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EIA and OPEC Update Their Short Term Forecasts

On August 9, 2016, the EIA updated their short-term energy outlook. The full report can be found here. Here are some highlights from the report:

The EIA estimates that the amount of electricity generated using natural gas reached a record high during July, surpassing the previous record set in July 2015. The record natural gas-fired generation was driven by competitive economics compared with coal (despite recent natural gas price increases) and by warmer-than-normal temperatures that boosted overall electricity generation. For 2016, EIA expects natural gas to fuel 34% of electricity generation compared with 30% for coal. In 2015, natural gas was used to generate slightly less than 33% of electricity, and coal was used to generate slightly more than 33% of electricity. (see our article this week on Natural Gas Use in Electric Power)Benchmark North Sea Brent crude oil spot prices averaged $45/barrel (b) in July, a $3/b decrease from June. This was the first monthly decrease since the Brent price fell to a 12-year low of $31/b in January 2016.Brent crude oil prices are forecast to average $42/b in 2016 and $52/b in 2017. West Texas Intermediate (WTI) crude oil prices are forecast to be slightly less than Brent in 2016 and the same as Brent in 2017. The current values of futures and options contracts suggest high uncertainty in the price outlook.U.S. regular gasoline retail prices this summer (April through September) are forecast to average $2.19/gallon (gal), 6 cents/gal lower than forecast in last month's STEO and 44 cents/gal lower than last summer. U.S. regular gasoline retail prices are forecast to average $2.06/gal in 2016 and $2.26/gal in 2017.U.S. crude oil production averaged 9.4 million barrels per day (b/d) in 2015. Production is forecast to average 8.7 million b/d in 2016 and 8.3 million b/d in 2017. This is an increase from 8.2 million b/d forecast last month. EIA estimates that crude oil production for July 2016 averaged 8.6 million b/d, almost 0.2 million b/d below the June 2016 level, and 1.1 million b/d below the 9.7 million b/d reached in April 2015. Domestic monthly oil production is therefore expected to begin consistently rising in late 2017 due in part to higher forecast for oil prices and improvements in drilling productivity.

Natural gas working inventories were 3,288 billion cubic feet (Bcf) on July 29. This level is 13% higher than last year during the same week, and 16% higher than the previous five-year (2011-15) average for that week. EIA projects that natural gas inventories will be 4,042 Bcf at the end of October 2016, which would be the highest end-of-October level on record.

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Is The New Iranian Oil Contract Another Nail in the OPEC Coffin?

Since OPEC’s historic decision in November of 2014 to leave crude output targets unchanged for member countries, thereby causing the price of oil to slide, many commentators have discussed the future role of OPEC on the world stage and as the price regulator and swing producer for the world.

Every whimper that comes from OPEC is met with a market reaction. On Monday, August 08, 2016, oil closed up 3% on mere speculation that OPEC might make another attempt to cooperate in reigning in supply after their last failed attempt. It is interesting to note that this story was first reported by the Wall Street Journal and relied on comments from Venezuela, Ecuador and Kuwait rather than powerhouse Saudi Arabia.

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The Week In Numbers for the Week Ending 8-5-2016

Each week, we strive to provide you a bare bones summary of what happened to the price of WTI, Natural Gas, and Brent Crude. In addition, we summarize the major reports from Genspace, API, and EIA on Inventory Data. And we also throw in the rig count for good measure.

WTI Open on August 1, 2016:$41.35WTI as of 12:00 on August 5 2016:$41.55  Brent Open on August 1, 2016:$43.11Brent as of 12:00 PM August 5 2016$43.94  Natural Gas Open on August 1, 2016:$2.840NG as of 12:00 PM on August 5 2016:$2.780

On August 4, 2016, Genscape released Cushing Inventory data for this week. Cushing is the largest oil storage tank in the world, and is the settlement point for crude oil futures traded on the New York Mercantile Exchange. According to Genscape, Inventory decreased 89,071 barrels at the Cushing settlement point from the beginning of the week until August 2, 2016.

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Short Takes

wellhead graph

This Week we are trying something different. As some of you may know, I review lots of articles to come up with those which I believe will be the most interesting for our customers. And then I try to combine them into a few featured articles. This week, I decided to provide you more of the articles I look at in summary form. Please let us know if you prefer the old format or the new one.

Saudi Arabia Lowering Price of Crude to Asia

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Ty’s Take For Week Ending 8-5-16

While I normally focus on where the price of oil is going, what I am more interested in this week is the fundamental question so important to all of us to help plan our business and know when this downturn will end: what price does it take for drilling to resume and when does service pricing recover (i.e. when do we all stop the agony)? I wrote about this issue a few weeks ago, and I largely remain behind my original opinion. But this week we got a host of new information from Big Oil Execs about their predictions and plans.

