Closing the deal

March 24, 2017 08:01 AM

Crude oil prices sold off after the Trump Admintation did not close the deal on the American Healthcare Act and delayed the vote until today. Oil today is bouncing back on growing expectations that OPEC will lay the groundwork for an extension of production cuts this Sunday at its technical meeting in Kuwait. 

OPEC has ridden the wild waves of oil prices as it started a price war flooded the world with oil and now want to reverse the process. Despite rising shale output and rising US oil inventories Saudi Arabia said its crude exports to the United States would fall by around 300,000 barrels per day (bpd) between February and March. That drop in supply from the Saudis would basically wipe out all the gains made from shale oil production increases. Yet to have real success in reducing global supply an extension of cuts are needed and OPEC must close the deal.

The shale revival is not without its problems. We are hearing that big money interests are looking to buy shale lots but word is the path are getting harder to find.  The Wall Street Journal is reporting that the cost of sand that is needed in fracking is skyrocketing. You also must deal with the fast decline rate of wells. You must keep drilling to keep production rising and any sharp price breaks could cause a production to pull back. Big oil is looking at shale as a quick profit turnaround but want an investment they can turn off quickly if prices fall. That also means that oil workers can be laid off as quickly as they are hired, raising concerns about the availability of human capital.

The Wall Street Journal, in a must-read, says that, “The market for sand—a key ingredient in fracking—is surging once again as U.S. oil production rebounds, and the rising price of the tiny grains threatens to cut into energy companies’ profits. Now that crude oil is selling for just less than $50 a barrel, American shale companies have rushed back into the oil patch, and they are using more sand to help supersize their wells. Sand props open underground fissures, which allows oil and gas to escape to the surface.” 

The tightening market has already sent prices marching toward $40 a ton or more, by some estimates, up from $15 to $20 a ton in the second half of 2016. Increasing sand orders are also raising demand for railcars and trucks to transport it from mines in states like Wisconsin to shale fields in Texas and Oklahoma. Some predict that demand for sand may outstrip supply by next year, creating a shortage that could linger for most of 2018. Tudor, Pickering, Holt & Co. estimates the sector will need 120 million tons of sand by next year, more than double the demand in 2014 at the height of the U.S. drilling boom.” Read it he Journal!

The Boom and bust in oil is making it hard for some shale player to find workers. Sources I talk to in the industry say laid off workers are reluctant to come back for fear they will be laid off during the next bust. It may cost companies more and more money even if they can find skilled workers. 

The Keystone Pipeline will be approved today but the real deal for the Market is the Healthcare Act. Trump said he is ready to hold the vote, let the chips fall where they may and move on. The question is will the markets let him. Obama care is going to collapse and has the risk to bring down the economy with it. It needs to be fixed but the problem is that when the government took it over they screwed it up so bad it is very difficult to fix.

The natural gas market is still getting support from yesterday’s EIA gas reported that supply fell 150 bcf from a year ago and that leaves supply 16% below last year’s levels. That is a bit disturbing because the month of February was the worst when it came to heating degree days. Nat gas traders are wondering just how far below year ago levels we might have been if we had a winter.

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.