Crude builds as dollar drops

October 26, 2016 07:58 AM
Daily Energy Market Analysis

Crude oil prices are getting hit as the dollar comes off a nine-month high and a surprise crude oil supply build as reported by the American Petroleum Institute (API). There were also some unsubstantiated reports that Russia did not want to cut oil production but the source was not reliable. Still, as the supplies increased and stocks fell, oil is in a weak position to start the day.

The API reported a whopping 4.75-million-barrel build while Street Account Consensus was looking for only a 780,000-barrel build. This came even as the API reported a 2.2million barrel drop in Cushing, Okla., that should continue to tighten in coming weeks as pipeline issues will reduce the flows into the Nymex oil delivery point. The combination of the headline build as well as the strong dollar has speculators, that came into the week with the highest net long position since May, going to the exits as they await today's Energy Information Administration (EIA) supply report.

The API also showed that gasoline inventories rose by 1.75 million barrels as opposed to a 1.1 million barrel draw expected. Distillate inventories fell by 940,000 barrels as opposed to expectations of a 2.18-million-barrel drawdown. Because the products came in on the bearish side of expectations, the 4.75 million barrel reported increase looks bigger even with the 2.2-million-barrel drawdown in Oklahoma. The EIA must contradict these numbers to the bullish side to give the market a bounce unless the dollar retreats and the stock mart stabilizes.

With all the talk of shale oil production making a comeback, it is struggling to increase output even with the addition of more oil rigs, unlike what we have seen in previous years. Shale output has fallen 6 months in a row. The real reason U.S. production is holding is the payoff from long term offshore production that was invested in a long time ago and is starting to pay off. The Energy Information Administration reported, “Global offshore oil production in 2015 was at the highest level since 2010, and accounted for nearly 30% of total global crude oil production. Offshore oil production increased in both 2014 and 2015, reversing consecutive annual declines from 2010 to 2013. Production from onshore tight oil plays has increased faster over the past several years and accounts for an increasing amount of total oil production.”

This comes as major oil companies cut back. The Wall Street Journal reported, “World-wide, oil-exploration spending last year was the lowest since 2007. There’s been less conventional oil and gas (as opposed to resources contained in shale or oil sands) discovered in the past 2-½ years than in 2012 alone," according to Edinburgh-based consultancy Wood Mackenzie. So in the short term, while prices are looking weak, the signs of long term global balancing continues. And oil companies will likely show continued pressure on exploration budgets when they report their third-quarter earnings over the coming week, say analysts.”

Natural gas got slammed on weather. So, is the long term bull over? EBW AnalyticsGroup in Andy Weismann’s Energy Market Outlook points out that the November natural gas contract sank 21.9¢ this week, adding on to last week’s 29¢ decline. This 51.9¢ drop in two weeks reduced the November contract to its lowest point since early June.

Bearish shifts in forecasts by prominent weather vendors, both for next week and for the entire month of November, precipitated the recent decline. He said that further downward pressure was added by quarterly earnings calls by natural gas producers indicating the potential for robust production growth at low prices, and the likelihood that the year-over-year storage surplus may grow following the EIA’s Weekly Storage Report for the first time since March. But he says that key determinant for natural gas prices remains. If and when weather patterns flip colder. If a cold back half of winter materializes, Nymex natural gas futures could gain 15-20% from current levels, even if they decline further near term.” We agree with that assessment so try to use the current market weakness to but on long term bullish natural gas strategies.

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.