Low crude prices may cure themselves

June 26, 2017 09:00 AM

Oil prices are bouncing back as the selling is drying up and so is the investment in the shale oil patch. Net longs for oil have reached a low for the year and reports of a pullback in investment in shale oil should be raising some concerns. Even as Baker Hughes Inc. reported that producers added 11 more rigs for the 23rd week in a row, there are signs that the rig party is over. The Houston Chronicle reports that, “Wall Street appears to have lost its taste for the resurgent U.S. shale industry as oil prices tumble and energy share prices fall."

Oil companies have only raised $3 million this month through selling new shares to investors, a dramatic drop in the public equity offerings that have helped fuel the return of drilling rigs across the nation this year. It's a stark shift in investor sentiment after last month, when producers like Kosmos Energy and RSP Permian collected a combined $1 billion from stock-market investors. That was before U.S. oil prices took a month-long tumble of around 20% to $43.15 a barrel on Friday. The shale players will have to change course as the "adding rigs at will" plan seems to be blowing up in their face.

This comes as bets on oil have turned wildly negative. Bloomberg News reported that money managers’ WTI net long positions, the difference between wagers on a price increase and bets on a decline, fell by 60,556 to 134,742 contracts, according to commitments of traders data from the U.S. Commodity Futures Trading Commission (CFTC) released Friday. Long positions dropped by 5.7% to 301,476, the lowest in almost eight months, while short positions grew by 34% to 166,734, the most since August, the CFTC said. Bets on falling gasoline prices reached their highest level in six weeks, while bearish positions on diesel were the largest in a year and a half, according to the CFTC.

Of course when you see all this negativity, one might think we are near the bottom. The month long sell off has already impacted investment in future supply and because of that, the U.S. oil production outlook will start to fall short of market expectations.

The sell-off is already having OPEC contemplate an even larger oil production cut at the next meeting. Reuters reported that, "The Iranian oil minister Bijan Zanganeh said that "We are in discussions with OPEC members to prepare ourselves for a new decision," Iranian oil minister Bijan Zanganeh said after a cabinet meeting, according to the website for the Islamic Republic of Iran Broadcasting (IRIB)."But making decisions in this organization is very difficult because any decision will mean production cuts for the members.”

In the meantime, oil supply could take a hit as Tropical Storm Cindy caused a lot of problems and shut-ins. The impact from the storm should lead to sizable draws in supply. We are looking for a 4.5 million barrel drop in crude supply and a 1.0 million barrel drop in Cushing, Oklahoma. Gasoline supply should fall by 3.0 million barrels and distillates by 2.0 million barrels. Refinery runs will drop by 1.0.

Natural gas is getting a pop as Tropical Storm Cindy lowered production and the fact that the market may be putting the cold temperatures behind it. 


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.