Statoil sells off Canadian oil sands assets, Pioneer expects $70 oil
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Oil Rises As Markets Regain Faith In OPEC Deal

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After having tanked as a result of the Fed rate hike, oil prices rose towards 17 month highs on Friday as a result of renewed faith in OPEC’s production cuts.

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Friday, December 16, 2016

Oil prices are ending the week largely where they started, with the strong gains from the non-OPEC deal having worn off as the week progressed. The non-OPEC deal strengthened credibility in the collective cuts from OPEC, with an expected 1.8 million barrels per day slated to be pulled off the market in early 2017. However, on Wednesday, the U.S. Federal Reserve poured cold water on the party with its interest rate hike – the strong dollar did a number on commodity prices. Oil prices closed the week in the green as markets regained faith in OPEC’s compliance to the deal.

Libya and Nigeria set to boost oil exports. A key oil export terminal as well as a pipeline in Libya are about to come back online, bringing disrupted oil production back onto the market. Libya has already doubled production from 300,000 to 600,000 bpd since September. Now more capacity is about to come online as the political situation improves. Separately, the Nigerian government signed a deal with ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A), Eni (NYSE: E) and Chevron (NYSE: CVX) to
resolve a dispute over back payments of $5 billion on joint ventures. The deal could pave the way to more investment and lead to a resurgence in Nigeria’s output, which is down to 1.8 mb/d from a peak last year of 2.2 mb/d. If the two OPEC countries, Libya and Nigeria, restore capacity, it could threaten the efficacy of the OPEC deal. 



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OPEC meets non-OPEC. IEA: Oil demand in 2017 to slow. In its latest Oil Market Report, the IEA said that global oil demand growth will slow to just 1.3 mb/d next year, down from 1.4 mb/d this year and 1.9 mb/d in 2015. The growth rate will be the smallest since 2014 and it poses a threat to a market on the mend. Other analysts put the 2017 growth rate much lower – Citigroup thinks demand will only expand by an unimpressive 1.1 mb/d. 

Goldman Sachs increases oil price forecast. Goldman Sachs issued a
revised oil price forecast for 2017 to reflect the effects of the non-OPEC agreement and greater confidence in the compliance of OPEC members to their historic deal. The investment banks expects WTI to average $57.50 in the second quarter of next year, up from its previous estimate of $55. Brent will average $59 instead of $56.50. Goldman is assuming an 84 percent compliance rate from OPEC, which will lead to cuts of 1.6 mb/d from the cartel instead of the announced 1.8 mb/d. 

Pioneer expects $70 oil. While Goldman Sachs is offering a sort of middle-of-the-road forecast on oil prices – not too bullish or bearish – Pioneer Natural Resources (NYSE: PXD) is a lot more optimistic. The Texas shale driller sees WTI rising to $70 per barrel by the end of 2017 as the world quickly draws down on storage levels. Pioneer’s COO Tim Dove told
Bloomberg that his company has hedged 85 percent of its production through 2017, but has declined to hedge much for 2018 as it plans on profiting from much higher prices. “We haven’t done much hedging for just that reason," Dove said. “We think there’s a chance that ’18 can be better."

WTI faces pressure from inventories at Cushing. While U.S. oil inventories are slowly coming down, they remain near
record highs at the key oil hub of Cushing, OK. Part of that is a seasonal phenomenon as Gulf Coast refiners put extra product in storage in Cushing for tax reasons. But also refiners process less in winter months. Another reasons is that production is booming in Texas, keeping pressure on storage tanks. The inventories are pushing the market into a deeper contango than what has been seen in recent weeks, and also putting pressure on the WTI-Brent differential. 

Statoil to sell off Canadian oil sands. Statoil (NYSE: STO)
announced its decision to sell off its oil sands assets to Athabasca Oil Corp. (TSE: ATH) in a deal that could be worth up to $832 million. Statoil spent nearly a decade in Alberta’s oil sands, and will exit the play with a loss of at least $500 million. “This transaction corresponds with Statoil’s strategy of portfolio optimization to enhance financial flexibility and focus capital on core activities globally,” Lars Christian Bacher, the company’s executive vice president for international development and production, said in a statement. Translation: Canada’s oil sands are too expensive. 

Chesapeake Energy’s “Prop-a-geddon.” Chesapeake Energy (NYSE: CHK) is conducting the largest frac job in the history of the Haynesville shale in Louisiana, a process the company is calling “prop-a-geddon.” The natural gas well the company is drilling is an experiment in economies of scale, drilling a well that is 2 miles deep and runs 2 miles horizontally, using 51 million pounds of sand. The monster frac job, Chesapeake believes, is a world record. Shale companies have been figuring out ways to use more frac sand, or drill longer laterals, to improve well economics, but Chesapeake is arguably pushing the bounds further than anyone. Chesapeake hopes it can cut costs by 75 percent compared to the average well. The WSJ
reports that the experiment is integral to the turnaround of a deeply indebted company. 

