ExxonMobil sets up trading division, third quarter earnings disappoint
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Oil Prices Falter On OPEC Uncertainty

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Oil prices fell on Friday morning as a result of OPEC infighting and traders doubting OPEC's ability to cut output.

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Friday, October 28, 2016

Oil prices faltered in the second half of this week, on deteriorating expectations of an OPEC deal. Prices regained some ground on Thursday following EIA data showing a surprise drawdown in crude oil stocks after the market predicted an increase. Gasoline stocks also fell by more than expected. Adding a bit more buoyancy to the market were comments from OPEC officials suggesting that the cartel would be willing to cut production by 4 percent. 

The markets initially took the announcement as positive news, but in what has become a familiar script from the oil cartel, the lack of details or hard commitments ultimately meant the price impact wore off. OPEC is meeting today and tomorrow to discuss the technical details of the Algiers accord, ahead of its official meeting at the end of November. Investors should take every OPEC utterance with a giant grain of salt, and wait to see what happens in a month’s time. WTI hovered slightly below $50 per barrel in early trading on Friday. 

Third quarter earnings start coming in. The quarterly earnings reports started this week, with Statoil (NYSE: STO)
posting a hugely negative result. The Norwegian firm lost $432 million in the third quarter, worse than the $307 million it lost a year earlier. The figure was also much worse than expectations, and Statoil said that it would cut spending by an additional $1 billion. ConocoPhillips (NYSE: COP) did not fare much better, reporting a $1 billion loss for the three months ending in September, although those figures beat estimates. The company lowered its full-year spending forecast from $5.5 billion to $5.2 billion. ExxonMobil (NYSE: XOM) reported earnings of $2.7 billion, or $0.63 per diluted share, down 35 percent from a year earlier. Eni (NYSE: E) lost 484 million euros in the third quarter, compared to a 317 million euro loss in the third quarter of 2015. 
Exxon considers setting up trading division.
The FT reports that ExxonMobil (NYSE: XOM) is looking into setting up an oil trading unit, which would mark a dramatic shift in its strategic focus. Struggling to find and produce large volumes of new oil reserves at a time of low oil prices, the oil major is looking to branch out. The trading division would buy and sell other producers’ crude, as well as its own. Exxon’s peers, including BP (NYSE: BP) and Royal Dutch Shell (NYSE: RDS.A), already have trading units within their companies, but Exxon has had a more conservative approach that focuses on upstream and downstream activity, viewing trading as a riskier form of business.

Iraq angles for data revision, eyes higher output. Iraqi officials are not only demanding that they be exempt from any OPEC production cut, but they are also pushing the cartel and energy watchers to see its side of the story. OPEC uses data from “secondary sources” to calculate each member’s production levels, and Iraq is disputing the accuracy of that data. It is not an academic argument – Iraq does not want its production to be restrained by inaccurate production figures. Iraqi officials rolled out the red carpet for energy reporters this week, Bloomberg
reports, in order to convince them that Iraq is not getting fair treatment. The dispute threatens to sink the OPEC deal. 

Meanwhile, Iraq is also soliciting bids from international oil companies to develop 12 “small and medium-sized” oil fields,
Reuters reports. The details of the tenders consist of incentives to rapidly increase output, a sign that Baghdad has no intention of limiting its oil production. 

Protests heat up in Venezuela. After Venezuelan President Nicolas Maduro cancelled a public referendum to recall him, the opposition took to the streets. Hundreds of thousands of people protested on Wednesday, and the fracas took a disturbing turn. A policeman was
shot dead during the protests, and the atmosphere is one of chaos in the capital. The economy is in a tailspin and although the President is trying to crackdown to maintain control, he has left the opposition no other avenue to protest than through direct confrontation in the streets, surely a worrying sign for the country’s stability. Oil production is down more than 10 percent on the year and will continue to fall. 

Nigerian militants hit Chevron pipeline. The Niger Delta Avengers proved that they have not gone dormant, announcing the successful attack against the Escravos pipeline, a 100,000 barrel-per-day oil export pipeline operated by Chevron (NYSE: CVX) in Nigeria. The
attack puts an end to a three-month ceasefire, and threatens to derail Nigeria’s efforts to bring back lost oil production. Nigeria’s oil minister said recently that output is up to 1.9 million barrels per day, not far off from the 2.2 mb/d the country produced before the attacks started earlier this year. Separately, ExxonMobil (NYSE: XOM) announced a new discovery off the Nigerian coast, which could hold between 500 million and 1 billion barrels of oil. Exxon holds a 27 percent stake in the project, along with Chevron Nigeria Deepwater, Total E&P Nigeria, Nexen Petroleum Deepwater Nigeria, and Nigeria Petroleum Development Company. 

