What’s Next For The Oil Markets? (USO)

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September 20, 2017 6:32am NYSE:USO

Image of an oil derrick with blue sky

From Tom Kool: Big Oil has been wheelin’ and dealin’ across the globe as geopolitical risks mount, and OPEC delivered a sigh of relief to crude markets with a signal that has brought the bulls out to play.


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  • The EIA projects total world energy consumption will rise by 28 percent between 2015 and 2040, with most growth coming from developing countries.
  • Non-OECD Asia accounts for nearly two-thirds of the growth, and that category is dominated by China and India.
  • All major energy sources will see demand rise except for coal. Renewables post the strongest growth rate at 2.3 percent per year.

Market Movers

Royal Dutch Shell (NYSE: RDS.A) said it began restarting its Deer Park refinery in Texas on Sunday, a facility that has a capacity of 325,000 bpd. ExxonMobil (NYSE: XOM) could restart most of its Beaumont refinery by the end of the week.

Sanchez Energy (NYSE: SN) was downgraded by Piper Jaffray from Overweight to Neutral, on concerns over leverage. Its price target was cut from $14 per share to just $6.

The Federal Energy Regulatory Commission overruled New York State’s denial of a permit for the Millennium natural gas pipeline, arguing that the state took too long to make a decision. The decision puts the project on path to begin construction, pending more permits. The short distance pipeline will service a 630 MW natural gas plant set to begin operations early next year. The pipeline is owned by TransCanada (NYSE: TRP), DTE Energy (NYSE: DTE) and National Grid (NYSE: NGG).

Tuesday September 19, 2017

WTI and Brent hit fresh highs in early trading on Tuesday, with oil demand looking particularly robust and fears over hurricane damage to the market having receded. Both benchmarks were at their highest levels in months but saw a slight drop off as trading continued.

Refiners profit on hurricane outages. After a quarter of U.S. refining capacity was knocked offline, fuel shortages cropped up, creating a unique opportunity for unaffected refiners. “You’ve got a lot of refiners running at full tilt, and they’re going to make better margins,” Sandy Fielden, an energy analyst with Morningstar Inc., told the WSJ. “Supply and demand is effectively telling the market that there’s a big incentive to produce more.” Refining margins for some East Coast and Midwestern processors have jumped by as much as a third, the WSJ says. PBF Energy (NYSE: PBF), a company with refining assets in the Northeast and the Midwest, has seen its stock price surge by as much as 26 percent since August 21.

Conflicting reports on U.S. withdrawal from Paris climate agreement. The WSJ reported over the weekend that the U.S. might not actually withdraw from the Paris climate accord, despite President Trump’s decision to do so in June. The Trump administration denied any change in policy, and the President’s top economic adviser, Gary Cohn, met with climate ministers from around the world on Monday. He told them that the U.S. would only stay in the Paris climate pact if the terms of doing so were more favorable. However, the administration routinely fails to recognize the fact that the pact consists of voluntary, not mandatory, targets. In theory, the administration could revise its commitments and stay in the pact.

OPEC considering longer cuts. Iraq’s oil minister hinted that OPEC might consider deeper and longer cuts, pushing the current output limits out through the end of 2018. Jabbar al-Luaibi said the group could take an additional 1 percent off of global supply, which would help to further rebalance the market. Still, he said there is “no firm decision yet.”

Russia’s Rosneft to invest in Kurdish pipelines. Rosneft said that it will invest in gas pipelines in Kurdistan, a crucial source of investment for the semi-autonomous region in Iraq ahead of its independence referendum next week. The investment could exceed $1 billion and grow Rosneft’s gas business.

Trump admin works to open up drilling in Alaska’s ANWR. The Washington Post reportedthat the Trump administration is trying to allow drilling in the Arctic National Wildlife Refuge (ANWR), a hotly contested region in Alaska that has been off limits for oil and gas drilling for decades. Permitting drilling would require an act of Congress, but the Post reports that the Department of Interior is working on draft rules to allow seismic testing in ANWR, a necessary precursor to drilling. It is not clear how interested oil and gas companies would be in ANWR, given its remote (i.e., expensive) location.

U.S. shale production to grow more slowly. The EIA said that U.S. oil production from its top shale basins will rise by 79,000 bpd in October, the first time in seven months that the monthly increase will come in below 100,000 bpd. The Eagle Ford will actually see a decline in output by 9,000 bpd, in part because of outages related to Hurricane Harvey. The Permian will still add a sizable 55,000 bpd in October.

Seadrill files for bankruptcy. Offshore oil drilling company Seadrill filed for bankruptcy last week after coming to an agreement with creditors. The deal will result in a fresh injection of $1 billion while also wiping out existing shareholders, according to the FT.

Energy stocks up, more room to run. Energy stocks just completed their first four-week stretch of gains this year, a sign that they may have bottomed out and could be heading higher. The Energy Select Sector SPDR exchange-traded fund, according to CNBC, is down 12 percent so far this year, a much steeper drop than the price of oil. Some analysts and major investors think that the market overdid the selloff this year, expecting much more shale production, which would have pushed oil prices down further. The rather large decline for the ETF suggests there is a lot of lost ground that could be regained going forward, which might mean stronger stock gains in the near future. “It needs to play a little catch up yet,” Rob Thummel, portfolio manager at Tortoise Capital, told CNBC, referring to the ETF.

Iran accuses U.S. of sabotaging nuclear deal. Top Iranian officials have accused the U.S. government of undermining the landmark 2015 nuclear deal. President Donald Trump has suggested that he would decertify Iran’s compliance with the accord in October, a move that could lead to the unraveling of the agreement. At that point, the U.S. Congress could move to re-impose U.S. sanctions. However, the U.S. will probably burn a lot of international good will if it goes down this path, and could be on its own pursuing a heightened confrontation with Iran. The international body that oversees the nuclear deal has said that Iran has in fact complied with its commitments, contrary to what the U.S. President has portrayed.

Vitol increases cash-for-crude trade with Kazakhstan to $5 billion. The FT reports that the world’s largest independent oil trader, Vitol, has agreed to increase its deal with Kazakhstan to provide cash in exchange for crude oil, a trading relationship that will reach $5 billion. Arrangements of this type have been on the rise since oil prices halved from $100 per barrel in 2014 down to $50 today. Vitol and its peers, such as Glencore and Trafigura, have loaned out billions of dollars to cash strapped oil producers, including Kazakhstan, Russia and Kurdistan.

Norway’s sovereign wealth fund tops $1 trillion. The value of Norway’s sovereign wealth fund just surpassed the $1 trillion mark. The world’s largest sovereign wealth fund has increased in value substantially this year on the back of strong equity markets and a weakening U.S. dollar. The fund has been seeded with oil revenues since it was established decades ago, with the mission to benefit Norway long after the oil is gone.

The United States Oil Fund LP ETF (NYSE:USO) rose $0.11 (+1.09%) in premarket trading Wednesday. Year-to-date, USO has declined -13.74%, versus a 12.86% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #72 of 130 ETFs in the Commodity ETFs category.


This article is brought to you courtesy of OilPrice.com.


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