Friday, March 10, 2017
Oil prices awoke from their slumber this week, breaking out of a narrow trading range and plunging by more than 8 percent. WTI dipped below $50 per barrel on Thursday, and Brent dropped below $53 per barrel, the lowest levels since early December when the OPEC deal was announced. The reason for the sudden decline was the bearish EIA report, which showed a whopping 8.2 million barrel increase to crude oil inventories, pushing total stocks to another record high. The inventory increases have been consistent throughout 2017, but the combination of rising U.S. oil production and relentless stock builds seems to have finally put a dent in market bullishness.
OPEC outreach to shale comes with warning. At the CERAWeek Conference in Houston this week, OPEC officials made a concerted effort to court U.S. shale players, hoping to smooth over differences in order to cut down on market volatility. OPEC’s Secretary-General dined with shale executives, and met with investment banks to better understand OPEC actions on the market. By all accounts, the meetings have brought an aura of understanding between OPEC and market players.
But, to be sure, they are still competitors. Saudi energy minister Khalid al-Falih warned shale companies not to move too quickly, arguing that OPEC would not bail out the shale industry if it makes unjustifiable investments. "He said we and other shale producers should not automatically assume OPEC will extend the cuts,” a shale executive told Reuters. The statement is all the more poignant given the slide in oil prices this week amid concerns of oversupply.
Harold Hamm echoes OPEC’s warning. Continental Resources (NYSE: CLR) CEO Harold Hamm also warned the shale industry not to “kill” oil prices by ramping up too quickly.
Will OPEC extend cuts? Wednesday saw the worst one-day drop in oil prices in over a year. That has added a lot of weight and speculation to OPEC’s production cuts and whether the cartel will extend their deal through the end of the year. OPEC officials said they would wait until May and look at U.S. inventory levels before they decide. But with oil prices already falling, the failure to extend the cuts would mean more losses are to come. “If OPEC doesn’t extend the deal that would be price suicide, plain and simple,” Tamas Varga, analyst at London-based PVM brokerage, told the WSJ.
Oil price correction raises risk of speculative-driven downfall. Speculators have built up a record position in net-long bets on crude oil, a position that could unwind with the shift in market sentiment. "It's confirmatory to me that they've thrown in the towel and we're in the process of a pretty big long liquidation at the moment that should carry us all the way down, I think, to the November lows of $42. We'll retrace the entirety of the rally from November to just recently," John Kilduff, founding partner at hedge fund Again Capital, told CNBC. Kilduff says crude oil could fall to $42 per barrel by the end of April.
Repsol announces Alaska discovery of 1.2 billion barrels. Spanish oil company Repsol SA (OTCMKTS: REPYY) announced a 1.2 billion barrel oil discovery on Alaska’s North Slope after drilling two wells with its partner Armstrong Oil & Gas Inc. Repsol says that the oil could begin flowing by 2021 and produce 120,000 bpd. Alaska has been suffering declining output and the state has been hemorrhaging tax revenue as a result. Also, the Trans-Alaskan Pipeline has seen oil flows fall to dangerously low levels. Repsol’s new discovery could buy the state some time.
Worst week for commodities in months. Oil prices dropped to their lowest levels in months, but the entire commodities sector also suffered a terrible week. Metals and grains also posted their sharpest weekly decline in quite some time. Persistent supply gluts and ongoing concerns about the strength of Chinese demand have deflated what have been strong rallies since the fourth quarter of 2016.
Libya’s oil production falls again. Turmoil near Libya’s major oil export terminals cut into production figures this week, pushing output down to 620,000 bpd, a decline of 30,000 bpd from last week and 80,000 bpd from January and February levels. Libya was thought to present a downside risk to the oil market because of expectations of rising levels of production, but violence and supply disruption could have the opposite effect on the market this year.
Shell warns oil industry faces threat from waning public acceptance. Royal Dutch Shell (NYSE: RDS.A) CEO Ben van Beurden said that the oil industry faces an existential threat if it continues to lose public trust. "I do think trust has been eroded to the point where it starts to become a serious issue for our long term future," he said at the CERAWeek conference in Houston. Shell supports carbon taxes and also said that it would increase investment in renewable energy to $1 billion over the next few years.
