The oil price continues a rebound as production problems start to plague the United States. The Energy Information Administration (EIA)reported yesterday that U.S. oil production plunged by over 100,000 barrels a day, mainly because of the shutdown by Tropical Storm Cindy but it came at a time when U.S. production was already struggling to meet lofty expectations set earlier in the month. While production will snap back next week, the truth is that we will not hit the 120,000-barrel production increase that was expected by the market this month and it could also mean the U.S. hit a short-term production peak as well-head economics for oil make it more likely that drilled oil wells will not be brought to completion.
The price collapse in oil will hurt the prospects for U.S. shale output. When most everyone was thinking just a few weeks ago that shale oil production was invincible, the warning signs are coming fast and furious that it might not be the case. It just goes to show that when everyone is thinking the same thing, then it is obvious that some people are not thinking. In fact, the oil market seemed to bottom when we dipped into the so-called bear market territory and we saw a rash of downgrades to energy companies and reports of a swift drop in capital especially when it comes to shale oil projects. The price shake out slowed the speculative fever that was being built up by shale oil producers and hot money that stayed too focused on production growth instead of making money. Like I said before, you can’t lose money on every barrel of oil and expect to make up for it in volume.
The EIA reported that crude oil inventories rose by 118,000 barrels to 509.2 million barrels and while that headline number looked disappointing, it was as disappointing if you looked beyond the headline. Commercial crude inventories were most likely enhanced by a 1.46-million-barrel release from the Strategic Petroleum Reserve (SPR) of oil that was previously sold. We also saw another drawdown in Cushing, Oklahoma! The utilization rate dipped to 92.5 percent which was partly storm related but we also saw 3.2% drop in the Midwestern states or PADD2.
Gasoline demand dropped to 9.538 million barrels a day and inventories fell by 894,00. Distillates dropped by 223,000, not as large as expected.
The FT reports that Canada, home of the world’s third largest oil reserve, might have seen producers slash capital spending during the three-year-old oil decline, but earlier investments in the country are set to keep pushing output higher for at least the next 18 months. A forecast released this month by the Canadian Association of Petroleum Producers sees the country’s output increasing by 270,000 barrels a day in 2017 and another 320,000 b/d next year. That, combined with the two-year Canadian increase, is equal to almost a third of OPEC production cuts that it made with allies like Russia at the beginning of this year to raise prices.
We will see about that. Today it is going to be all about natural gas. The EIA is expected to release its gas report that should come in below average due to the impact from Tropical Storm Cindy. Look for an increase of 47bcf.