Crude can’t slow down

April 2, 2018 07:09 AM
Daily Energy Market Analysis

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Crude oil prices are on the rise after Baker Hughes reported the U.S. oil-rig count fell by 7 to 797 rigs. After recent increases that might not seem like  a lot, traders now know that to keep U.S. shale production rising you must keep on drilling. Steep shale decline rates means you can’t let up or production will start to ebb and fall. Globally, even with increases in U.S. oil production, the overall decline rate of oil production has fallen by 4%. The lack of global drilling, underinvestment and problems like Iran and Venezuela have seen global production fall at a time when the mirage of U.S. production masks a looming global oil squeeze.  

This comes as Bahrain announces a major oil find. Using new shale technology, Bahrain has led strikes oil in biggest find since 1932, or maybe ever. The country plans to provide additional details on Wednesday about the reservoir’s “size and extraction viability,” so stay tuned.

The market also is talking about the possibility of New Sanctions on Iran. Reuters news reports that President Donald Trump has threatened to pull out of a 2015 international nuclear deal with Tehran, under which Iranian oil exports have risen. He has given the European signatories a May 12 deadline to “fix the terrible flaws” of the deal. The hardline on Iran may offer more support for oil but the real reason why oil is rising is supply and demand.

Demand in China, for example. Despite trade war fears, China’s demand for oil continues to ramp up. Reuters reports that growth in China’s manufacturing sector picked up more than expected in March as authorities lifted winter pollution restrictions and steel mills cranked up production as construction activity swings back into high gear. The official Purchasing Managers’ Index (PMI), released on Saturday, showed a rise to 51.5 in March from 50.3 in February and was well above the 50-point mark that separates growth from contraction monthly. Analysts surveyed by Reuters had forecast the reading would pick up only slightly to 50.5. With those expansion rates in place, oil demand in China should stay near records.

Demand for gasoline that already hit a record in March looks to continue into April. Refiners have to balance meeting strong current gasoline demand with building up supply of the summer blends of gasoline. Rising prices means the return of $4.00 a gallon gasoline in some places like San Diego. Of course, in California, they seem to like high prices.

The AP reports that The Trump administration is expected to announce that it will roll back automobile gas mileage and pollution standards that were a pillar in the Obama administration’s plans to combat climate change. It’s not clear whether the announcement will include a specific number, but current regulations from the Environmental Protection Agency require the fleet of new vehicles to get 36 miles per gallon in real-world driving by 2025. That’s about 10 mpg over the existing standard. 

Any change is likely to set up a lengthy legal showdown with California, which currently has the power to set its own pollution and gas mileage standards and doesn’t want them to change. About a dozen other states follow California’s rules, and together they account for more than one-third of the vehicles sold in the U.S. Currently the federal and California standards are the same according to AP.

Cold weather is supporting both Ultra low Distillates and natural gas. Farmers are planting fewer acres according to the USDA report that sent soybean and corn prices soaring. Low grain prices have left idle acres but do not be fooled if you are planting. The global market for diesel is tight so lock in prices before we surge again. Gasoline buyers should be hedged as well.

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.