Committed to crude

April 3, 2017 08:00 AM
Daily Energy Market Analysis

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OPEC is committed to extending production cuts as the global crude oil market continues to see inventories fall. While the U.S. oil rig count rose, it plummeted in Canada offsetting the gains. This comes after Morgan Stanley reports that crude stockpiles are, "less visible, as supply in Asia and in floating storage have fallen by 72 million barrels this year."

The bears are going to have to face reality as the global market moves from oversupply to deficient. You can’t wait for the OPEC accord to fall apart because it is not going to happen. The lack of major investment in production will start to show up and the oil cycle will go on like it always has. Even as talk about a resumption of Libya oil exports make the rounds the reality is that Libya will not be a  reliable supplier anytime soon.  

Reuters is reporting Libya's Sharara oil field resumed production on Sunday after a week-long shutdown when a pipeline linking it to an export terminal was blocked, a Libyan oil source told Reuters. Crude from the field is due to reach the Zawiya terminal later tonight the source said, declining to be identified because he was not authorized to speak to the media. NOC declared force majeure on exports of Sharara crude on March 28, a day after the shutdown of the field. The force majeure remains in place for now, the source said but added it could be lifted as early as Monday morning.

The source said the state-owned National Oil Corp's Chairman Mustafa Sanalla was able to convince the group which blocked the pipeline from the field to the Zawiya terminal of the importance of resuming oil flows unconditionally.

The field was producing around 220,000 bpd before the shutdown.

OPEC cuts are mounting, taking its toll on global supply. While the market is fixated on U.S. supply and U.S. rig counts, the oil world outside of the U.S. is tightening. Oil rig counts around the globe are falling. The Canadian oil rig count fell by 30 last week and by 21 the week before. The U.S. is about the only place where oil rigs are being added and globally we are down 77 rigs and that's where we were a year ago.

RBOB futures are rising as the summer blends will soon be taking hold. Gas demand is surging and the refiners are working furiously to keep up with demand. Refiners should start refining record amounts of crude oil in the coming weeks and that should start to reduce U.S. oil supply. U.S. pool and product exports will rise as well. We could see U.S. oil inventories start to fall sharply in coming weeks.

Distillate demand should start to rise as farmers get ready to plant what is supposed to be the most acres of soybeans ever planted. Market Watch reports that soybean planted area for 2017 is estimated at a record high of 89.5 million acres. If realized, that would be an increase of 7% from last year’s record 83.4 million acres, according to the USDA’s Prospective Plantings report. Corn is still king, but just barely. Farmers intend to plant 90 million acres in 2017, USDA said, down 4% from last year. Farmers intend to plant 46.1 million acres to wheat in 2017, down 8% from the realized total in 2016. Of that, 32.7 million acres are expected to be planted to winter wheat, down 3% from 2016.

Analysts had widely expected a shift toward soybean acres given expectations the crop would be relatively more profitable than corn in the coming year. The number of acres that can be shifted between the crops can be constrained, however, by crop-rotation practices and other factors.

Natural gas is strong again as the structural problems in this market are becoming more apparent. With production falling below 70bcf a day, the market realizes that prices must stay strong if demand is going to be met this summer. 

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.