The big news from the U.S. this week was new data that showed that the weekly rig count…actually increased. That’s right, after 29 consecutive weeks of rig count declines, the industry may have finally hit bottom and could be on its way back. For the first time in seven months the U.S. saw additional rigs added into operations. Baker Hughes reported that an additional 12 oil rigs came into service for the week ending on July 2, although natural gas rigs declined by 9, for a net gain of 3 rigs.
The data is evidence of ongoing efficiency gains and resilience on behalf of shale drillers. Despite oil prices still 40 percent lower than they were a year ago, many companies are still drilling. On the other hand, the data is not supportive of oil prices, which had a rough week. After trading a few dollars above and below $60 per barrel for WTI (and a few dollars more for Brent), oil broke below that trading range this week for the first time in two months.
The positive rig count figures add more softness to the markets, as it signals a possible return of new drilling while the global glut in oil has yet to substantially subside. Just to sum up why this is such bearish news: production has not substantially declined in the U.S., the world is still awash in oil, and shale companies just added more rigs back to the field. That is not a recipe for market equilibrium.
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Then again, there were plenty of other reasons to feel pretty pessimistic this week about oil prices. Astonishingly, the Greek debt crisis has continued to drag on, surprising many that the parties involved were unable to come to terms despite Greece’s default on IMF payment and the government’s decision to call for the closure of banks and the stock market. The position of Greek Prime Minister Alexis Tsipras has significantly weakened over the past week, as creditor nations have held firm on no new concessions and the Greek people start to doubt whether or not they want to follow Tsipras down the uncertain path that leads away from Europe. A referendum on accepting Europe’s bailout terms is set for July 5, but either result will not necessarily offer clarity to the situation. Such uncertainty is weighing on global markets.
The past week also saw gyrating fluctuations in the two main stock market exchanges in China. The Shenzhen Composite and the Shanghai Composite have skyrocketed over the past year, perhaps too far and too fast. By June, cracks finally started to form. Over the past week the two exchanges have lost nearly 30 percent and 25 percent of their values, respectively. The Chinese government intervened this week to try to stem the outflows, and their efforts worked briefly, before another 5 percent decline on July 2. China recently moved into first place in terms of the world’s largest oil importer, so if there is a possibility of financial distress in such an important oil consuming country, it would have very significant implications for oil demand, and thus oil prices.
Moving onto another developing story that could have negative consequences for oil markets – the Iran negotiations. There is still quite a bit of disagreement over how fast Iran can bring oil back online, but the Wall Street Journal reported that Iran has put together an armada of oil supertankers and it is ready to resume trade with the West if a deal is sealed. NITC, a private Iranian shipper, revealed that it has stitched together a fleet of 42 supertankers over the last few years, the largest fleet in the world.
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The talks with Iran seem to be progressing, although unsurprisingly there are still a few critical issues that need to be resolved. Some of the diplomats have left Vienna and plan on returning on Sunday. French Foreign Minister Laurent Fabius said he hopes that by Sunday, the negotiating parties will “be in a situation to advance towards perhaps…a robust deal.” That is a notable quote, coming from one of the countries that has taken the hardest line on Iran.
Also, there appears to be progress on the timing of sanctions relief, a key sticking point for the U.S. and Iran. The Supreme Leader last week issued rather harsh language, demanding a removal of sanctions immediately upon agreement of a deal. That was not something the West was prepared to agree to, but it now appears that they are making progress on common ground, consisting of a phasing out of sanctions while Iran meets key milestones on certain dates.
In other words, prospects look good for a deal next week. While that is good news for peace, it is bad news for oil prices, as the prospect of more Iranian oil coming back online gets stronger by the day.
BP (NYSE: BP) and the U.S. Justice Department announced a settlement requiring the British oil giant to pay a record fine of $18.7 billion to put to rest outstanding claims stemming from the Deepwater Horizon catastrophe. BP’s share price jumped 5 percent on the news, as investors felt enthusiastic about BP finally putting the disaster to bed. The company estimates that the final bill for all charges relating to the 2010 oil spill could surpass $54 billion.
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Royal Dutch Shell (NYSE: RDS.A) is not thinking twice about risks in the Gulf of Mexico. Shell announced this week the final investment decision on a new deep-water project in the Gulf. It will be the Anglo-Dutch company’s eight and largest oil platform for the Gulf of Mexico, with the Appomattox and Vicksburg fields expected to eventually produce 175,000 barrels of oil equivalent per day. Shell has huge investments in the Gulf, including the enormous Perdido field.
The move comes as Shell’s CEO Ben van Beurden acknowledged that Saudi Arabia and OPEC have caused U.S. shale production to stall out. He said that despite oil price weakness, production will probably continue “for a while,” but that output could start to fall once “the sweet spots start running out.” He said that many in the oil industry were wrong to think that OPEC would prevent prices from crashing.
Finally, natural gas prices are showing some signs of life, after weekly data showed lower than expected inventory builds. Storage levels increased by 69 billion cubic feet in the last week of June, the second straight week of disappointing builds. Hot weather is contributing to heightened gas consumption – Washington DC experienced the hottest start to summer on record – as consumers crank up the AC. Henry Hub prices are now trading above $2.83 per million Btu.
By Evan Kelly of Oilprice.com
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