Oil prices look like they are waiting around for Christmas to make a decisive move but really, they are just waiting for oil inventories and the FED. The news seems to suggest overnight that the market is worried about an increase in NON-OPEC production and shale production, but the way things are going on the demand side they may want to focus on that demand instead. The U.S. economy is on fire as we added 228,000 jobs in November, while the unemployment rate remained at a 17-year low of 4.1%. We also saw upward revisions in the two prior months of figures adding to the oil demand expectations in the overall marketplace. The global economy is growing as well, and oil demand is on an upward trajectory the likes of which we have not seen in decades.
Of course, you still have the OPEC doubters, even though OPEC and NON-OPEC have exceeded their quota as I predicted. There are some once again trying to make a story about Russian reluctance to continue the cuts, they tried this to stir up doubts at the last meeting causing a drop-in price monetarily, but it turned out to be not true. Now they are saying that Russia will push production increase in June.
Listen, we already know that OPEC and NON-OPEC are going to review the decision on output cuts in June. So, the talk that, oh my gosh, the Russian’s may want to raise output in June should be no surprise and not a big deal. I predict that OPEC will have to raise output in June because prices will be flying ad supply won’t be keeping up. There are also some worried about Non-OPEC supply increases, while it is possible as Goldman Sachs suggests that NO-OPEC output could rise by 500,000 barrels a day the demand for NON-Opec oil growth should exceed that.
The Saudis are digging in. Dow Jones reported that Saudi Arabia said it would maintain its overall crude oil supply levels in January 2018 at their recent low levels, in line with the country's commitments to the OPEC-led supply reduction pact aimed at helping rein in a global supply glut. State oil major Saudi Aramco (SAMR.YY) will keep its exports to the U.S. and Europe steady, while exports to Asia will be cut by more than 100,000 barrels relative to December 2017, the kingdom's energy ministry said in an e-mailed statement. "This is in line with our continued demonstration of keeping to, and in fact, exceeding our commitments... We hope that by leading by example, our partners from OPEC and non-OPEC will do the same to keep conformity levels above 100% and accelerate the rebalancing of the market," a ministry spokesperson said in the statement.
The U.S only added to oil rigs last week as Shale producers are lacking capital and trying to be smarter about wellhead economics. The Wall Street Journal said last week that “The Paradigm Shift is where U.S. shale producers switch from a business model of "growth at any cost" to one that's "return focused" is one reason that Shale oil projections may fall short of expectations.
The Wall Street Journal wrote that shale has been a lousy bet for most investors. Since 2007, shares in an index of U.S. producers have fallen 31%, according to data provider FactSet, while the S&P 500 rose 80%. Energy companies in that time have spent $280 billion more than they generated from operations on shale investments, according to advisory firm Evercore ISI. Some say that the market is too optimistic on shale output. MIT last week said that U.S. oil and natural gas production from new wells could undershoot the EIA estimate by more than 10 % in 2020. I think that MIT is right.
It might not feel like it, but retail gas prices are up 43 % since February 2016. We saw a big build in gasoline last week and a drop-in demand, but we believe those numbers were off. We see another million barrel drop in Crude supply and a 2 million barrel drop in ready to use gasoline. Distillates should fall by 1 million and refinery run will stay at their historically high pace. Last week we set a record for diesel production.