Crude: Finding a bid

January 11, 2017 08:44 AM
Daily Energy Markets Report

Crude oil prices are trying to find a bid after a strong dollar and some commodity index fund rebalancing pressured oil prices. Oil traders are still showing skepticism over production cuts even as all countries involved in the process continue to insist that they are all complying with cuts.

Iraq said that it has reduced its oil production by 160,000 barrels a day and will comply with cuts it agreed to make under an OPEC output deal according to oil minister Jabbar Al-Luaibi  as reported by Bloomberg.It was also reported that OPEC and its partners will fulfill their implementation of a deal to cut output, having already announced 60% to 70% of the promised cuts. Countries including Saudi Arabia, the United Arab Emirates, Russia, Kuwait, Qatar and Iraq have announced cutbacks that account for the bulk of the deal reached last year, Kuwaiti oil minister Essam Al-Marzouk said Monday. Full implementation won’t be immediate, but rather a “process” carried out in the coming six months, according to the minister, who is chairing the committee to oversee compliance with the accord. He said, “We are very confident that the remaining countries will abide by the cuts.” 

Yet, the trade is still worried after seeing some technical weakness on the chart as the market may want to test the theory that $50.00 per barrel is a new floor for the market yet a supportive American Petroleum Institute (API) supply report may stop that test. The API reported that crude supply increased by 1.5 million barrels, only partly recovering the 7-million-barrel drop reported last week. We also saw supply in Cushing, Okla., fall by 187,00 barrels, which tilted the report to the bullish side. Even a 5.48-million-barrel increase in distillates did not shake the market too much because it is assumed that bad weather in Texas has slowed exports and that we should see that number fall hard in the coming weeks. As for gasoline, the API was in line, up 1.67 million barrels. If the Energy Information Administration confirms, we should get a bid.

In the meantime, the Energy Information Administration released its Short-Term Energy Outlook! Some Highlights! Crude Oil: “The general decline in U.S. crude oil production that began almost two years ago is likely over, as higher average oil prices and improvements in drilling efficiency are giving a boost to output... Final data are expected to show that U.S. oil production increased during the last three months of 2016, the first quarterly output increase since early 2015.” 

So, the EIA is saying that U.S. output will rise but so far a lot of what I have been seeing is in Alaska.

The report goes on: Gasoline/Refined Products: “Despite higher pump prices, U.S. gasoline consumption is expected to reach a record high in 2017 because of a strong economy and higher employment... Ethane is expected to account for almost half of U.S. liquid fuel consumption growth in 2018, as several petrochemical plants come online that use ethane as a feedstock in the manufacturing process.”

Natural Gas: “U.S. natural gas production is expected to rise in each of the next two years, reversing the first decline in annual output in more than a decade that occurred during 2016... U.S. natural gas exports are expected to continue growing over the next two years as several liquefied natural gas export terminals come online.”

Electricity: “The average U.S. household will use 3% more electricity between December and March compared to the same period last year because of forecast colder temperatures than last winter.”  

On the demand side things are looking bright. Not only are we on track for record gas demand in the United States, we saw the World Bank raise the growth forecast and strong demand in India. Bloomberg reported that India’s oil consumption rose 11% to a all-time record high last. The world’s second most populous nation consumed 196.5 million tons of oil products in 2016, up from 177.5 million tons in 2015, according to the Oil Ministry’s Petroleum Planning and Analysis Cell. Gasoline demand increased 12% in the year to 23.7 million tons and diesel consumption grew 5.6% 76.7 million tons. The EIA says that, “China’s oil production will continue to decline this year and during 2018 because of cuts in investment by oil companies.”

So, that means that China’s oil imports should stay strong. 

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.