Connect with us

Markets

Oil at $40 No Problem as U.S. Drillers Snub OPEC With Hedges

Published

on

oil
  • Oil at $40 No Problem as U.S. Drillers Snub OPEC With Hedges

OPEC’s worst enemy isn’t U.S. shale drillers. It’s the hedges propping them up.

American oil explorers who survived the worst of the 2014-2016 market rout are shrugging off the 14 percent slide in prices this year from a high of $55.24 to less than $48 a barrel Tuesday. The price would have to drop to the $30s or lower to dent the bottom line of many drillers now working U.S. shale fields, said Katherine Richard, the CEO of Warwick Energy Investment Group, which own stakes in more than 5,000 oil and natural gas wells.

That’s because many producers have already locked in future returns with financial contracts that guarantee the price of their oil for most of the rest of the decade. Such resilience poses a dilemma for countries that agreed to an OPEC-led production cut aimed at tightening supplies to raise prices and relieve their distressed national economies.

“We’re in a boom again in Texas, despite what’s happening with prices lately,” said Michael Webber, deputy director of the University of Texas’ Energy Institute in Austin. “The cowboy spirit is back. Hedging is playing a big role.”

Oil prices took another hit on Tuesday after Saudi Arabia dropped a bombshell on the Organization of Petroleum Exporting Countries: the Saudis, heavyweight of the 13-nation cartel, raised its output last month to more than 10 million barrels a day, reversing about a third of the cuts it made the previous month.

Though Saudi Arabia is still meeting its commitment even with the increase, other members are lagging and the disclosure intensified concern that the group won’t be able to muster enough of the promised cuts to strengthen the market.

No Free Rides

Just last week, Saudi Energy Minister Khalid Al-Falih warned a Houston energy conference that the kingdom won’t indefinitely “bear the burden of free riders,” a veiled shot at Russia, Iraq and the United Arab Emirates, which have yet to deliver all the curbs they promised. At the same time, shale billionaire and Continental Resources Inc. founder Harold Hamm cautioned that unbridled drilling by shale explorers would crush prices and “kill” the oil market.

Prices are probably headed even lower in coming months, Warwick’s Richard said. Explorers that own drilling rights in the richest zones of the most profitable shale plays will continue making big returns, prompting them to boost output even more, while weaker companies on the fringes of the best zones will falter, she said.

Falling Prices

West Texas Intermediate, the benchmark for U.S. crude, settled at $47.72 Tuesday on the New York Mercantile Exchange after earlier falling to as low as $47.09 a barrel, the lowest level since late November. The futures lost 9.7 percent of their value in the past week alone.

Hedging is how oil companies shield themselves from a potential market collapse. Risk management teams buy and sell derivatives such as options contracts that set a floor and ceiling on the price a company will receive for its oil. The banks on the other side of the trade get a fee and may record additional gains if the market moves in their favor. If the price drops, the oil company is protected.

Pioneer Natural Resources Co., one of the most prolific drillers in the Permian Basin beneath Texas and New Mexico, had 85 percent of its projected 2017 crude output hedged as of last month. Another 10 percent of estimated 2018 production also was protected, according to the Irving, Texas-based company. Pioneer’s founder and Chairman Scott Sheffield predicted last week that crude will drop to $40 if OPEC and its allies don’t extend their output cuts beyond June.

Well-Hedged

Parsley Energy Inc., an Austin, Texas-based explorer created by Sheffield’s son, Bryan, as of last month had locked in prices for barrels that won’t be pumped until 2019. Other well-hedged oil producers include Hamm’s Continental, RSP Permian Inc. and Diamondback Energy Inc.

The number of rigs searching for crude in U.S. fields has nearly doubled to 617 since hitting a multi-year low in May. And while crude prices are up more than 80 percent since touching a 12-year low of $26.05 in February last year, prices haven’t topped $55 since the first week of January.

The growth in the rig count is expected to taper off if oil prices don’t climb above $55 a barrel around the end of this month, Andrew Cosgrove, an analyst at Bloomberg Intelligence, said in a phone interview. It would take oil dropping below $50 for a few months to bring about an actual reduction in the rig count, he said. In recent weeks, even prices above $45 were enough to encourage explorers to rent more rigs, he said.

