Natural Gas rises on small inventory build, Iran's oil production growth stalls
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Oil Down As Glut Fears Return

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Oil prices fell on Friday as the IEA downgraded its projections for oil demand, dashing hopes that oil markets would rebalance this year.

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Friday 16th September 2016

Oil prices posted another down week after the IEA dashed hopes that the global supply and demand picture would come into balance this year. The Paris-based energy agency said demand is much slower than it previously expected, and supplies are also surprising on the upside, mostly due to record OPEC production. The end result? The supply surplus might not be worked through until the middle of next year. Oil prices plunged on the news earlier this week and have struggled to regain ground. 

Goldman pessimistic on oil prices. Jeff Currie, the head of commodities research at Goldman Sachs, sees low oil prices sticking around for a while. Not only that, but Currie says the risk to oil is on the downside, not the upside. He sees a dearth of bullish catalysts, and unexpectedly high output from Saudi Arabia, Iran and Russia adding to global supplies. He predicts oil will trade within a narrow range of $45 to $50 per barrel. “It really looks similar to the period of the early 1990s, when we were at $20 oil,”
he said. “Is $45 to $50 the new $20? I am not ready to say we are in this new equilibrium environment, but it sure does feel like we’re moving in that direction.” The negative sentiment echoes the latest monthly report from the IEA, which surprised the markets with its downbeat assessment, predicting a rise in crude oil inventories through much of next year.

Libyan and Nigerian supply raise fears of deeper surplus. After several oil ports were briefly taken over by a rival general in Libya’s east, the government
lifted a block on sales from three ports, which could see exports rise by 300,000 barrels per day relatively quickly. That would take output up to 600,000 barrels per day, and Libyan officials are targeting further increases to 950,000 barrels per day by the end of the year, or about triple current levels. Libya has repeatedly failed to follow through on such promises, but the prospect of a return of some Libyan supply is weighing on oil prices. Also, violence in the Niger Delta is finally calming a bit. ExxonMobil (NYSE: XOM) said that it would resume shipments of its Qua Iboe crude, the largest Nigerian grade. Royal Dutch Shell (NYSE: RDS.A) is also expected to bring an additional 200,000 barrels per day back in Nigeria. 

Bottom for offshore rig market within sight. Offshore rig owners have been slammed by the collapse in oil prices as drilling activity has screeched to a halt. However, Transocean (NYSE: RIG) says that the bottom for the market
could arrive by the middle of next year, with rig utilization rates stabilizing at some point in 2017. The third-largest offshore rig operator also said that rental rates have probably already stabilized, although at levels ($200,000 daily) less than one-third of 2013 levels ($650,000 daily).

Colonial pipeline down, but should restart on weekend. The Colonial Pipeline, the largest refined product pipeline in the United States,
suffered a leak this week, spilling about 6,000 barrels of gasoline in Alabama. Its owner shut down the main gasoline and distillates line last Friday, although the distillates line has since been restarted. The gasoline line should start back up over the weekend. The outage led to surging refining margins, owing to the supply disruption. The incident could also temporarily push up gasoline prices in the U.S. Southeast. 

Nord Stream 2 moving forward. The pipes being used to build the Nord Stream 2 expansion should be delivered in December or January, the head of Pipe Innovation Technologies
said at the Reuters Russia Investment Summit this week. The pipeline, which would double the volume of Russian gas to Germany via the Baltic Sea, is highly controversial in Europe. Many EU countries, particularly in Central and Eastern Europe, are opposed to the expansion because it would increase EU dependence on Russian gas. The prospects for the pipeline have been up in the air but the confirmation about the delivery of pipes suggests the project is moving forward. 

PDVSA looking at $7 billion debt swap. Venezuela’s state-owned PDVSA is looking to defer hefty debt payments that come due this year and next, hoping for some breathing room. Bloomberg
reports that the oil company is hoping to swap $7 billion in debt, asking unsecured bond owners to take notes with payments spread out over the next few years. The specifics have not been disclosed, but the effort is an attempt to avoid default, and an economist with Capital Economics in London told Bloomberg that Venezuela could buy itself 12-months if it succeeds with the swap. 

UK government greenlights controversial nuke plant. EDF’s $24 billion Hinkley Point nuclear power plant got the
go ahead from the British government this week, a highly controversial project that will be Europe’s largest energy project. The approval came after a tightening up of security over fears of Chinese involvement in the project. The announcement is a win for EDF, but analysts are not sure it is a good idea for the UK. “In light of a changing energy landscape, the falling cost of renewables, and lower financing costs, we are not convinced that this would be the right decision for the U.K. consumer,” Martin Young, an analyst at RBC Capital Markets, said in a research note on Thursday. The two reactors are expected to take ten years to build. 