Dakota Access pipeline protest turns violent. On Thursday, more than 200 police officers
forced protestors of the Dakota Access pipeline in North Dakota away from a barricade along the pipeline’s construction route. Authorities arrested more than 140 people. The controversial pipeline, owned by Energy Transfer Partners (NYSE: ETP), is quickly becoming the sequel to the Keystone XL saga. 

GE considers merging oil unit with Baker Hughes. GE (NYSE: GE) has
reportedly approached Baker Hughes (NYSE: BHI) about merging their oil and gas units, a deal that could be worth around $20 billion. The idea would be that the merged company would be spun off from GE’s core business. However, details have not been released and the talks are not guaranteed to lead to a deal. Baker Hughes was the target of a takeover effort from Halliburton (NYSE: HAL), but that acquisition ran into a brick wall of antitrust opposition from the U.S. government earlier this year. 

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
Editor, Oilprice.com

P.S. – Veteran oil trader Dan Dicker notes that while refiner margins have been healthy for most of the year, most refiners have not been capitalizing on this ‘golden’ opportunity. Regulation seems to be one of the reasons why the U.S. downstream sector hasn’t performed as it should. Dan separates the cream of the crop from the weak performers in this week’s
Oil and Energy Insider. 
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What's in Oil & Energy Premium this week:
Inside Investor
• Why Are Refiners Still Underperforming?
Inside Opportunities:
• Oil Bears Should be Alert to the Possibility of a Reversal Next Week
Executive Report:
• Worrying Signs In The Oil Markets
Inside Markets:
• Can Crude, NatGas Break Out Of Their Range?
Inside Intelligence:
• Global Energy Advisory October 28th 2016
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Oil Bears Should Be Alert To The Possibility Of A Reversal Next Week

Regular readers will be aware that I have, for the last few weeks, been generally bearish on the price of oil, and for two main reasons. The strength of the dollar had until recently gone unnoticed in much of the financial media, but it has been a sharp climb and, while the inverse relationship between the dollar and oil is not a perfect, tick for tick thing, a high dollar does put a cap on oil’s upside potential and keeps pressure to the downside. In addition, the main reason for oil’s climb a month or so ago, the potential agreement by OPEC to limit production, is not a reality yet and still faces significant hurdles. That bearish view has worked out well, but there is a good chance that it will change in the next few trading days, as both things that have driven oil down look like changing.

Figure 1: Dollar Index 6 Month Chart. Source: Marketwatch.com

Firstly, there are signs that the dollar’s rise is overdone and that the direction is about to change. In terms of the dollar index, significant resistance has been met just above 99 and, as the chart above shows, upward momentum has ceased over the last few days. That is hardly surprising. The move in the dollar has been driven by the expectation of a Fed hike in interest rates, but that now looks fully priced in. The market can be expected to start to adjust for the, admittedly slight, possibility that the U.S. central bank will once again back away from the tough decision to risk a market selloff, and will further delay that hike. 

Secondly, and probably more importantly, the OPEC meeting at which talks of an agreement will take place is at the end of November, and as it approaches a change of tone in the chatter surrounding that meeting looks likely. I have written in the past about the tendency of the OPEC nations to talk their book and that will probably be a factor over the next few weeks. Even if, and maybe especially if, the members see the obstacles to an actual agreement as insurmountable, it will be in all of their interests to keep those opinions to themselves and talk up the chances of a production freeze, or even a cut.

Since the potential deal was announced, OPEC members, and the Saudis in particular, as demonstrated by their last production numbers, have ramped up production to take advantage of the spike in prices. If they see a deal as difficult to achieve or enforce there is every reason to keep a positive spin on the upcoming meeting to continue to take advantage of that. Doubts and dissent such as those recently aired by Iran will be muted, and the market, faced with a seeming determination to reach a deal, will likely react positively.

Figure 2: E-Mini Oil Futures 1 Year Chart

Those two things combined make it likely that oil prices will turn tail at some point soon and climb back towards the $52 top, but I am not prepared to change direction quite yet. There is still strong resistance over $51 in WTI as those levels seem to attract a lot of hedging from U.S. producers, and the knowledge of that alone should keep oil down for at least a few more days. If, as I expect, the dollar does start to correct next week, however, and if we start to hear positive murmurings from OPEC members, that move down will reverse at some point soon.

The message for traders and investors here is to stay alert, and not to get too comfortable with short positions. No move lasts forever, and over the next few days taking profits at the very least, if not actually reversing to long positions looks like the best strategy for now.  
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