Risk Minimized

No hint of a coming drop off in the rig count has been seen yet, thanks to explorers’ hedging underpinned by two years of cost-cutting. A lot of the risk has been carved out of spending budgets, especially for U.S. drillers, James West, an analyst at Evercore ISI, wrote March 13 in a note to investors. So a 10% slide in the oil price in March won’t have a commensurate impact on activity, he said.

Oilfield service companies benefiting from the increased work are focused on not losing their traction during the recovery, West said.

“The downturn has strengthened the resolve of service companies, and they are unfazed by modest, temporary moves in commodity prices,” West wrote. “Balance sheets and cost structures have been completely overhauled to profit in a low commodity price environment.”

Nabors Industries Ltd., the world’s largest land-rig contractor, surveyed its customers working onshore in the U.S. just after the start of the year. Nearly 60 percent plan to add rigs between now and June 30, and none indicated a cutback, the company said late last month.

Some of the newest, most technologically advanced rigs available for rent from Nabors are commanding more than $20,000 a day, up from about $17,000 last year. In fact, rental prices for its rigs are moving up so strongly that Nabors is “actively trying not to contract too far in advance” so it can take the fullest advantage of rising prices, Anthony Petrello, chief executive officer at Nabors Industries Ltd, told analysts and investors Feb. 23 on a conference call.

Break Even

In the best areas of the Eagle Ford of South Texas, oil prices would have to fall considerably for exploration and production companies to lose money on their drilling. In LaSalle County, explorers break even when oil is $36 a barrel or higher, and in nearby Gonzales County, the price is $39, according to William Foiles, an analyst at Bloomberg Intelligence.

“Unless we see a full-scale collapse in prices, I don’t think you’re going to see a lot of E&Ps totally abandon their production forecasts and their activity commitments,” Foiles said in a phone interview.

Is the CEO and Founder of Investors King Limited. He is a seasoned foreign exchange research analyst and a published author on Yahoo Finance, Business Insider, Nasdaq, Entrepreneur.com, Investorplace, and other prominent platforms. With over two decades of experience in global financial markets, Olukoya is well-recognized in the industry.

Continue Reading
Comments

Crude Oil

Brent Rises to $73 Per Barrel as Oil Producer Iran Plans Another Attack on Israel

Published

on

markets energies crude oil

The international crude benchmark, Brent Crude, rose to $73 per barrel as it rose 29 cents or 0.4 percent to settle at $73.10 a barrel on Friday on expectations that Iran will attack Israel from Iraq in the coming days.

The US West Texas Intermediate (WTI) crude gained 23 cents, or 0.3 percent to settle at $69.49.

The market has seized on the news from Thursday that Iran is preparing to attack Israel from Iraq within days.

However, market analysts point out that the impact on oil prices may be muted as the attacks signify a show of strength rather than action. This is why there wasn’t a much price boost.

Iran’s backed groups are currently fighting Israel, including Hezbollah in Lebanon, Hamas in Gaza and the Houthis in Yemen. So, this has seen the two countries engaged in a series of retaliatory strikes within the broader Middle East warfare set off by fighting in Gaza.

In a related development, the US asked Lebanon to declare a unilateral ceasefire with Israel to revive stalled talks to end hostilities between Israel and Hezbollah.

Another factor supporting prices is the Organisation of the Petroleum Exporting Countries (OPEC) and its allies, OPEC+ which could delay plans to increase supply in December.

The group has always maintained that its planning production cuts rollback would depend on market conditions.

The US, the world’s largest oil producer has been seeing an increase in its production with Exxon Mobil saying its global output hit an all-time high while Chevron also said its US production hit a record high.

This aligns with projections that annual output was on track to hit a record 13.2 million barrels per day in 2024 and 13.5 million barrels per day in 2025.

Last month, OPEC’s production increased by 370,000 barrels per day in October after Libya’s political resolution and its resultant 500,000 barrel-per-day output boost.

Libya’s output recovery led OPEC to raise its production to nearly 30 million barrels daily, even as Iraq, Iran, and Saudi Arabia lowered their output.

