Crude: The great rebalancing

October 3, 2017 09:15 AM
Daily Energy Market Analysis

The great oil market rebalancing will continue as low oil prices have sparked demand and global oil and shale oil production is failing to keep pace. Underinvestment due to the crash in oil prices is keeping the market in a tight situation. More pressure on shale by activist investors that are worried that they are not getting the bang for their buck may further hamper an industry where already investor has pulled back because of the lack of good returns in the shale patch.

While the oil market stalled on the first day of the quarter the global rebalancing of the oil market is still underway. We should see more evidence of that in tonight’s American Petroleum Institute supply report that will be released today after last week’s surprise drop in U.S. crude oil supply. Libya oil output was at a 5-month low as their biggest oilfield was shut down and the market is going to react when they hear that the field may come back online. But in the bigger picture oil is looking to see if it can hold $50 as we enter what is rationally weak demand period for oil.  Yet the traditional shoulder season for oil is off as Hurricane Harvey, Irma have made it necessary for many refineries to put off maintenance to replace lost supply and to keep up with growing global demand.

The distillates fell hard after the market recorded record long positions. Still, the long distillate short RBOB gasoline spread did well. The market knows that diesel is very tight globally so any signs of winter arriving early could make this market soar.

Nat Gas is in a weird situation. New rule to support Coal and Nuclear could reduce demand for natural gas this winter. Yet globally natural gas demand could be stronger. Reuters on a report by Wood Mackenzie said that China will add 10 billion cubic meters of gas demand this winter. That’s about 5 % of China’s consumption last year or the equivalent of Vietnam’s total annual use.  As the country tries to move Northern Cities off of dirty coal, the project will also need heavy investment in infrastructures such as pipelines and storage tanks according to the report.

Reuter is reporting that “Activist investors are taking aim at U.S. shale producers, the companies most responsible for turning the nation into a global energy powerhouse, pushing them to stop rewarding executives for spending billions of dollars on new wells when crude prices are depressed.

U.S. crude output has surged past 9 million barrels a day largely because of the shale sector, whose output this year is up 27.5%. The gains are fueled by a boost of about 50% in capital spending, benefiting executives come bonus time but crimping shareholder returns. Investors want the higher spending to go to dividends and buybacks, not more drilling. The shift they are seeking could dampen spending on new wells, chilling a shale boom that has benefited U.S. motorists and consumers. It could help the Organization of the Petroleum Exporting Countries, Russia and other producers who are trying to drain a global crude surplus. Booming U.S. shale production has largely thwarted OPEC output cuts aimed at lifting prices. Low oil prices, in turn, have hurt shareholder returns. Stay tuned! As I said before, you can’t lose money on every barrel and expect to make up for it in volume.

Bloomberg reports that “ President Donald Trump may soon have a chance to prove wrong the notion that economics will kill the U.S. coal industry and keep clean energy thriving. Two initiatives pending in Washington—one to prop up large traditional power plants and a second to impose tariffs on solar panels—could let Trump upend wholesale electricity markets and tip the advantage away from renewables.

The moves, which both invoke laws that haven’t been used for a decade, come as Congress begins debating a White House tax plan that may undermine a key source of financing for clean energy. Together, they raise questions about whether falling costs will be enough to keep wind and solar thriving under a president intent on supporting fossil fuels.  For natural gas, this could weigh until we get clear rules.

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.