Trump selects Rep. Ryan Zinke (R-MT) for Interior. The Republican Congressman was chosen to lead the Interior Department, a former Navy SEAL. He is a supporter of oil and gas drilling, as expected, but he has also shown a bit of an independent streak, bucking his party on matters of public lands. While many Republicans want to privatize public lands to accelerate industry development, Zinke has fought to keep public lands public, offering a small sliver of hope for environmentalists fearing an onslaught from the Trump administration. Still, Zinke will likely oversee greater drilling opportunities on public lands. 

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. – The expected cuts in drilling regulation and possible opening of federal lands for drilling under the Trump administration creates a huge opportunity for oil & gas companies. Veteran oil trader Dan Dicker recommends buying oil stocks as ‘certain’ oil companies are set to thrive as Trump plans to unleash American Energy. Find out which oil companies Dan Dicker is talking about by claiming your risk-free 30 day trial on
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What's in Oil & Energy Premium this week:
Inside Investor
• This Is The Time To Pick Up Oil Stocks
Inside Opportunities:
• Oil & Gas Predictions For 2017
Executive Report:
• Will U.S. Shale Undo The OPEC Rally?
Inside Markets:
• Nat Gas Traders Focused On Weather Not Demand
Inside Intelligence:
• Global Energy Advisory December 16th 2016
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Nat Gas Traders Focused On Weather Not Demand

Natural gas futures had a volatile week that began with a gap lowering opening on Monday, December 12. Despite the threat of extremely cold temperatures in several key demand areas in the U.S., forecast for later in the week, sellers came out firing, suggesting they were already looking at the weather pattern weeks in advance. I guess that’s why they call it the “futures” market. 

As the week progressed, the selling pressure intensified as investors reacted to a new forecast calling for warmer temperatures in key demand areas. Long speculators took profits and headed to the sidelines as the weather news outweighed government storage data that showed an unexpectedly large draw from inventories. 

According to the U.S. Energy Information Administration, natural gas stockpiles fell by 147 billion cubic feet in the week-ended December 9. Analysts and traders were looking for a 130 billion cubic feet drawdown. 

The decline in inventory was well-above the average withdrawal of 79 billion cubic feet for that week on a historical basis. Current inventories are now 1.3 percent below last year’s level. It was only a month ago that inventories stood at a record high. 

Next week’s inventories should drop even further since they will incorporate this week’s high demand due to the extremely cold temperatures in the Midwest in high usage areas like Chicago. However, traders are likely to treat this data as “old news” because they are looking at the weather at least two weeks out. 

Although the longstanding supply glut is expected to be reduced further during the upcoming weeks, traders are more focused on new forecasts calling for warmer weather. Traders are also discussing the possibility of the warmer-than-expected weather continuing into the end of the month. 

Weekly March Natural Gas

The main trend is up according to the daily swing chart. The trend turned up last week when buyers took out the October 18 swing top at $3.630. However, the buying dried up at $3.703. 

With the market closing on its high for the week and momentum pointing up, the chart pattern suggested an easy follow-through move to the upside, but this was not to be as the market opened sharply lower December 12. This was proof that traders were not watching the extremely frigid weather for the upcoming week, but rather the weather about two weeks out. 

The main range was formed by the top from the week-ending June 20, 2014 at $4.606 to the bottom from the week-ending February 26, 2016 at $2.468. Its retracement zone is $3.537 to $3.789.

This zone is controlling the longer-term direction of the natural gas market since it stopped the rally in October and last week. 

The zone is so important that we can say with confidence that we expect a bull market to extend on a sustained move over $3.789 and for weakness to develop on a sustained move under $3.537. 

If buyers can overcome the Fibonacci level at $3.789 with conviction on better-than-average volume and a bullish weather pattern behind it, then the market will have a clear shot at trading as high as $4.382 before the winter ends. 

This week’s close under the main 50 percent level at $3.537 indicates the presence of sellers. The market is likely to continue lower if the warm weather into the end of the year continues to be forecast. 

Given the short-term range of $2.764 to $3.703, the next potential downside target is its retracement zone at $3.234 to $3.123. 

Daily March Natural Gas

The Daily March Natural Gas futures chart shows that the main trend is down according to the daily swing chart. The series of lower tops and lower bottoms suggests the downside pressure is building. If it continues to increase then we probably will see a drive into $3.234 to $3.123. 

This zone is a value zone so buyers will likely show up on a test of this zone. Don’t give up on the long side just because the market is in the midst of a correction. The price action is orderly as well as the trade. Buyers and sellers are clearly following the weather pattern and with the official start of winter next week, we can easily see a return of cold weather. 

Ideally, we’d like to see a frigid arctic blast re-emerge when natural gas is trading inside $3.233 to $3.123. This zone is our primary downside target over the near-term. 

The way I see this market. If we get extremely cold temperatures this winter, we are either going to be looking to buy the break into $3.233 to $3.123 or strength over $3.685 and $3.902. Hopefully, we’ll get a chance on this current correction. 
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