Oil prices hit $50 a barrel on Thursday for the first time in seven months, then bounced below that level and settled lower on the day as investors worried robust price gains could encourage more output and add to the global glut.
Wildfires in Canada’s oil sands, unrest in the Nigerian and Libyan energy sectors, and a near economic meltdown in OPEC member Venezuela have knocked out nearly 4 million barrels per day in immediate production, sparking a buying frenzy in crude futures.
Brent and U.S. crude’s West Texas Intermediate (WTI) futures have risen nearly 90 percent from 12-year lows hit this winter. They have recouped about half of what they lost since mid-2014 when both traded at above $100 a barrel.
A climb above $50 per barrel could spur producers, particularly U.S. shale drillers, to revive scrapped operations, which could bloat supplies and trigger a new selloff, analysts said.
“We are viewing current risk/reward ratios as unfavorable toward new longs at current levels,” said Jim Ritterbusch of Chicago-based oil markets consultancy Ritterbusch & Associates, who cites a potential drop of Brent to $47.50.
Brent LCOc1 surged as high as $50.51, its highest since early November, then retreated and settled down 15 cents at $49.59 a barrel.
WTI CLc1 fell 8 cents to settle at $49.48, after reaching $50.21, its highest since early October.
U.S. crude for the balance of 2016 CLBALst remained above $50 while the calendar strip for 2017 CLYstc1 was above $51.
“I am maintaining my oil view at neutral with a short term bias to the upside,” said Dominick Chirichella, senior partner at the Energy Management Institute in New York. “The global surplus still exists and there is still a possibility that oil prices could retrace further.”
But he conceded that crude was trading “more and more in sync with the forward looking or perception view with the overall bearish fundamentals mostly priced into the market as production issues offset any short term negativity”.
Adding to outage concerns, a source at Chevron Corp (CVX.N) said the producer’s activities in Nigeria had been “grounded” by a militant attack, worsening a situation that had already restricted hundreds of thousands of barrels from reaching the market.
Investors will watch next month’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) for signs of an output hike.
“The bigger risk is that following the meeting, (the) Saudis will increase production to meet rising summer domestic demand, to preserve market share in its oil wars with Iran and Iraq,” David Hufton, head of PVM Oil brokers, said. Source.
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Headline crude prices for the week beginning 11 March 2019 – Brent: US$66/b; WTI: US$56/b
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In 2017, Norway’s Government Pension Fund Global – also known as the Oil Fund – proposed a complete divestment of oil and gas shares from its massive portfolio. Last week, the Norwegian government partially approved that request, allowing the Fund to exclude 134 upstream companies from the wealth fund. Players like Anadarko Petroleum, Chesapeake Energy, CNOOC, Premier Oil, Soco International and Tullow Oil will now no longer receive any investment from the Fund. That might seem like an inconsequential move, but it isn’t. With over US$1 trillion in assets – the Fund is the largest sovereign wealth fund in the world – it is a major market-shifting move.
Estimates suggest that the government directive will require the Oil Fund to sell some US$7.5 billion in stocks over an undefined period. Shares in the affected companies plunged after the announcement. The reaction is understandable. The Oil Fund holds over 1.3% of all global stocks and shares, including 2.3% of all European stocks. It holds stakes as large as of 2.4% of Royal Dutch Shell and 2.3% of BP, and has long been seen as a major investor and stabilising force in the energy sector.
It is this impression that the Fund is trying to change. Established in 1990 to invest surplus revenues of the booming Norwegian petroleum sector, prudent management has seen its value grow to some US$200,000 per Norwegian citizen today. Its value exceeds all other sovereign wealth funds, including those of China and Singapore. Energy shares – specifically oil and gas firms – have long been a major target for investment due to high returns and bumper dividends. But in 2017, the Fund recommended phasing out oil exploration from its ‘investment universe’. At the time, this was interpreted as yielding to pressure from environmental lobbies, but the Fund has made it clear that the move is for economic reasons.
Put simply, the Fund wants to move away from ‘putting all its eggs in one basket’. Income from Norway’s vast upstream industry – it is the largest producing country in Western Europe – funds the country’s welfare state and pays into the Fund. It has ethical standards – avoiding, for example, investment in tobacco firms – but has concluded that devoting a significant amount of its assets to oil and gas savings presents a double risk. During the good times, when crude prices are high and energy stocks booming, it is a boon. But during a downturn or a crash, it is a major risk. With typical Scandinavian restraint and prudence, the Fund has decided that it is best to minimise that risk by pouring its money into areas that run counter-cyclical to the energy industry.
However, the retreat is just partial. Exempt from the divestment will be oil and gas firms with significant renewable energy divisions – which include supermajors like Shell, BP and Total. This is touted as allowing the Fund to ride the crest of the renewable energy wave, but also manages to neatly fit into the image that Norway wants to project: balancing a major industry with being a responsible environmental steward. It’s the same reason why Equinor – in which the Fund holds a 67% stake – changed its name from Statoil, to project a broader spectrum of business away from oil into emerging energies like wind and solar. Because, as the Fund’s objective states, one day the oil will run out. But its value will carry on for future generations.
The Norway Oil Fund in a Nutshell