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Here’s Why The USO Dropped 2.3% This Week

Saturday, January 14, 2017 7:09
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From Evan Kelly: Oil prices are set to close out the week slightly down. Speculators have taken a breather on bullish bets, which is taking the momentum out of the rally. Meanwhile, U.S. oil data is also putting downward pressure on crude (see below).

OPEC admits compliance with cuts won’t be 100%. “Compliance won’t be 100 percent, it never is,” an OPEC source told Reuters. The source went on to add that a compliance rate of 50 to 60 percent would be good enough to do the job, and as high as 80 percent would be a very positive result. The comments come after Saudi Arabia and Kuwait announced this week that they have cut more than they had promised to, reductions that will help make up for some non-compliance elsewhere. Saudi output is down below 10 million barrels per day and Saudi officials said it could fall further in February.

U.S. oil data bearish. OPEC is doing its best to tighten the market but the U.S. is not cooperating. Crude stockpiles in the U.S. rose last week by 4.1 million barrels, leaving inventories stubbornly high. Gasoline stocks also saw a strong jump. And there are early signs of an uptick in production. EIA weekly data showed an increase in output by about 176,000 bpd last week, a shocking increase in production. It should be noted that weekly data is not as accurate as the monthly data that EIA publishes on a lag. However, the data suggests that production could be on the rise in the U.S., offsetting some of the cuts from OPEC.

Pipeline bottleneck in U.S. Northeast aiding revival of Haynesville Shale. A dearth of pipeline capacity in the U.S. northeast is leading to a shortage of supply, which is allowing the Haynesville Shale to receive more drilling activity, according to S&P Global Platts. That is because the pipeline bottleneck is forcing gas from the prolific Marcellus Shale to trade at a discount to gas in the U.S. South. As such, drillers are moving rigs to the Haynesville to take advantage.

Trans Mountain Expansion receives green light from BC. A major pipeline that could connect Alberta oil sands to the international market received an approval from British Columbia, one of its last major hurdles before construction can begin. Kinder Morgan’s Trans Mountain Pipeline Expansion will nearly triple the existing line’s capacity from 300,000 to 890,000 bpd when completed. The twin line was viewed as a less controversial pipeline since it will be built alongside the existing pipeline that runs from Alberta to the Pacific Coast. The Canadian government had already given the go-ahead for the pipeline but it still needed to obtain provincial approvals. Nevertheless, environmental and First Nations groups have promised to protest the pipeline.Related: Blockbuster Oil Deal In Argentina Could Trigger Drilling Boom

Industry to approve new large oil projects, discoveries to follow. Wood Mackenzie issued some interesting projections for 2017, expecting the global oil industry to more than double the final investment decisions on large oil projects of at least 50 million barrels of oil reserves. They also expect new oil discoveries to bounce off of the seven-decade lows exhibited in 2016. Overall, 2017 will see more spending, more drilling and more discoveries.

Smog has delayed cargos in China. Horrific smog in China has stalled tanker traffic. Poor visibility has halted unloadings of iron ore and coal in several Chinese ports, leading to a traffic jam of ships sitting off the coast. Some materials are running low just as winter demand hits a peak.

China’s 2016 oil imports strongest in six years. China’s import demand for oil rose by nearly 14 percent last year, the strongest annual gain since 2010. Some of those additional imports were diverted into storage, so the strong growth in import demand may not continue.

Anadarko to sell $2.3 billion in Texas oil assets. Anadarko Petroleum (NYSE: APC) agreed to sell oil and gas assets in the Eagle Ford in South Texas to Sanchez Energy (NYSE: SN) and private equity giant Blackstone Group (NYSE: BX) for $2.3 billion.Related: How Tillerson Could Jeopardize Geopolitics In Iraq

Hess announces charge and will increase spending. Hess (NYSE: HES) made some news this week, announcing an increase in capex spending this year, but less than what the markets expected. Also, production could disappoint in 2017. Hess’ stock fell by 8 percent on Thursday. At the same time, Hess, along with operator ExxonMobil (NYSE: XOM) made another discovery in Guyana, an offshore oil play that will receive a lot of attention from the companies this year.

Small modular reactors inch forward. Oregon-based NuScale Power LLC submitted documents to the Nuclear Regulatory Commission, looking for the nuclear watchdog to certify its small modular reactor (SMR) design. Typical nuclear reactors have a capacity of as much as 1,000 megawatts; the NuScale design would only have a 50 MW capacity. The SMR concept is been heralded as a cheaper and faster way to build nuclear power. Still, any certification of the design would be years away.

Trump nomination hearings begin. There was no shortage of political news coming out of Washington this week. Energy was certainly not the focus, but there will be a lot of moving parts on the policy front in the next few weeks as the Trump administration takes over. Former ExxonMobil CEO Rex Tillerson had his nomination hearing on Wednesday, in which he impressed many, but not all U.S. Senators, with his fluency on global affairs. He still could run into some obstacles with a few Russia hawks in the Senate, however. Next week, nomination hearings continue, with Rep. Ryan Zinke’s (R-MT) nomination hearing for the Department of Interior scheduled for Tuesday, and EPA nominee Scott Pruitt scheduled to appear on Wednesday. Former Texas Governor Rick Perry will testify on Thursday. All have strong ties to the oil and gas industry, having accepted large donations from drillers.

The United States Oil Fund LP ETF (NYSE:USO) closed at $11.41 on Friday, down $-0.13 (-1.13%). Year-to-date, USO has declined -2.65%, versus a 1.57% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #40 of 123 ETFs in the Commodity ETFs category.

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