Saudi purge as oil supply fall

Daily Energy Market Analysis

Oil prices hit a two year high as U.S. oil rig counts had the biggest drop of the year and the Saudi Crown Price goes after his “rivals” in a corruption crackdown. Drama in the Saudi Kingdom as Crown Prince Mohammed bin Salman consulates power in a shocking crackdown that even saw Saudi billionaire investor Prince Alwaleed bin Talal arrested along with 14 of Mohammed bin Salman cousins.  Crown Prince Mohammed bin Salman has also ordered that all members of the royal family should remain in the country and that may mean there are more arrest’s coming. Then there was a helicopter crash near Yemen killing a bin Salman rival, Prince Mansour bin Moqren, the deputy governor of Asir province and son of a former crown prince. One wonder if this is a coincidence or not.

This comes as global oil and petroleum supplies are draining at a historic pace as demand and OPEC production cuts are failing to keep up with global oil demand growth. Don’t look for shale oil producers to save the day they are in major retreat.  We saw the U.S. rig count fall eight oil rigs the biggest drop this year and the biggest drop since May 2016. That puts the U.S. oil rig count at 729 in the lowest level since May. Some of the drops are seasonal in nature but you can’t ignore the fact that the U.S. shale producers are seeing a peak in oil production as August U.S. oil output fell to 9.2 million barrels. That is well below what was expected at this point.

But it is not just shale that is peaking. Major oil firms have major CapX cutbacks and we will see a major disappointment in future production. Still, Reuters reports that exploration and production (E&P) companies expect to increase the amount of money they plan to spend on U.S. drilling and completions in 2017 by about 53 % over 2016, according to U.S. financial services firm Cowen & Co. That was up from 50 % in the firms prior capital expenditure tracking report last week.  That expected 2017 spending increase followed an estimated 48 % decline in 2016 and a 34 % decline in 2015.

Oil refiners have fallen behind the curve and are struggling to keep up with global oil demand. Low oil prices have sparked a global oil demand surge catching many by surprise as there was a sense of complacency in the market. Underreporting of demand and the talk of an oil glut made many miss the most significant bottom on oil prices in a generation.

Oil Supply in the U.S. will continue to plummet into the end of this year. Gas and diesel prices will remain elevated. Now with more tension caused by the Saudi Shakedown, we will see more of a geopolitical risk premium in oil going forward.

On top of that, we had a Bloomberg report that a militant group in Nigeria’s southern Niger River delta, whose attacks on oil installations in 2016 cut output to the lowest in three decades, said it ended a  self-imposed cease-fire and will resume its violent campaign.

Nat gas hit a strong seasonal bottom. With more cold temps on the way, the nat gas looks like a strong buy. 

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.