Slump and Dump. The Energy Report 06/16/17

The oil market had another week of slump and dump as the main event seemed to be the International Energy Agency (IEA) report about increasing shale output and slack demand for gasoline in the U.S. that suggests the supply glut may last longer than previous thought. For natural gas though we may have hit a bottom after a bullish storage report from the Energy Information Administration (EIA) and forecasts for hot weather and potential tropical storm activity brewing in the Atlantic Ocean.

Crude oil could not catch a bid as the market is believing more and more that OPEC production cuts may not be enough. Since OPEC announced the expected extension of cuts, the market has gone straight down. This week the IEA piled on by saying that the global oil glut will not subside in 2017 and that OPEC efforts to get supply under control is taking longer than expected. This while we see increased production by the U.S. shale producers as well as by OPEC countries that are not bound by the agreement such as Libya, who announced that its production will reach 900,000 barrels a day within days and Nigeria. To add even more bearish news, there are reports now that even the Canadian oil sand producers that were so beaten down may make a comeback this year giving the U.S. a run for its money on supply growth.

While that is all well and good the reality is that if oil prices fall much further, it is not going to happen. Despite the amazing advances made by U.S. shale producers and apparently Canadian oil sands producers, most can’t operate below $44.00 a barrel. If we get into a sustained sell off we will see what we saw a couple of years ago as producers start to make large cut backs. As the hedges that kept the shale producers operating in recent months diminish, the banks may force them to either shut down or put hedges in at higher prices. In other words, prices must hold or get ready for another sector crash.

Yet despite the failure of oil to get a bid I still believe that the market will tighten. Shale oil wells are being drilled but not completed and with the recent price drop, drilling activity may slow. That means that the IEA will have to lower their projection for shale and even Canada oil sands output. Still that did not help prices yesterday as oil saw its lowest close in seven months and failed to get the market adjusting to a lower for longer attitude and producers believe it may impact spending.

Weak U.S. gasoline demand is another reason the trade is skeptical. The IEA predicted that U.S. crude supply will increase by 430,000 barrels a day this year, and will grow by 780,000 barrels a day in 2018 and that prediction is still weighing heavily. Technically the market is poised for a recovery. Now that oil is trading the September contract, there may be a new attitude. We are going to listen for more OPEC comments as the cartel may try to talk about another production cut.

Natural gas futures got fired up after the EIA reported a 78bcf injection, almost 10 bcf below the consensus. The weather forecasts are looking hotter so the electricity power burn will be on the rise. On top of that there is a possibility of some tropical storms developing with one weather forecaster, Dave Tolleris of WXRISK, saying a storm could be in the Gulf of Mexico next week. He is not looking at a major a hurricane but a tropical storm. Natural gas storage is now at 2,709 bcf or just 66 bcf above the five-year average of 2,443 bcf.

The NHC for the North Atlantic is reporting…Caribbean Sea and the Gulf of Mexico: 1. Cloudiness and showers associated with a tropical wave located several hundred miles southwest of the Cabo Verde Islands are showing some signs of organization. However, development, if any, of this system should be slow to occur during the next few days while the wave moves westward near 20 mph over the tropical Atlantic. Formation chance through 48 hours…low…10 percent. * Formation chance through 5 days…low…20 percent. . A broad area of low pressure is expected to form over the northwestern Caribbean Sea and the Yucatan peninsula this weekend. Conditions appear to be favorable for gradual development of this system while it moves slowly northwestward toward the southern Gulf of Mexico early next week.  Formation chance through 48 hours…low…near 0 percent.  Formation chance through 5 days…medium…50 percent.

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Phil Flynn


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