Shell to sell off almost all of its oil sands assets. Shell announced on March 9 that it would seek to reduce its stake in key oil sands projects from 60 to 10 percent. Shell will sell its assets to Canadian Natural Resources (NYSE: CNQ) for an estimated $7.25 billion. The move is a sign of the shrinking appetite that international companies have for Canada’s high-cost oil sands. It is also part of Shell’s multiyear divestment campaign to pay down debt.
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.
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As oil prices continue to plunge, veteran oil trader Martin Tillier warns against ‘’herd behavior’’ on the way down. Martin thinks it’s time to take a contrarian view as long-term fundamentals are not as bad as they may look. As part of his contrarian view, Martin advises to buy the drop in oil prices, but with a keen eye to controlling potential losses. Find out how Energy Insiders trade by claiming your risk free trial to Oil & Energy Insider
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This week, an update on an investment I recommended last year in late May – Silver Run Acquisitions Corporation, then the SPAC of ex-CEO of EOG Resources, Mark Papa. That SPAC morphed into an 89 percent controlling investment in Centennial Resources (CDEV), with Mark Papa taking the helm at the Permian shale company. So far, the initial investment has paid us very, very well indeed, as the initial investment of shares has converted into a near doubling – from the original $10 rollout of the SPAC to the current share price in Centennial over $18. But on top of this, shareholders of Silver Run also gained warrants in the conversion for another approximately 1/3 of total shares at an exercise price at $18 a share.
And here, we have a great opportunity to talk about where crude oil is, where it’s going, and whether this piece of the Silver Run/Centennial puzzle is a do or a no do.
In the last few days, we’ve seen the rapid selling of energy futures, which we all noticed were well-nigh overrun with long positions. Here at the oil and gas insider, the ‘numbers game’ authors who write below my column did a tremendous job of showing just how strong the speculative long positions were in crude, in this case almost as deep a ratio as we’ve ever seen.
And as those energy futures unravel, today under $50 a barrel, we have to take a good hard look at how we’re going to manage our energy stocks – and specifically the case of the Centennial warrants, needing an answer later this month.
If we take, as a given truth, that the drop in crude prices is less about the increase in stockpiles or the incremental rise of production here in the U.S. and more about the long/short ratio in the futures markets, we should gain an insight about what to do with this drop in prices. Crude analysts are surely wringing their hands about U.S. production again, drifting towards 9 million barrels a day, and wondering, even now, whether OPEC will again extend production limits in May, more than two months away. But if we keep our heads, this drop in prices will appear to be more of an opportunity gained than a temporary loss to fear.
We’ve found a new sweet spot for U.S. crude, or at least shale production, that just barely tips the balance at over $50 a barrel. As crude drops below that level, producers must again turn off rigs or cancel the scheduling of new DUC’s that they had hoped to bring online. All of the work that’s gone into efficiencies in laterals and spacing is being felt today as only the most responsive acreage is appearing in new rig counts and production margins. But, that is a limited number of producers and a limited number of wells. While the markets and the analysts are focused on these few producers and their rigs and the temporary swelling of U.S. stockpiles driving prices lower, the demand curve for global crude continues to catch up with the global supply glut.
OPEC compliance, which in January was an unheard-of 90 percent, crept up to an even more unbelievable 94 percent in February. At the annual CERAweek, not only did OPEC beg for help in limiting global production to U.S. frackers, but some bigshot oil guys did too.
But we must remember that this dream of cooperation between the U.S. and OPEC is focused on only one area: The Permian. And this is precisely where we’ve focused all of our core energy plays and where Centennial is based, as well.
So, while oil markets can temporarily rotate under $50 a barrel at the same time as global markets continue to slowly, but surely, rebalance, and while OPEC might plead with U.S. producers during their own supply curb, we’ve surely got the inside track in long-term, profitable investments in oil when we continue to concentrate on Permian players.
Which brings me back to Centennial warrants. As crude prices have swooned, some U.S. oil stocks have swooned as well – like the aforementioned bigshot’s Continental Resources (CLR), down 6 percent yesterday alone. Less harmed, of course, have been the Permian producers – and Centennial itself is still marginally above that $18 strike price for those warrants. I believe it’s there for a reason.
This is a real opportunity – maybe the last one you’ll see. If you own these Centennial warrants, you need to exercise them. And if don’t own the warrants and not yet looked at Permian oil producers to start or round out your core oil portfolio, you need to do that now too.