Peak Oil Notes – Oct 28

After two weeks of steadily falling oil prices, the markets rebounded on Wednesday, closing up 6.3 percent in New York at $45.94 and 4.8 percent in London at $49.05. The move was prompted by a somewhat smaller-than-expected increase in the US crude inventory, a larger drop than expected in gasoline and distillate stocks, and an 800,000-barrel decline in the inventory at the Cushing, Okla. storage depot. Technical “buy” signals were also cited as a reason for the move as was expectations that US interest rates will not be raised until December and the announcement that Mexico has been allowed to swap 75.000 b/d with the US.
 
As the US has been a large importer of Mexican oil for decades, it is hard to see what the “swap” part of the deal means as the volume of the US imports of Mexican crude has been falling for years. The real pressure has been on the US to unload its excess supply of light oil. The announcement, however, was seen as a sign that the US export embargo was slowly eroding despite the White House’s vow to keep it in place.
 
Most analysts say Wednesday’s price spike was just another incidence of what has become normal market volatility these days and that there as yet has been no indication that global oversupply of crude is coming to an end anytime soon.
 
Natural gas prices have undergone a stunning decline in the last few days, dropping nearly 50 cents per million BTU’s to the lowest close since 2012 – just above $2.00 per million. Outside of the brief 2012 dip below $2, prices have not been this low for decades.  Weather forecasters expect that it will be unusually warm across the northern US for the first two weeks of November delaying the seasonal drawdown of natural gas inventories.
 
Most of the news this week has been of the gloom and doom variety with job cutbacks, falling profits and cancelled projects across the oil industry being reported every day.  Among the major announcements were a $2.4 billion loss posted by Anadarko; a decision by Royal Dutch Shell to abandon a $2 billion construction project in the Canadian tar sands; the decision by Shell and rig contractor Transocean to delay by 12 months the delivery of two new deepwater drill ships; and the announcement of a third round of spending cuts by BP in order to position the company to cope with sub-$60 oil prices which it expects to continue into 2017.
 
Many of the world’s largest oil companies are struggling to come up with enough cash to cover their current spending and the generous dividend programs that were established in better times.  Financial institutions are starting to shy away from companies with little or no prospects to become profitable in the foreseeable future. The “supermajors” such as Exxon, Chevron, Shell and BP have slashed spending by more than $30 billion in the past year and this trend seems likely to continue.
 
The debate as to whether there is adequate storage capacity for the ever-increasing oil glut came up again this week. Goldman Sachs reiterated its position that while it is unlikely that every available storage tank will soon reach capacity, the need for swing space and the growing glut of distillates in Europe and parts of the US could reach near the the capacity to store oil products and push prices lower in coming months.