Crude inventories: Build me up

May 26, 2017 08:14 AM
Weekly Energy Markets Report


Why do you build us up with oil cuts baby, just to let us down and mess us around? And then worst of all, you don’t extend production cuts when you say you will, but supply will fall still. Shale needs you to keep on drilling, we have known that from the start. So cut back more and get non-OPEC to take part?

It is not nice to fool crude oil traders. OPEC and non-OPEC Russia paid the price for building up traders' expectations of a longer extension of OPEC production cuts or even a deeper cut only to come back with a priced in the nine-month extension of the current production cuts. As soon as the Saudi oil minister said that the safe bet was a ninth month extension of cuts, the market fell from a Bollinger Band high of $52.00 a barrel to a close of $48.90, down nearly 5% in a wild trading session.

OPEC’s sin was not an extension of cuts but its communication. The early announcement by Saudi Arabia that cuts would be extended by nine months was somewhat priced in and declarations by both the Saudis and the Russians that they would do whatever it takes to get the market in balance, made the decision just to extend a bit underwhelming.

Yet, is the market’s reaction fair? Despite the market mantra that the current cuts are not working, the evidence is quite the opposite. U.S. inventories have fallen for eight weeks in a row and we should see that trend continue and the number of draws get larger. The Saudis now are saying they will reduce crude shipments to the United States, which have fallen already by 1.0 million barrels a day from early March. U.S. refiners prefer heavy Saudi crude to shale oil as refiners are better equipped for heavy crude. The trend of falling U.S. crude supplies should accelerate because the increase in shale output will be offset from falling Saudi oil imports.

Reuters agrees, writing that between, “April and May, U.S. crude draws averaged 3.4 million barrels every week, on track for the first decline for that period since 2008. U.S. refiners are churning crude at near-record levels. Refinery utilization was at the highest level seasonally in two years last week even ahead of the U.S. Memorial Day holiday, the de facto start of peak gasoline demand. Saudi Arabia's oil minister said on Thursday that the seven weeks of U.S. stock draws, along with a drop in floating storage, is "excellent news," adding that exports to the United States were dropping measurably.” Reuters did warn that the primary offsetting factor is U.S. production, which sits now at 9.3 million barrels a day, 550,000 barrels higher than a year ago, according to EIA data.

Yet that may be not enough to offset OPEC cuts. We also are going to see peak shale oil production, or at least a plateau, in the United States. While U.S. shale has done a fantastic job in lowering costs, the trajectory of shale production will start to level off. The high decline rate of shale rigs and costs that are already starting to rise, may slow shale oil’s meteoric rise. I am not saying that shale is dead. It will grow, but not at the current rate. 

Anyway, the next OPEC meeting is Nov. 30, so we will have to stay tuned but by then there may be pressure on the cartel to raise production.

Natural gas fell after the Energy Information Administration, EIA, reported that working gas in storage was 2,444 bcf as of Friday, May 19, 2017, according to EIA estimates. This represents a net increase of 75 bcf from the previous week. Stocks were 371 bcf less than last year now and 241 bcf above the five-year average of 2,203 bcf. At 2,444 bcf, total working gas is within the five-year historical range. Still, production is just hanging above 70 bcf not enough to inspire confidence that we will be able to rebuild storage if we have a hot summer. Dry production fell to 70.9 from 71.0 last week and 71.8.

This comes as the National Oceanic and Atmospheric Administration is predicting an active 2017 hurricane season with as many as 5 to 7 hurricanes expected to form.

Remember to say a prayer and honor those who gave all so we can live in freedom. God Bless them and their families and God Bless America. 

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.