Once a shale well has been drilled it needs hydraulic fracturing or fracking and other procedures to start production. The number of drilled but uncompleted wells, often known as DUCs, in the U.S. main shale oil and gas regions has been rising sharply this year, going from 4,944 last December to 6,031 in June, according to the U.S. government’s Energy Information Administration.
Reuters reported that U.S. shale output is expected to hit 6.1 million barrels of oil per day (bpd) this month, up 35 percent from a year earlier, according to the U.S. Energy Information Administration. Yet many doubt the accuracy of these figures. Harold Hamm of Continental Resources says that the EIA has consistently overestimated shale oil production because it has a flawed way of measuring the decline and flush rates of newer wells. Regardless of what shale scenario you believe, the truth is that it won’t change the fact that U.S. oil inventories are going to continue to plummet into the end of this year.
While everyone kept a focus on supply everyone forgot about demand. An improving U.S. economy and the global economy is driving demand through the roof. Oil Prices says that oil consumption reached a 10-year record of 21 million barrels a day during the summer of 2017. August consumption was 300,000 barrel a day ahead of the year before. The IBD reminds us International Energy Agency said last month that global supply and demand will balance next year as demand growth rises 1.4% in 2018. Gasoline demand from China remains especially robust thanks to a 17% increase in SUV sales. And in the U.S., trucks and SUVs remain popular
AAA reported yesterday that U.S. gasoline demand in October hit the highest level since 2006. That is one of the reasons why we have seen gas price go up at the pump. AAA says that according to the Energy Information Administration (EIA), the latest gasoline demand measurement is the highest for the end of October since 2006. At $2.53, today’s gas price is six cents more than a week ago, two cents more than a month ago and 31 cents more than a year ago.
“October has seen strong demand numbers likely, in part, due to consumers taking advantage of the unseasonably warm weather rather than spending time indoors,” said Jeanette Casselano, AAA spokesperson. “As consumers fill up their tanks more frequently, we are seeing supply levels tighten and gas prices increase. However, we don’t expect this increase to be long-term.”
All and all it is why we have seen oil hit a two year high. The last time when oil prices failed two years ago July was because of three historic oil events that set prices tumbling. First, it was the July 4th Greek exit vote. You know when Greece voted to leave the EU and decided to stay when their banks ran out of cash. That set back EU growth and slowed demand. Then later in that month, President Obama started the process of lifting oil sanctions on Iran. Another bearish event. Then came the Chinese currency devaluation that set the stage for global economic stability leading to a slowdown in growth so dire that 6 months later lead to one of the worst starts in U.S. stock market history.
We are now in a much different world. Global growth is on fire. Oil demand should not stop growing unless we get an economic shock. If you look back at the double bottom at $26 a barrel and where we are now it is clear that, that was the bottom of an oil cycle. And now we are behind the curve.
We said natural gas bottomed last week and it sure looks like it. Weather demand and supply tightness in storage have set the stage for further gains. Tonight, we get the API report! We are looking for big draws on oil gas and distillates. We have some interesting plays coming up going into the end of this year.