U.S. Exports Could Be Game Changer In Markets.

Greetings from London.

Urgent Note: In this week’s Inside Investor, our man in the markets, Dan Dicker, is predicting a lot more pain in the oil sector with bankruptcies, defaults and restructuring all set to take place long before any sustained oil price rebound emerges. For a weekly dose of energy market realism and a no-nonsense approach that cuts through industry hype and provides investors with the insight they need.
This week saw yet more bad news for the oil sector, as the EIA’s latest figures released on Wednesday showed U.S. Inventories at levels not seen since 1982, when the agency first started collecting such data. To put it another way, the last time an ounce of gold bought you 29 barrels of oil was 1988. This resulted in a dip midweek before modest gains began to emerge yesterday off the back of news coming from Iraq of Islamic State militants launching an offensive on Kurdish forces near the oil-rich city of Kirkuk. Iraqi production rose by 200,000 barrels a day for a total monthly output of 3.9 million, according to a Bloomberg survey of industry experts, while total OPEC production rose by 483,000 barrels a day to 30.905 million barrels a day. Building on yesterday’s modest gains, we are seeing some highly promising signs after this morning’s trading, with oil prices currently up by over 7 percent at $47.97, but even so, it appears that the supply glut will continue as the battle for market share continues.

This war for market share may intensify further as yet more pressure mounts on the Obama administration to lift the U.S. crude export ban which has lasted for over 40 years. There are several fronts to the export battle, both external and internal. Latest poll data from Reuters suggests more Americans are now in favor of oil exports than ever before (though only by a small margin). In terms of public opinion, the overriding factor is concern over gasoline prices, which have halved in recent months thanks to the drop in crude oil prices. Former National Security Advisor to President Obama, Tom Donilon, says a complete lifting of the ban would be the “correct policy decision,” citing economic benefits, securing America’s energy future, foreign and energy policy goals as the benefits. Elsewhere experts maintain that easing the ban would have a positive impact for consumers in terms of gasoline prices as more crude oil on the international markets would maintain lower prices. However, not everyone would rejoice at the ban being lifted, first and foremost the U.S. refining industry, that has benefitted greatly from cheaper domestic crude oil supplies. Four refinery CEOs have already sent letters to the Senate Energy and Natural Resources Committee Chairwoman Lisa Murkowski to highlight the thousands of long-term, well-paid jobs that have been created by the U.S. shale boom replacing imports of foreign oil.

In addition to pressure for the oil export ban to be lifted, the House and Senate are also pressuring Washington to approve natural gas exports faster than ever before. The House passed legislation on Wednesday that would give the Energy Department a 30-day approval window for natural gas exports to non-free trade agreement nations. The Senate is considering a similar bill but with a 45-day window. The thinking behind such a move is that the U.S. could gain favor in Europe by filling the vacuum left by cooling relations with Russia, highlighted by a recent ultimatum to Europe. While many on the Hill have acknowledged the likelihood of a modest increase in domestic natural gas prices, it is argued that this would, in fact, encourage production while increasing federal revenue while also reducing the trade deficit. Further supporting the case is a host of European nations already lobbying in favor of such a move including Hungary, Slovakia, the Czech Republic and Poland. Despite repeated threats of utilizing his veto power on energy projects such as the Keystone XL pipeline, one has to wonder how much longer Obama can hold off on energy exports given such overwhelming support and the significant strategic opportunity it represents in light of Russia’s well-documented shift towards Asia.

Finally this week, earnings reports from the oil sector are starting to emerge with expectations understandably low. Europe’s largest energy major Royal Dutch Shell was the first oil major to show its hand. This week the company reported upstream earnings for Q4 2014 of $1.7 billion, down 20 percent from expectations of approximately $2.8 million, according to Reuters. In other words, the company’s central pillar, oil production, made almost no money in the final months of 2014. In addition, Shell announced a $15 billion cut in spending over the next three years on top of its recent cancellation of a $6 billion facility in Qatar. This spending cut represents a 14 percent cut from 2014’s $35 billion capital investment. Thankfully for Anglo-Dutch firm, diversification has saved it from worse figures as its refining and trading divisions tripled their earnings to $1.55 billion. In spite of poor revenues from oil production and the planned spending cuts, Shell is still planning to resume drilling operations in Alaska subject to permits and legal clearance. Investment by the company in Alaska for 2015 is estimated at $1 billion.

Another oil major, and the United States’ second-largest producer of energy Chevron, posted its weakest quarterly profits, since the financial crisis over five years ago, of $3.47 billion down from $4.93 billion the previous year. In response, Chevron is planning a 13 percent reduction in capital projects in 2015 of $35 billion, down from $40.3 billion in 2014. While it has just announced a 23 percent reduction in jobs in its Pennsylvania operations, Chevron appears to be banking on its offshore operations particularly in the Gulf of Mexico. In December, the $7.5 billion Jack/St. Malo project began production and is expected to produce oil and gas for Chevron over the course of four decades. It also agreed to take control of two Gulf discoveries and a lease from BP. Expect more of the same in the coming weeks as other majors announce weaker profits from Q4 2014 and major shifts in strategy for 2015 and beyond.

We also invite you to enjoy this week’s Executive Report below in which we examine the latest changes introduced by the Obama Administration which will have a dramatic impact on the U.S. Offshore scene. While some opportunities have been shut off, other promising developments look set to catch the eye of several major players in the scene as offshore oil looks set for a comeback that may take the crude oil crown back from shale in coming decades.

Also in our Premium Service this week, our top trader Martin Tillier has some sage advice for investors looking to regroup and build a solid base from which to get more aggressive as the year progresses, the markets improve and the inevitable oil rebound nears. Find the balance between caution and conviction when navigating these markets. 

 

Best regards,

Evan Kelly
News Editor, Oilprice.com

30/01/2015 in OIL PRICE,
http://oilprice.com/newsletters/free/opintel300115