By July 21, 2017 Read More →

Oil prices news brief: Crude prices drop; Big Oil likely to double down on cost cuts

Oil prices

Oil prices fell on Friday after forecasts from an energy consultant predicted an increase in OPEC production this month. Encana photo.

Oil prices down 2 per cent

On Friday, oil prices dropped about 2 per cent after consultant Petro-Logisitcs forecast an increase in OPEC production this month, despite the cartel’s deal to curb output.

Brent crude futures were down 92 cents to $48.38/barrel at 12:16 p.m. EDT and US WTI futures traded at $45.99/barrel, down 93 cents.

Petro-Logistics tracks OPEC supply forecasts and says driven by higher output from Saudi Arabia, the United Arab Emirates and Nigeria, the group’s oil production will rise by 145,000 barrels per day (b/d) In July.  Should the forecast be correct, OPEC’s July production would be over 33 million b/d.

Next week, an OPEC committee will meet in St. Petersburg to discuss further steps for continuing the production cuts.  The committee known as the JMMC is made up of OPEC and some non-OPEC producers and it can make recommendations on any adjustments to the OPEC supply cut deal that may be necessary.

“We have the OPEC meeting in Russia on Monday and that’s going to be top of mind,” Dan Katzenberg, Senior Exploration and Production analyst at Baird and Company told Reuters.

But, there is rising skepticism that the group will address increased production from pact-exempt Nigeria and Libya.

“There’s no expectation…that there’s going to be anything of substance in that meeting,” said Katzenberg, “It’s highly unlikely steepen the cuts.”

“Libya and Nigeria won’t be too enthusiastic to cap their production,” Frank Schallenberger, head of commodity research at LBBW told Reuters.

Big Oil had hoped for $60/barrel oil

As oil prices stumble under the $50 mark, the world’s top oil and gas companies are looking to double down on cost cutting.

Investors are now concerned about the ability of Big Oil firms, including Exxon Mobil, Royal Dutch Shell and Total, to live within their means as oil prices sit well below the $60/barrel companies had hoped for.

In recent years, oil companies have cut thousands of jobs, abandoned projects, sold assets and squeezed service companies.

Their efforts have paid off, according to analysts’ estimates compiled by Reuters, with net income for Exxon, Chevron, Shell, BP, Total, Eni and Statoil set to double on average in the second quarter from one year ago.

But it may not be enough, according to Jason Kenney, head of pan-European oil and gas equity research at Banco Santander.  “Given where oil prices are, 2017 is still a year of transition for these companies, and that is not necessarily supportive for investment.”

Kenney told Reuters that with Big Oil targeting break even at $55/barrel, companies need to continue reducing costs. To do so, they will likely delay investments, simplify offshore and other project designs and sell assets.

Exxon and Chevron have opted to invest in the US shale play, looking to profit from relatively low development costs and the relatively quick time it takes to extract crude.

Shell, BP and Total have chosen to cutting costs at their large, deepwater oil and gas projects in an effort to compete with lower-cost shale.

“The fundamental environment is looking quite good because this is an environment where (companies) can cut costs and reduce headcount and they don’t have to develop anything,” Jonathan Waghorn, co-manager of the energy fund at Guinness Asset Management told Reuters. “They are off life support at $55 a barrel.”

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