Oil, boom shakalaka

May 18, 2018 08:22 AM
Daily Energy Market Analysis
Come join the bull oil party. The room was empty a few years ago but now everybody is jumping on the dance floor. Crude oil is a boom and bust market. Two years ago, we went bust and since then we are in a boom shakalaka. Oil prices closed steady after giving up gains as the June option expiration pressured prices, only to have them stay strong based on the crude realities of strong global demand and tightening supply. Those supply fears were felt as Genscape reported that supply in Cushing, Okla., fell 568,000 barrels from the last EIA report signaling another drawdown in oil supply next week.

In the meantime, the oil market will be on guard for more problems as Venezuela goes to the polls in a sham election that will appoint President Nicky Maduro President of a failing socialist experiment. The Election will draw the ire of the Trump Administration that more than likely will impose sanctions on their oil industry, that is already in a historic decline.  

The U.S. pulling out of the nuclear deal with Iran is also adding support. Despite promises by some EU members to protect companies that do business with Iran many will not take the chance. Total, the French energy company, has already said that they will pull out of a multibillion-dollar gas project in Iran if it cannot secure a waiver from U.S. sanctions.

In the meantime, not is all well in the shale patch. While production is rising, the industry is facing labor shortages and rising costs and shale oil bottlenecks. Reuters reported just today that “ Finding roughnecks remains a challenge for oil drillers as rising crude prices increase demand for their services,” oilfield executives said on Thursday at a conference in Houston. Oilfield service suppliers cut tens of thousands of workers following the 2014 oil-price collapse, and skilled employees have moved to other industries or are no longer interested. A worker shortage is helping drive up service costs for oil producers, especially in the hottest shale fields. “Recruitment and staffing is a big challenge. We’re aggressively focused on recruiting people,” said Kevin Neveu, chief executive at Precision Drilling Corp (PD.TO). The Calgary, Alberta-based company added about 2,000 workers last year.  That is driving up fracking costs and that may force the world reporting agencies to reduce their outlook for shale growth.  

Oil is a boom and bust market. Two years ago, we went bust and since then we are in a boom. The market is starting to grasp the enormity of the oil crash that zapped over a trillion dollars of investment,  that’s because of an overreaction and an incorrect assessment about demand and production has now left the market structurally undersupplied for the coming years. We will have to do significant investment to get ahead of the curve. Now the oil market is faced with a tightening supply situation that enhances the rash of geopolitical risk factors that the market is faced with along with a trek of record-breaking demand growth expectations. Get prepared and hedged for the super cycle. Look down the curve and be prepared to prosper in the new oil boom cycle.

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.