Crude oil prices are on the move as tension and rhetoric grow between the United States and North Korea, and due to bullish oil inventory data. As oil risk premium will rise on war fears, we also must acknowledge the great oil rebalancing as U.S. oil inventories plunge by a near record 6.451 million barrels. This comes as U.S. oil production fell by 7,000 barrels a day and the sense that even as the U.S. Energy Information Administration (EIA) tweaks upward production forecast, the growth, along with OPEC production cuts, is going to fall short of global oil demand growth. U.S. refiners are surging to 96.3% of total capacity, the highest since August 2005 to meet surging global demand.
The large drop in U.S. inventories is showing clearly that OPEC production cuts are starting to work. Even as reports show that OPEC production rose to 32.87 million barrels in July, according to their own data, it just seems to be keeping up with explosive oil demand growth. We had a big drop in Gulf Coast oil supply as U.S. crude imports fell by 491,000 barrels a day. U.S. fuel demand also has risen by 2.38% during the last month and an even with U.S. shale oil production, we are having trouble meeting OPEC barrel for barrel as the cost of shale is now unsustainable under $50 a barrel.
Despite the talk by some producers that they can make it under $50 a barrel, the facts do not bear that out. John Kemp at Reuters said that U.S. shale producers need a WTI oil price around $50 per barrel to break even, according to an analysis of financial statements for the second quarter. Fifteen of the largest shale oil and gas producers reported total net losses of $470 million for the three months between April and June when benchmark WTI prices averaged $48.00 per barrel. Total losses were down from $3.7 billion in the first three months of the year and $7.4 billion in the same period in 2016, according to earnings statements published in the last week.
Kemp writes that shale companies have staunched the losses thanks to a combination of cost cutting, improved efficiency and the rise in oil prices. But there is considerable controversy about how high prices need to be for shale producers to cover all their costs and earn a return for their investors. Kemp says that some firms claim they can break even and even make large profits with benchmark WTI prices below $50 or even $40 per barrel. Yet it remains unclear if these figures apply to full lifecycle costs (including overheads) and all the parts of all the shale plays, or just the most productive sweet spots.
Harold Hamm, chief executive of Continental Resources CLR.N, a large shale producer in North Dakota and Oklahoma, has said prices need to be above $50 to be sustainable. He says that prices below $40 would cause drillers to idle rigs again. Kemp correctly says that some shale producers have lower breakeven prices than the average and some higher, but the sector seems to need around $50 to grow production profitably. Empirical evidence suggests Hamm's figures are roughly correct, with shale producers making small losses just under $50 per barrel. Readers of my daily Energy Report are on top of this as we warned traders to not put too much faith in shale.
Gasoline demand fell week-over-week leading to a surprise increase in U.S. gasoline supply but still, U.S. demand is near a record high! Gas prices may rise but that is reflecting better economic growth and more spending power by consumers so don’t get down in the dumps. Gas supply was up by 3.42 million barrels.
That is being reflected in rising distillate demand as well. U.S. manufacturing is making distillate demand great again! I love when oil prices are being driven higher by economic growth! That growth may rescue some shale guys and save some oil jobs!
Natural Gas prices are also rising as the weather gives us one more blast of summer! Weather could also impact the entire sector as Mexican production is being impacted by Tropical Storm Franklin and two other waves that may, next week, impact production.