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. – Two weeks ago, with WTI at $43, veteran trader Martin Tillier recommended inaction in the oil markets, this week, with prices at the same level, Martin sees a big move on the horizon. Find out what has changed by claiming your risk-free 30 day trial on
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What's in Oil & Energy Premium this week:
Inside Investor
• Avoid These ‘Shale Legends’ For Now
Inside Opportunities:
• WTI: The Same Price But A Different Play
Executive Report:
• Speculators Go Short As Demand Is Downgraded
Inside Markets:
• Uncertainty Hits Markets Ahead Of OPEC Meeting
Inside Intelligence:
• Global Energy Advisory - 16th September 2016
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Avoid These ‘Shale Legends’ For Now

The Fed continues to dominate the markets and our trading in oil and oil stocks.

God knows there are hundreds of writers out there with opinions on the next move for rates, so mine would only be so much more noise. Instead, let’s just acknowledge that the market is more likely than not to drag for the next several weeks, and thank our recent discipline in keeping our portfolios safe. 

Let’s also notice some recent news that convinces me that our investment discipline will be well served for a long time to come. Oil stocks have in many cases, run ahead of Oil, the commodity – as these examples will show: 

First up, the EOG Resources (EOG) purchase of Yates Petroleum for $2.5b in mostly stock.  This strikes me as a prime example where the current disconnect in oil prices compared to shale oil stocks has made me wary of increasing positions, even selling majority percentages of long-term positions in many of my most favored E+P’s, including EOG. Add to this the even more exuberant froth that is persistently seen in those E+P’s who have a majority interest in the Permian formation, and even more specifically in the most Western Delaware basin.  We have benefited from this ourselves, as our holdings in Silver Run Acquisitions, now acquiring its interest in Permian player Centennial, has rocketed (prematurely) above $16 a share, although is tempering itself.    

Don’t call me bearish on oil, or bearish on the Permian – I was a buyer of Cimarex (XEC) as it was trading under $90 a share in the spring – but there are values to be found in energy at every level, and in this lone play, stocks like Cimarex and Pioneer Natural Resources (PXD) and Concho Resources (CXO) are priced as if oil were trading above $70 a barrel, not here at $45. The Yates deal was particularly heralded as EOG managed to buy acreage in this red-hot play for an average cost of less than half of other M+A deals. But Yates, a private oil company, was for sale on the cheap because of real challenges it faced, including a major negative cash flow that had virtually stopped fresh drilling.  Yates family owners are banking on EOG expertise in longer well laterals, as well as much better access to capital, to reinvigorate production – but many challenges remain. I’m less enthusiastic about this deal than the market is, and happy to wait for an EOG pullback to add to this position. 

I also retain more than a bit of skepticism towards the latest shale play of Apache Energy (APA) in the Delaware, the new ‘Alpine high’ discovery. This area of the Permian was previously thought to be difficult, if not impossible to frack, based upon its high level of clay composition that rejected liquid stimulation. Apache, through a new technology that it has understandably refused to talk about, has slowly acquired more than 350,000 acres in the Davis mountains, drilling 14 promising new wells. The technology of fracking certainly doesn’t stand still, and I don’t assume that Apache hasn’t been able to solve a fracking into clay problem where others haven’t previously. My skepticism comes in their claim of 3 billion barrels of oil equivalent in the play, and particularly 30% return at current oil and gas prices. I remember similar claims in the Monterey shale going bad. Infrastructure shortages in the Davis mountains will limit Apache growth in the area, at least for the next several years.  In all cases, I’m not about to buy Apache closer to $60 a share, based solely on the enthusiasm for this finding. 

Finally, both Sandridge and Halcon Resources (HK) are finding plans and gaining approval from courts to return out of bankruptcy. 

The big takeaways from these recent events are an increasing but unwarranted (in my mind) premature enthusiasm about U.S. recovery in fracked oil, particularly in the Delaware area of the Permian basin.  The destruction of production potential that we’ve needed to see to complete the bust cycle in oil and completely rebalance markets, allowing for a long-term constructive rise in the prices of oil and natural gas have yet to be seen. That, in turn, promises that the full recovery and big profits in oil stocks are still several quarters ahead of us. Patience remains the order of the day in our investment strategies, no matter what the final timing of the Federal Reserve plans turn out to be.
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