Power Up: Shale oil is a dagger aimed at the heart of oil prices

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Power Up is Stockhead’s fortnightly look at all the news and moves driving ASX energy stocks.

After a brief foray above the $US65 ($85.60) a barrel mark in March, oil prices have slid back down to hover around the $US60 a barrel level thanks to a resurgence in COVID-19 infections and more importantly, the realisation that shale oil places a hard cap on how high prices can go.

Oil prices were previously supported by expectations that an accelerated recovery from COVID-19 would occur with vaccines now available and OPEC+ discipline in maintaining oil supply cuts.

However, the surge in infections along with concerns about the safety of the AstraZeneca vaccine has put paid to the first while reports that fracture stimulation activity in North America has almost recovered to pre-pandemic levels has raised concerns that US shale oil production could offset any attempts by OPEC+ to moderate oil production.

Rystad Energy noted that the count of starting frac jobs reached a 12 month high in March with the number of wells completed in the Permian Basin during the first quarter exceeding the required output maintenance level.

The consultancy added that oil production is likely to rise in the current quarter before slowing again later in the year.

US shale oil appears unlikely to return to the days when the sector appeared to have an unending appetite for drilling and fraccing new wells with companies flagging that growing production for growth’s sake is a mistake and that they would return more cash to shareholders.

However, any significant increase in oil prices is likely to tempt producers to start increasing production, which could in turn result in prices dropping as supply outstrips demand.

$US60 a barrel appears to be a comfortable point for both OPEC+ and US shale oil producers and it’s not a stretch to say that it will stay at this level in the current economic environment.
 

Hedge funds exiting oil

With oil exposed to price pressures, hedge funds sold the equivalent of 35 million barrels (MMbbl) in the six most important petroleum futures and options contracts in the week to April 6.

Reuters reported that according to records published by ICE Futures Europe and the U.S. Commodity Futures Trading Commission, the combined position of hedge funds slashed from 913MMbbl on March 16 to 799MMbbl.

Despite this reduction, hedge funds are still bullish about the outlook for oil prices with long positions outnumbering bearish short ones by a ratio of 5.2:1.
 

Oil Search identity crisis

Meanwhile, oil and liquefied natural gas producer Oil Search (ASX:OSH) is facing pressure from institutional investors to change its name, which prominently features a fossil fuel, on concerns that it doesn’t reflect global climate change efforts.

Oil Search was one of the first ASX companies to align its reporting with the Taskforce on Climate Related Financial Disclosures and has committed to net zero emissions by 2050.

However, it is still very much focused on its LNG operations in Papua New Guinea and is currently developing an oil project in Alaska’s North Slope.

Other oil and gas majors have rebranded in the past include Norwegian state oil company Statoil, which became Equinor to mark its shift away from fossil fuels.
 

Here’s how a basket of ASX stocks with exposure to oil, gas, uranium and coal are performing>>>

Scroll or swipe to reveal table. Click headings to sort. Best viewed on a laptop:

Small cap energy plays

Lion Energy (ASX:LIO) +132%

Shares in the company surged after it reported a 203 per cent increase in proved and probable reserves for the Oseil oil field to 4.37MMbbl (Lion’s share 0.109MMbbl).

In addition, a volumetric assessment on the Lofin gas field has indicated best recoverable contingent resources at 1,450 billion cubic feet (Bcf), or about 36.3Bcf for Lion.

Oilex (ASX:OEX) +83%

With the receipt of all necessary approvals from the Indian Government, the sale of Oilex’s 40 per cent interest in the Bhandut production sharing contract (PSC) is now complete.

It will now receive $US0.29m in cash as proceeds for the sale of its stake in the PSC.

The buyer Kiri has expressed an interest in engaging the services of Oilex’s office on a contract basis to review field production, stabilise operations, and initiate field re-development of the Bhandut PSC.

Last week, the company noted that its SUS$2.2m purchase of GSPC’s 55 per cent participating interest in the Cambay PSC in India has been approved.

Po Valley Energy (ASX:PVE) +27%

Environmental approval has been received for the Selva Malvezzi and Teodorico natural gas field production concessions in Italy.

This paves the way for the grant of full production licences for both fields with the company to prepare and submit required documentation during the current quarter.

Selva Malvezzi will be developed through the installation of a fully automated gas plant at the existing Selva/Podere Maiar 1dir well site and a 1km pipeline to connect the well with the Italian gas grid.

The field is designed to produce up to 5.3 million standard cubic feet of gas per day.

Peninsula Energy (ASX:PEN) +4%

On the uranium front, Peninsula’s test modifications to the MU1A low-pH field demonstration at its flagship Lance project in Wyoming have delivered favourable results.

These results include improved response times, target pH levels close to being achieved and an increase in uranium within the recovery solution.

The company has now activated the pilot ion exchange uranium recovery circuit and will continue technical evaluations related to the potential for application of membrane separation systems to enhance resin performance, which could reduce downstream processing and operating costs.

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