Crude's landslide

March 9, 2017 08:28 AM
Daily Energy Market Analysis

They took the oil and took it down, a stunning build and it turn straight down! When you count the barrels and the oil drilled, a landside brought it down!

A massive crude oil build rocked the oil market in what could be a major downside breakdown that is raising the stakes for OPEC and U.S. shale producers. Will it be cut back or face prices falling even further? Call it a landside if you will, as record long positions in oil ran for their lives and analysts like me are scratching their head to try to figure out how they did not see this historic and record breaking increase in weekly crude oil supply. 

No one expected the massive 11.6-million-barrel increase in crude supply that we saw in the American Petroleum Institute (API) report and crashed when the Energy Information Admintation reported a smaller but still gigantic 8.2-million-barrel increase in weekly supply. In some ways in does not even make sense but strong imports and rising shale oil production finally raised production to year ago levels.

Now with oil below $50 per barrel, the shale resurgence once again is at risk. If oil prices look like they cannot maintain a barrel then we should see rig counts to start to fall and that means that production might peak unless OPEC and non-OPEC shock and awe this market with another production cut. KLR Group put out a report that the U.S. breakeven point for U.S. shale on average is $50 a barrel. For natural gas that number is $335! Numbers that we are now below in both markets. We already are seeing reduced production for natural gas and unless oil rebounds soon, then oil output once again will contract like we did one year ago, when the oil price collapsed.

Part of the big oil build was due to a big jump in crude oil imports that rose by 561,000 barrels a day suggesting that we are still seeing the offloading of pre-OPEC cut oil tankers that were filled before cuts went into effect. We also know that the Department of Energy sold 16 million barrels of oil from the Strategic Petroleum Reserve last month and yet we only saw SPR supply drop modestly by 300,000 barrels. It still is not clear whether some of those crude sales are showing up in commercial inventory but they should not be unless we see a corresponding drop in SPR supply. That means we might have to add another 15 million barrels to the commercial inventory levels in the coming weeks. Yet, the build still seems to not make sense. 

Compliance from OPEC has been amazing and while shale output has risen fast, it only is back to where production was a year ago. Yes, U.S. supply is at a record high but still only 1.5% above one year ago levels. A year ago, we could not export crude. This drop in price puts the shale resurgence again at risk. If oil prices look like they cannot maintain $50.00 a barrel, rig counts will start to fall and production will peak.

Really, it looks like major technical damage was done as oil fell below the major and psychological $50 a barrel floor and unless we see a big turnaround that negates that breakout, it is going to have a hard time rallying. This, of course, is hard for me to say because over the longer term I still expect to see this market dramatically higher and believe that perhaps this build may be a one off. The problem is that really this is a two off. In fact, it was one month ago yesterday that the market got hit on a big increase in supply only to rebound and start making new highs a few days later. The problem is this time, after an extended sideways period, a confirmation of a breakdown would suggest that this market will need some major news to get us back on that long term bullish track. The monthly charts still look bullish but it would still look friendly long term if we test $44.00 a barrel. The oil market might retrace like the charts look like because usually oil goes up into the summer driving season. 

The build in crude overshadow what was a big 6.6-million-barrel drop in gasoline supply and the RBOB futures held up well. Look to that market as the strongest of the complex as it may be need to bull oil back from the brink of total price collapses. Total commercial Inventories fell by 2,4 million barrels. Refinery runs also disappointed as they feel to 85.9% of capacity to 15.5 million barrels a day as refining maintenance is still in full swing. Still, oil needs to climb a mountain and turnaround or the landslide will bring them down,.

Natural gas is on tear. Gas put in a great performance yesterday but was held back by the oil slide. Today we expect supply will fall by 67bcfs and if oil stabilizes, we could have a strong up day.    

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.