigeria last year as Africa’s top oil exporter—a status that is no being challenged again by Nigeria now that militant attacks on oil installations have subsided and Angola is obliged to cut in line with the OPEC agreement.

•    We’re closely watching China’s apparently latest chess move as the new U.S. government gets rolling, and the underlying pre-approved aim is to drive a wedge between China and Russia. China—if military deployment rumors are true—may have just made this strategy more difficult by deploying the DF-41 in Heilongjiang province, from where it could reach the U.S. It is on Russia’s border, but Moscow isn’t concerned largely because China has always had this capability with Russia, Heilongjiang province or no. This is a direct message from China to the US, and it could start a new nuclear arms race. 

Deals, Mergers & Acquisitions

•    Shell has sealed a deal for the sale of its interest in a joint venture with Saudi Basic Industries Corp. The Saudi firm (Sabic) will pay $820 million for the stake. The deal, which is part of Shell’s divestment plan aimed at reducing its debt after the acquisition of BG Group, should close by the end of the year. Sabic and Shell will at the same time boost their cooperation on other investment opportunities in Saudi Arabia and abroad.

•    BP has agreed to buy two stakes in Kosmos Energy assets in Mauritania and Senegal. BP will buy a 62% working interest in the Mauritania project and a 32.5% interest in the Senegal operations. The combined acreage of the two offshore projects is 33,000 sq km of gas-rich shelf. BP will invest up to $1 billion in the development of the fields instead of payment to Kosmos.

•    Noble Energy has bought Clayton Williams, a Permian-focused family-owned energy firm. The deal, valued at US$2.7 billion, will significantly expand Noble’s footprint in the star performer of the U.S. shale oil patch, including in the Wolfcamp basin that was recently estimated by the USGS to contain as much as 20 billion barrels of crude.

•    Targa Resources has acquired $1.5 billion worth of midstream assets in the Permian from local field operator Outrigger Energy. The initial payment would be $565 million, which could be raised to $1.5 billion depending on the performance of the assets.

Tenders, Auctions & Contracts

•    Rosneft has started shipping crude to Slovakia and Hungary, following Glencore’s acquisition of a 19.5% stake in the company. The two central European states are new markets for Russia’s top oil producer. According to sources close to the company, total deliveries, to be made via the Druzhba pipeline, will reach 500,000 tons of crude in the first quarter of the year.

•    Brazil is preparing for three oil tenders this year, expected to bring in some $1.5 billion in upfront revenues, from the bonuses the tender winners will pay the state for the exploration rights they will receive. These tenders will be the first since 2015, when the last exploration licensing round failed to attract much attention, with just 14% of the blocks put up for sale finding a buyer.

Company News

•    The Kurdistan Regional Government may soon restart the monthly payments to international oil companies operating in the autonomous region. The KRG suspended payments to the three energy firms – Genel, Gulf Keystone Petroleum, and DNO – seven weeks ago, pressured by the low oil prices. Now, however, as prices have risen, Kurdistan’s coffers have started filling up again and it will soon be in a position to resume monthly payments for oil exports made in recent months.

•    Low oil prices plunged Oman into a budget deficit that for the period January-November 2016 reached $12.7 billion, up by 21.4% over the 11-month period and 60% more than estimated in the 2016 budget. The government identified two factors that played a role in this development: one, that its estimates for average oil prices in the period missed reality by a long shot and two, that expenditures were higher than stipulated in the budget.

Discovery & Development

•    BP has launched an expansion project at its Thunder Horse field in the Gulf of Mexico almost a year ahead of schedule. The $1-billion project was also $150 million below budget. This is one of the very few new projects in the Gulf after the 2010 disaster on the BP-operated Deepwater Horizon platform that caused the biggest environmental catastrophe in the history of the oil industry there.

•    Total is preparing to start drilling off the Cyprus shore, after being awarded a license by the local government last month. The plot where the French company will drill is adjacent to Egypt’s giant Zohr gas field, where Italian Eni is operator.

•    Pakistani-UAE joint venture Parco has announced plans to build a deep conversion refinery with a daily capacity of 300,000 barrels of crude at the port of Khalifa. The money necessary to fund the project is estimated at $5 billion, which will be provided by the UAE. Parco will now conduct a feasibility study and should its results turn out positive, go ahead with the project.

•    Gazprom Neft has added two more production wells at its Prirazlomnoye field – Russia’s only offshore Arctic oil field operating to date. With a total of six wells after the additions, Prirazlomnoye is projected to yield some 19 million barrels of crude oil this year, up from 15.4 million barrels in 2016.

•    Renaissance Oil and Lukoil will develop the Amatitlan block in Mexico jointly, the companies said. Amatitlan spans 56,800 acres and is estimated to hold 59 billion barrels of crude oil equivalent. It is a producing field, with peak output at 650,000 bpd but most of its reserves are considered still untapped.

•    Woodside Petroleum reported a 5.5% drop in oil output for the fourth quarter of 2016 but higher sales, at 2%. The Australian company said this year production will fall further, to 84-90 million barrels of oil equivalent, from 94.9 million boe in 2016.

•    Genel Energy expects its crude oil output in Kurdistan to fall by as much as 34% this year because the company lacks sufficient funds to invest in expanding production. This means that average daily oil output in 2017 will be between 35,000-43,000 bpd, from 53,300 bpd last year.

Regulatory Updates

•    Environmental groups are staging protests against the Bayou Bridge oil pipeline, proposed to be built in Louisiana. Protests began at the first hearing for a U.S. Army Corps permit and are expected to continue during the second hearing, scheduled for early February. According to the organizations behind the protest, the companies behind Bayou Bridge are the same as the ones behind Dakota Access and the project will have a harmful effect on the Louisiana environment.
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