Ring in the New Year oil bull market

January 3, 2017 08:44 AM
Daily Energy Markets Report

Crude oil prices are springing up into the New Year as signs that OPEC will comply with production cuts is giving the market a boost. This rise comes despite a dollar index that once again is challenging 13-year highs. We had another re-opening massacre for natural gas on a questionable change in the weather forecast that is raising suspicions that the weather models in some cases may be flawed. And drivers at the pump are paying their highest start to a year for gas price since 2014.

Oil prices hit another 18-month high as we capped off last year with our best gain since 2009. The rebound is oil would have been higher if it were not for the incredible strength of the U.S. dollar that is basking in a higher U.S. rate outlook and expectations that President-elect Trump is going to make the dollar great again. Oil is also coming to grips with the fact that the OPEC/non-OPEC agreement is for real and is continuing.

A Bloomberg report says that Kuwait and Oman both are cutting oil production. Kuwait reportedly cut output by 130,000 barrels a day to about 2.75 million a day and Oman is cutting 45,000 barrels a day from 1.01 million. These cuts by the smaller players puts pressure on Saudi Arabia and Russia to comply as well as it really was these two countries that really pushed to make this historic OPEC/non-OPEC accord a reality.

Saudi Arabia said it would cut its production in January by 486,000 barrels per day (bpd) to 10.058 million bpd. Russian oil production in December did not rise but stood at a record 11.21 million barrels per day (bpd), yet Russia is commited to cut production by 300,000 barrels a day over the next few months. While Russian oil production did not fall in December; the key is it stopped rising.

The start to the new year in oil is one where we should see a bull market more like the ones we used to know. With rising demand and less production we should see oil rally with less volatility and fewer sharp corrections. We should also have more spare production capacity around the globe that should reduce panic spikes due to weather and geopolitical events. Demand should also rise as the US leads the way on what could be a Trump economic boom. Oil prices should rise to $60.00 in the short term and we have a new longer term target of $73.00 a barrel.

U.S. refiners are exporting a lot of product, exporting close to 4 million barrels of oil products to Latin America. US oil exports are on the rise as well cementing the U.S. as a global energy hub. With cold weather on the way and rising export demand, both heating and gasoline future/ RBOB are poised to move higher.

AAA says that the New Year began with increased gas prices reaching today’s average of $2.34 per gallon. The national average has moved higher for 34 of the past 35 days, largely due to market reactions to last fall’s OPEC deal. Pump prices increased by five cents on the week, by 18 cents per gallon on the month, and are up by 34 cents on the year.

Don’t you love these changing weather models that seem to be colder on Friday and magically turn warmer into the new week only to turn colder as the week goes on. The GFS model has been all over the place and once again it is causing a major drop in natural gas prices on their consistently inaccurate long term forecast. Forgetting the weather, this market needs to focus on the fact that we have already wiped out our storage surplus of this year and withdrawals from storage continue to come in larger than expected and larger than year ago and larger than the 4-year average. Use the drop-in price to buy calls and establish long term bullish strategies.

With the New Year, we have a new bull cycle in energy that is well established. Wow, we predicted the bottom a year ago and while a market bottoming isn’t pretty and was met with some historic volatility, it only enhances what a generational bottom in this sector look like. Barring any major economic distress, this may be the best time to build on long term positions from this market that bottomed in 2016.  

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.