When $40 a barrel crude was a bold call

February 16, 2017 08:36 AM
Daily Energy Market Analysis

Sometimes I get pop-ups when I am mentioned in a news article on Google or Facebook. A radio interview that I did one year ago to the day today on the Wall Street Journal radio network was a reminder on how far oil prices and the economy has come in just one year. Even as we fret about a recent build in oil inventory perhaps weakening the price of oil a bit, one year ago many were predicting oil at $20 a barrel and some were saying as low as $10. Many believed we were entering an era of perpetually low prices.

Per the podcast, oil was trading around $30 at the time and we were talking about a breaking story of Saudi Arabia and Russia agreeing to a production freeze. Those first freeze talks were a thaw in Saudi/Russia relations that had become stressed over geopolitical issues. Those issues revolved mainly around Russia’s unwavering support for Saudi nemesis Iran that was in a proxy war with the kingdom as well as casing unrest with Saudi neighbor Bahrain. While many at the time dismissed the production freeze talks as nothing, I predicted that the talks would set the stage with a move to $40. I also said that the freeze talks were the first step to a production cut that eventually happened and is the reason that oil is now above $50 a barrel.

The famous failed talks in Doha led to a major sell-off, but I expected that at some point they would try to put the cut back together. The deal was eventually done only to have Saudi Prince Salman pull out at the last minute because the Iranian oil minister failed to show up at production cut talks. That move angered Russia and many of the OPEC delegation that thought the meeting in Doha was a colonial signing of an agreement as opposed to a negotiation. There was diplomatic damage and long-time oil minter Ali al-Naimi was fired and the new Saudi oil minister Khalid al Falih made it his mandate to do whatever it would take to get a deal done. The deal was done, setting the stage for what is a generational bottom in oil and the upside is just getting started over the next few years.

Of course, it’s hard to rally when you get another near record increase in weekly oil supply. The Energy Information Administration reported a massive 9.5 mb build even with exports of 881,000 barrels a day and oil production dropping by 100,000 barrels. Still, oil held tough! U.S. oil exports hit a record high top of 1.0 million barrels a day for the first time since the Energy Information Administration has been keeping records. U.S. oil exports are only going to increase and we will see a further drop in U.S. reliance on oil imports.

The market also knows that U.S. refineries are running at a low rate as we are in refinery maintenance season. Next month runs should ramp up and we should start to see our seasonal run up in price ahead of the summer driving season.

The crude oil market is also wondering why the Strategic Petroleum Reserve numbers remained unchanged even as the Department of Energy announced that it had already sold over 6.0 million barrels of oil to a private concern, and they announced another sale of 10 million more barrels of oil by the end of this month. We know there is mandatory reporting of inventory shifts by the oil companies but is the SPR on the same reporting schedule. At what point does the sold oil go into the commercial side of inventories? Do they report it as supply right away while the government lags? We have calls to the SPR and will report what we find out.

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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.