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Eyes on Doha

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By Ed Crooks: April 15, 2016

All eyes in the oil market this weekend will be on Sunday’s meeting in Doha, which will bring together leading producers including Russia and most – although perhaps not all – of the members of Opec. Expectations that the countries will agree to freeze production, encouraged this week by statements from Russian and Iraqi representatives, have helped drive Brent crude prices up more than 60 per cent from about $27 per barrel in January to around $44 today.  The heads of some of the world’s largest trading houses have concluded that for oil producers, the worst is probably now over.

However, analysts and the International Energy Agency warned that no-one should expect too much from Doha. I wrote about reasons why oil producers can’t break out the champagne just yet. My FT colleague Nick Butler highlighted the potential for US shale companies to start increasing drilling activity and raising US oil production even with prices in the $40-$50 range. The oil market is oversupplied by about 1.5m barrels per day right now, and even though the IEA expects that oversupply to shrink  sharply in the second half of the year, if Mr Butler is right about US production potential the rebalancing of the market will be a slow process.

Reuters described one consequence of the glut: fully-laden tankers forming “huge queues” in some of the world’s busiest sea lanes. (They cheated by using a file picture from last July, though.)

Liam Denning at Bloomberg Gadfly pointed out that the flattening of the oil futures curve means that buying physical oil and storing it, while selling it in the forward market, is no longer as profitable a strategy as it was for much of last year.

Evidence of the financial strains created by low oil and gas prices keeps on coming. There has been some good news for the industry: high-yield energy bonds had their best month since at least 1996 in March. Chesapeake Energy , one of the most heavily indebted US exploration and production companies, managed to reset its bank borrowing facility at its existing level of $4bn.

However, at the same time banks have been steadily raising their provisions to cover for losses on energy lending loans, and the oil company bankruptcies are still coming. Energy XXI, an independent explorer operating in the Gulf of Mexico, this week filed for bankruptcy with $3.6bn of debt.

The Brookings Institution published research showing how the oil and gas price slump, and the sharp slowdown in drilling, was hitting state budgets in the US. Alaska is suffering worst of all.

John Kemp at Reuters highlighted another downside of cheap oil: it is holding back improvements in fuel efficiency.

Cheap oil and gas have also had beneficial consequences, of course, including the reduction in US carbon dioxide emissions from power generation through the shift towards burning gas and away from coal. Peabody Energy, the world’s largest private sector coal producer, has been a victim of that shift, as well as of its own ill-fated expansion in Australia. This week it made its long-expected filing for Chapter 11 bankruptcy protection.

In the New York Times, Gary Sernovitz cited those carbon dioxide reductions as reason number one why “I find liberalism and fracking to be completely compatible.” The piece is an interesting reflection on the way the energy debate in the US has become so strongly partisan. Be warned, though: he misquotes what the EPA actually said in its study last year of the consequences of fracking for water pollution.  With presumably fortuitous timing, a rebuttal to Mr Sernovitz’s  argument, compiling evidence of the alleged harm done by fracking, was published on Thursday by Environment America, a campaign group.

In other news: BP’s chief executive angered his shareholders by not sharing in the pain they have felt as a result of the oil crash.

Question: what’s worse than being exploited by a Western multinational corporation? Answer: being exploited by a company that isn’t a Western multinational.

Book of the Week: ‘The Oracle of Oil’, Mason Inman’s thoughtful and sympathetic biography of Marion King Hubbert, the prophet of Peak Oil. I’ll be reviewing it in the FT soon.

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