Crude: Shell vs. shale

July 27, 2017 09:16 AM

Who says that the U.S. oil supply picture is not getting in balance? Crude oil supply in the United States fell by 7.2 million barrels, down more than 50 million barrels since the end of March. It would have been more than 60 million barrels if it were not for the reclassification of oil released from the Strategic Petroleum Reserve. That puts supply at the lowest level this year and 7.1% below last year. U.S. crude production faltered last week, a sign that U.S. shale producers are getting wobbly. Yet, Shell posted better than expected blow away earnings as opposed to shale firms that are struggling to stay solvent. 

Shell revenue came in at $72.13 billion versus expected $67.78 billion, according to Reuters in a bright spot for bigger oil. Shell made money on reefing as strong margins and growing demand against a backdrop of near record productions for products boosted the bottom line. Reuters reported that Shell’s net profit (on a current cost of supplies (CCS) basis) at $3.6 billion, up a whopping 245% from $1 billion for the second quarter of 2016. Shell's CEO said that Shell promised to "remain very disciplined" to avoid seeing earnings impacted by the low prices of oil. He also suggested that oil prices lately have been driven by market sentiment and not fundamentals.

Shell’s good fortunes are not being repeated in the shale front. Yesterday, Hess Oil said it would be cutting spending and exploratory expenditures forecast to $2.15 billion from original guidance of $2.25 billion after posting a bigger than expected loss. This comes after the CEO at Halliburton said that rig count growth is showing signs of plateauing and customers are tapping the brakes. Hess sold assets in the Permian basin but is still trying to entice investors with the promise of more oil. The Hess cut was lower than Anadarko's $300 million capex cut due to losses on shale oil production. Sanchez Energy also announced $75 million to $100 million in 2018 spending cuts as shale oil is not yielding them a profitable price. 

This comes as U.S. oil production fell by 19,000 barrels a day. Most of the drop was in Alaska and the lower 48 saw production rise in the Gulf of Mexico, but shale production gains are still below estimates of growth. More cuts in capex and rig counts slow down, decline rates and capped wells could hurt as many shale guys are bleeding cash. OPEC cuts do matter and there are clear signs the market is on a path to a much tighter market than we have had since the global financial crisis.

Still, oil is overbought technically and we need to see sustained follow through or consideration to perhaps make that big move. We have kept a bullish outlook as we knew that despite the price, the oil market was focusing on present supply and not future tightness due to a change in market players that the future would some day come. That day is here and now and we still maintain that oil can break out and hit 70 by the end of the year. Oil inventories globally will continue to drain a record pace at elevated prices. Shale producers will be in the process of pulling back for the rest of this year.

Shale, at this point, is not a swing producer. Unlike Saudi Arabia that can quickly raise or lower output in a crisis, shale producers have a much slower reaction time. Someday shale will get there but they are not there yet.

Gasoline demand also soared once again as concerns about demand are now in the rear-view mirror. Supply also fell by 1 million barrels. U.S. oil exports and exports of diesel and gasoline gain as the US becomes refiner to the world. Venezuelan sanctions have not hit their oil exports yet but if it does, US gas prices will pop. Tensions with Iran and Nigerian oil disruption added support.   

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.