Continue Reading

Petrol

IPMAN Pushes Back on Dangote’s Call to End Petrol Imports, Cites High Costs at Refinery

Published

on

stakeholders

The Independent Petroleum Marketers Association of Nigeria (IPMAN) has addressed concerns about its members purchasing petrol outside the country.

Investors King reported that Aliko Dangote, the owner of Dangote Refinery, urged Nigerian oil marketers to stop importing petrol and instead lift supplies from his refinery.

Dangote mentioned that the refinery currently has over 500 million liters of petrol in storage and that marketers’ reluctance to lift his product is causing financial losses.

In an interview on Friday, IPMAN’s National Assistant Secretary, Yakubu Suleiman, stated that the association cannot compel its members to buy petrol from the Dangote Refinery due to the deregulated nature of the market.

According to Suleiman, IPMAN members cannot patronize Dangote if his petrol is more expensive than other suppliers. He explained that, for profitability, marketers must seek the most affordable fuel sources.

Suleiman also accused Dangote of trying to monopolize the oil market, noting, “Prices are determined by international pricing. Dangote should ideally be communicating daily about his pricing. But he can’t enforce that we buy only from his depot without stakeholder engagement.”

Suleiman added, “IPMAN cannot simply instruct our members to purchase solely from Dangote Refinery. We operate in a deregulated system. Marketers will source products where prices are cheaper and advise members accordingly.”

He explained, “If Dangote sells at N1000 per liter, and there are other sources selling at N900, we can’t direct marketers to choose Dangote simply because it’s his product. We prioritize lower prices and profit.”

Suleiman also noted that last week, Dangote’s price was higher than other sources, explaining, “For example, last week he offered N995 per liter, with additional costs to transport the product to depots. Independent marketers can’t sell at a profit under these conditions, so we must consider Nigerians’ interests.”

This comes after IPMAN President Abubakar Garima countered Dangote’s allegation that marketers were boycotting his refinery.

He pointed out that marketers cannot load petrol from Dangote’s refinery in Lagos despite having paid ₦40 billion to the Nigerian National Petroleum Company Limited (NNPCL).

Continue Reading

Crude Oil

Rivers State Governor Refutes Claims of NNPCL Shutdown, Labels Report as ‘Propaganda’

Published

on

The Governor of Rivers State, Siminalayi Fubara has denied shutting down the Nigerian National Petroleum Company Limited (NNPCL), and other oil companies in the state as retaliation to a Federal High Court’s ruling barring the release of allocations to the state as widely reported.

Shortly after the court’s ruling, a report claiming that Fubara had ordered the immediate closure of NNPC and other oil companies in the oil rich state emerged on social media.

The report alleged that the Rivers State Governor declared that if the government fails to reverse the court ruling, there will be no oil for the country from Rivers.

Reacting to the allegation via a statement signed by the Commissioner for Information and Communications, Warisenibo Joe Johnson, the Rivers government said the report is not only false but a concocted propaganda from the enemies of the state.

The government urged Rivers people to ignore the report, adding that Fubara is committed to the rule of law and does not rely on unconventional and crude approaches to respond to matters of governance.

The statement reads, “The attention of Rivers State Government has been drawn to a spurious news item circulating on social media on “Gov. Siminalayi Fubara shutting down NNPCL and all oil companies in Rivers State”.

“The report was not only false, but a concocted propaganda from the imagination of the author and enemies of the State. The story was also circulated by an inconsequential and unverified medium

“Governor Siminalayi Fubara is committed to the rule of law and does not rely on unconventional and crude approaches to respond to matters of governance.

“We therefore enjoin Rivers people and well-meaning Nigerians to discountenance the spurious and fake report as Governor Fubara at no time contemplated and/or directed such needless order of shutting down the economy for any reason.”

Investors King reported that a Federal High Court in Abuja on Wednesday, restrained the Central Bank of Nigeria (CBN) from releasing monthly allocations to the Rivers State Government.

The judge, Joyce Abdulmalik, in a judgement, held that the receipt and disbursement of monthly allocations since January 2024 by Governor Siminalayi Fubara of Rivers State is a constitutional somersault and aberration that must not be allowed to continue.

Abdulmalik submitted that the presentation of the 2024 budget by Fubara before a four-member Rivers State House of Assembly was an affront to the constitutional provision.

Continue Reading

Trending