Weighing the risks

May 13, 2016 08:29 AM
Daily Energy Market Analysis

Crude oil prices are having a hard time trying to decide whether they should be focused on risks to supply or risks to demand. 

Early on Friday it appears that the risk to demand fears are outweighing risks to supply fears as the dollar rallies and economic concerns weigh. Concerns are rising that the vote for the UK to leave the Euro zone are weighing on market sentiment as well as weak data in Hong Kong. Hong Kong's economy contracted in the latest quarter seasonally adjusted 0.4 percent. That weakness worried oil traders as they are trying to get a handle on whether the recent strength in oil demand can continue.

We also saw a down beat prediction by Russian Energy Minister Alexander Novak. He said that global oil surplus he believes is at 1.5 million barrel per day the market might not get into balance by the first half of 2017. Novak’s take on the size of the global surplus is way above what most others are estimating and his timing on the proverbial market balance is a lot further out than all of major oil industry agencies. The market is a little worried if he is right and everyone else is wrong.  Of course, he may be talking down the market in the hopes that there can be a renewed push towards production freeze talks. 

Yesterday, crude oil got a boost on some renewed hopes for a production freeze. After falling early in the Thursday U.S. session on private forecaster Genscape's prediction that supply in Cushing, Okla., would rise again despite the Canadian wild fires, we bounced back after comments from the Deputy Iraqi Oil Minister said he sees some hope for renewed talks about an OPEC production freeze at the June OPEC meeting. He also had a bullish price forecast predicting that oil prices would be at $76 in 2017 and that the markets should rebalance in the second half of the year or early next year.

On the supply side risks abound. While it is possible that Canadian Oil Sands production may start to comeback, Nigerian oil production is in a flux with production down to a 20-year low. Brazil's oil output will fall further as the state-run oil company Petróleo Brasileiro SA reported a first-quarter loss of 1.2 billion reais from a net profit of 5.3 billion reais in the same period a year earlier according to Dow Jones.

Shell cut oil production in the Gulf of Mexico after barrels of crude may have leaked into the Gulf of Mexico. The AP reported that about 88,200 gallons of oil have leaked from a Shell flow line into the Gulf of Mexico about 90 miles off the coast of Louisiana. Chief Petty Officer Bobby Nash said the leak has been secured and cleanup crews will be dispatched. The leak was reported Thursday. Shell spokeswoman Kimberly Windon, in a statement late Thursday, said a helicopter saw an oil sheen near the Glider subsea tieback system at Shell's Brutus platform shortly before 8 a.m.

"There are no drilling activities at Brutus, and this is not a well control incident," Windon said. Officials were investigating the cause of the leak, but Windon said the likely cause is a release of oil from the subsea infrastructure. Officials said the oil apparently leaked from a line connecting four wells in the Green Canyon area of the Gulf to the platform and has left a miles-long sheen.

The key today will be risk appetite and rig counts. Use market weakness to position for a long term move!!  The Rig count is again at the lowest level since Baker Hughes started counting rigs in 1949.The number of US oil rigs in use fell for the seventh week in a row by 4 328.This is the lowest oil rig total since October 2009. The record high for oil rigs in use topped out at 1,609 back in October 2014.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.