In creating the article on Earnings, I reviewed hundreds of pages of transcripts from the various earnings calls (thank you to www.seekingalpha.com for all of your hard work transcribing the earnings calls). And while each company has their own opinion as to market conditions and what they foresee happening, I did glean a bit of insight and can tell you that there seems to be at least an undercurrent of consensus. I know the article on earnings is long and tedious, but I do strongly encourage you to read it to help develop your own opinion.

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Oil Majors Reported Earnings Last Week

Last week, Major Oil Companies reported earnings. Below is a list of the major oil and gas companies, and what they reported:

Eni (NYSE: E):Q2 EPS of -€0.27ExxonMobil (NYSE: XOM):Q2 EPS of $0.41 (misses by $0.23)Chevron (NYSE: CVX):Q2 EPS of -$0.78 (misses by $1.10)ConocoPhillips (NYSE: COP)Q2 EPS of -$0.79 (misses by $0.18Total (NYSE: TOT)Q2 EPS of $0.90 (beats by $0.16)Royal Dutch Shell (NYSE: RDS.A)Q2 EPS of $0.13Total (NYSE: TOT)Q2 EPS of $0.90 (beats by $0.16)Royal Dutch Shell (NYSE: RDS.A)Q2 EPS of $0.13BP (NYSE: BP): Q2 EPS of $0.23 (misses by $0.05)Pioneer Natural Resources (NYSE: PXD): Q2 EPS of -$0.22 (beats by $0.12)Suncor Energy (NYSE: SU)Q2 EPS of -$0.36 (misses by $0.15)Anadarko Petroleum (NYSE: APC)Q2 EPS -$0.60 (beats by $0.20)

(see: http://oilprice.com/Energy/Energy-General/Oil-Industry-Slammed-By-Disappointing-Earnings-Oil-Price-Plunge.html

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The Week In Numbers for the Week Ending 7-29-2016

Each week, we strive to provide you a bare bones summary of what happened to the price of WTI, Natural Gas, and Brent Crude. In addition, we summarize the major reports from Genspace, API, and EIA on Inventory Data. And we also throw in the rig count for good measure.

WTI Open on July 25, 2016  $44.20WTI as of 12:00 on July 29, 2016 $41.34  Brent Open on July 25, 2016 $45.70Brent as of 12:00 PM on July 29, 2016 $43.31  Natural Gas Open on July 25, 2016 $2.779NG as of 12:00 PM on July 29, 2016 $2.895

 

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Ty’s Take For the Week Ending 7-29-16

Oil Fell This week and fell hard. But why? As we discussed last week, I remain bullish on the price of oil over the long-term as I believe supply and demand will converge sooner rather than later. In fact, during their earnings call the CEO of Anadarko Al Walker stated that he foresees sustained oil prices of $60/bbl for 2017, perhaps reaching that price point by Fourth Quarter 2016. And as we discussed in our earlier article Wood MacKenzie reported that 56 of the biggest oil and gas companies are cash flow neutral at U.S. $50.00 per barrel.

So, then why is oil and gas falling? First and foremost, I think it has to do with the gasoline inventories remaining so high. The announcement that refiners are moving to winter blend this early is a bit troubling. In addition, hedge funds are driving the market down by taking short positions. Overall though, oil may not be reacting as much as their negative bet would indicate. I think the market is also anticipating the typical refinery maintenance that usually starts in August and ends in October. This means that crude stockpiles may start building again and that creates some jitters in the market. Additionally, Goldman Sachs said $40-50 a barrel oil is here to stay until mid-2017. While the World Bank raised its outlook for the average 2016 price from $41 per barrel to $43 a barrel this week, it also indicated it believes oil prices will end the year low compared to current levels. These factors were negative for the price of oil.

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Some Bad News: Refiners Switching to Summer Blend and Hedge Funds Go Short

We got some bearish news on oil this week. First, some refiners stated that they are switching to from summer to winter blend gasoline. Without naming which refiners were switching, Reuters noted that several major refiners had switched from producing summer blend gasoline to winter blend. (http://www.reuters.com/article/us-usa-gasoline-flows-idUSKCN1040G1)

Generally, summer blend is considered more environmentally friendly but is more expensive to produce. The U.S. government allows refiners to start selling winter blend on September 15th. Usually, refiners switch over production to winter blend in August. Currently, gasoline stockpiles are at their highest level in 25 years despite U.S. motorists setting record demand during the summer driving season. However, with so much supply overhang, we see refiners switching to winter blend earlier.

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Oil Majors Cash Flow Neutral at U.S. $50.00 per barrel.

Last week, we discussed that 70% of future development is commercially viable when Brent Crude hits $60.00 per barrel. http://www.fsmetals.com/about-us/newsletters/so-what-does-the-price-of-oil-have-to-be-to-turn-this-around

This week we got a bit of more good news. Because of the large CAPEX cuts seen across the industry (reduction of 49%, or U.S. $230 billion relative to 2014 levels), fifty-six major oil companies will be cash flow neutral if Brent crude has an average price of $50.00 per barrel, and a growing list will be cash flow neutral at $40.00 per barrel.

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