Crude: Hack attack

June 28, 2017 08:50 AM

The global markets have another concern as a ransomware attack across the Ukraine targeted business including Russian oil and gas company Rosneft and Danish shipping firm Maersk. Last night after oil traders saw the American Petroleum Institute (API) supply report might leave some to wonder if they got hacked after the API reported that crude oil supply, in defiance of conventional thinking, increased by 851,000-barrels last week. That was a stunner as the street was looking for a 2 million barrel plus a decrease in supply and the whisper number was even larger because of the perceived impact of Tropical Storm Cindy. The market was pulled down but managed to close back above the level that put it in a so-called bear market territory and raises more questions about the stubborn U.S. supply. It also raises questions about the numbers provided from the API that keeps increasing week after week. Are they out of line with the so-called official data from the Energy Information Administration (EIA). Sometimes I wonder if they know they are supposed to be reporting on the same data for the same week.

How can the two reporting agencies continue to be so different in what they report? There obviously is no accountability for the data from the API that is non-mandatory reporting and as we can see from last night’s retreat, it can move the market and give a trade advantage to traders and firms that subscribe to the data regardless of its accuracy. In many cases, the subscribers to the data are the same ones who actually provide the information for the report. 

I am not saying that the API is actually wrong and maybe the EIA will confirm the increase but it is a valid question. When you have two groups providing potential market-moving data and continue to report different numbers every week it is obvious that one or both of the groups releasing the data is getting it wrong. For all of the folks that I have talked to about this and all that share this thought, you are welcome.

While the API is showing that crude supply in Cushing, Oklahoma increased by 851,000 barrels, they also reported a 1.351-million-barrel increase in gasoline supply and a 678,000-barrel increase in distillates. It appears that gas production is exceeding U.S. demand and while exports are nearing records and refiners produce record amounts, the market is very well supplied.

The ransomware attacks against companies and agencies across the world, particularly targeting Ukrainian business, is a growing concern. The attack of Rosneft, an oil company, should be a concern. Even as the hack did not impact production this time, the threats against business and energy can have far-reaching consequences. Not only on the production or execution side but on the safe side as well. 

A big drop in Permian oil production should be raising concerns. Production in the shale sweet spot is down over 14% per well year over year and that is expected to fall to over 30% lower by the end of the year. 

Pipeline wars are causing havoc in the oil world. Reuters is reporting that “pipeline operators are selling their underused space at steep discounts to keep crude flowing - angering shippers and distorting an already opaque market for oil trading. Pipeline firms such as Plains All American (PAA.N) and TransCanada Corp (TRP.TO) move about 10 million barrels of crude around the United States every day.” For pipeline operators to secure financing to build pipelines and storage facilities, they need oil producers, refiners and traders to sign long-term contracts to use space on the pipelines. Pipeline firms can then use the guaranteed revenue from those contracts as collateral. Firms shipping on the pipeline have historically benefited from the long-term deals because they offered a discount compared to the price of buying space occasionally.

But now, in the wake of a two-year oil price crash, pipeline firms are still struggling to keep their lines full. So their marketing arms are offering steep discounts to ad-hoc buyers of pipeline capacity - which irritates customers whose long-term contracts are now more expensive than spot purchases. Some of those pipeline firms are offering prices as low as 25 percent of federally regulated rates, creating a secondary market that undercuts shippers with long-term contracts, according to four sources at companies that regularly ship on the pipelines.” That may get even cheaper as U.S. shale oil production increases start to slow.

SAI Energy reported a forecast that U.S. shale oil production will reach 5.6 million b/d by Dec. 31, more than 1 million b/d higher than at the end of 2016. But the pace of growth is expected to slow in 2018 as current oil prices below $50/bbl are likely to hinder the momentum of rig additions. U.S. shale and tight oil producers have become more capable of operating profitably with lower oil prices than a year ago, but most require an oil price in the upper $40s/bbl to break even, ESAI said. ESAI believes the most active basins will see cost inflation of roughly 15-20% in 2017. Analysts expect that productivity gains of 2015-16 are starting to show signs of leveling off.

Andy Weissman at EBW Analytics says the likelihood of increasing early July heat, adding 14 bcf and 30 bcf of projected natural gas demand, helped spur the July contract to a 10.8¢/MMBtu gain early this week. Near term we have the July contract expiration on Wednesday, Thursday’s EIA Weekly Storage Report, and low demand ahead of July 4th may all increase price volatility. The accelerating decline of the natural gas storage surplus vs. the five-year average contributes to our bullish outlook for the 2017 injection season. If bulls can broach resistance at $3.15/MMBtu for the August contract, fundamentals could lift NYMEX gas futures significantly further. Eventually, we anticipate prices reaching $3.50-$3.75/MMBtu to put mid-November storage on a trajectory to reach 3,825 bcf ahead of winter 2017–2018. Electricity futures could move meaningfully higher in the coming weeks as gas markets tighten and summer cooling demand solidifies.

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.