The Phil Flynn Energy Report 11-6-2019
Shale Pains and Crude Gains
The crude oil price gained on reports of more shale pain along with reports that Saudi Arabia wants to cut production and an American Petroleum Institute report that showed a big build in crude supply but a disturbing drop in gasoline and distillate.
The API seemed to suggest that American refiners are not keeping up with strong demand, leading to a 4.17 million barrel drop in gasoline supply and another 1.65 million barrel drop in distillate supply. The big drops in products overshadowed a much bigger than expected 4.26-million-barrel increase in crude supply that was enhanced with a 1.25-million-barrel increase in the Cushing, Oklahoma hub. That is the 5th increase in a row at Cushing and can be blamed on the Keystone pipeline leak.
Still, the build in crude oil is a concern because it looks like refiners are not building product supply. While the drop in distillate is not massive, it is sending warning signals that the impact of the IMO rules are going to come at a hefty cost. It also shows that refiners focus on those new rules that may come at the expense of gasoline. In this type of environment, it is best to be hedged if you are not all ready.
The 177th OPEC meeting is scheduled for December 5th in Vienna, Austria with the OPEC and non-OPEC ministerial meeting scheduled for the next day. It seems that as we get closer to that meeting, we are getting conflicting signals about what is actually going to happen. Yesterday the OPEC Secretary-General Mohammed Barkindo seemed to suggest that the outlook for oil was more bullish for 2020 and that a further production cut may not be needed. Yet according to today’s Wall Street Journal, the Saudis see it another way and are pushing for a bigger cut. I am sure the Saudi Aramco IPO has nothing to do with their desire for a cut because as the Saudis have often told us, there is no price manipulation that they are after but only price stability for consumers and producers.
The big question then will be whether Saudi Arabia can convince other OPEC members to toe the line. One sign that might happen is that Iran, Saudi Arabia’s traditional foe in and out of OPEC, seems to be on board for a cut. Iranian Oil Minister Bijan Zanganeh was quoted by Reuters as saying on Monday that he expects further production cuts to be agreed to at the next meeting of the Organization of the Petroleum Exporting Countries (OPEC) in December. We also have commitments from Iraq and Nigeria to rein in overproduction. Yet to get a cut done, the Saudis may have to kiss Vladimir Putin’s ring, because if it’s going to work, they are going to need Russia. Maybe they can offer Vladimir a few shares of Saudi Aramco.
Of course talk of a cut comes against a backdrop of OPEC's own admission that they are losing market share due in part to U.S. shale oil. Yet could a cut by OPEC signal that they see the threat from U.S. shale as diminishing. Pioneer Natural Resources Chief Executive Scott Sheffield seems to think so. Investing.com reported that, “Pioneer Natural Resources (NYSE:PXD) Chief Executive Scott Sheffield, meanwhile, said he expects the Permian Basin, the top U.S. shale field, to “slow down significantly over the next several years.” “I don’t think OPEC has to worry that much more about U.S. shale growth long term,” Sheffield said on Tuesday on a call with analysts, Reuters reported.
Shale has been the nemesis of OPEC over the past five years after all-time highs in domestic U.S. production prompted the cartel to cut output to keep global prices stable. But U.S. producers are now under pressure to trim spending and return profits to shareholders through dividends and share buybacks. The number of rigs drilling for oil in the United States has declined about 21% over the last year, according to last week's rig-count report from Baker Hughes. Analysts with a bullish view on oil, such as Price Futures Group’s Phil Flynn, have been arguing almost daily in recent weeks that the seemingly infinite threat from shale has been overplayed. Pioneer's Sheffield seemed to agree in principle to such arguments, saying that despite new production coming from Norway, Brazil, and Guyana in the next year, “There’s not much coming on after.” “We’re becoming more optimistic that we’re probably at the bottom end of the cycle” in oil prices,” he added.
Ah yes, the old oil cycle. Throughout history, no matter what the innovation, the oil market always cycles. Long term the lack of investment in traditional oil wells and an over-reliance on shale does suggest that long term we are at the bottom of a cycle. Actually, we have been since oil bottomed around $25.00 a barrel a few years ago. Still, the bottoming action has been fraught with a multitude of factors that have caught us in a range in the short term. Yet as refiners come out of maintenance, we should be at the bottom for a new run.
A new milestone for Freedom Gas and or LNG as some call it, according to Natural Gas Intelligence, “Canada fell far behind the United States in the natural gas export arena during the first six months of 2019, according to the latest trade scorecard of the U.S. Department of Energy (DOE). U.S. exports reached 31 markets and grew by 27%. But the United States remained the sole destination for Canadian gas exports, and they shrank by 7%. First-half 2019 U.S. exports were 2.13 Tcf or 11.8 Bcf/d, compared with 1.68 Tcf or 9.3 Bcf/d in the same period of 2018, DOE said. Canadian exports dropped to 1.41 Tcf or 7.8 Bcf/d from January through June versus year-ago exports of 1.52 Tcf or 8.4 Bcf/d. The increased U.S. exports included liquefied natural gas (LNG) ocean tanker and ship container deliveries to 29 countries, as well as pipeline, flows to Canada and Mexico. First-half 2019 U.S. LNG exports rose by 57.5% to 774.1 Bcf or 4.3 Bcf/d from 491.4 Bcf/d or 2.7 Bcf/d in the first six months of 2018. American gas exports to Mexico rose by 10.4% to 883.3 Bcf or 4.9 Bcf/d in the first half of this year from 800.2 Bcf or 4.4 Bcf/d a year earlier. U.S. pipeline exports to Canada climbed by 22.4% to 475.3 Bcf or 2.6 Bcf/d in the first six months of this year from 388.4 Bcf or 2.1 Bcf/d in first-half 2018. For Canadian exporters, improved prices offset their sales volume erosion. At the U.S. border, Canadian gas rose by 14.6% to a first-half 2019 average of $2.72/MMBtu from $2.37/MMBtu in the same period of 2018. Prices fetched by U.S. exports to Canada slipped by a penny or 0.4% to $3.09/MMBtu in first-half 2019 from $3.10/MMBtu in the same period of 2018. Natural Gas Intelligence says the Mexican market was less kind. The first-half 2019 average price for U.S. pipeline exports to Mexico dropped by 11.7% to $2.82/MMBtu from $3.20/MMBtu during the comparable 2018 period. Prices fetched by U.S. LNG cargoes varied widely across their 29 destinations from $2.95/MMBtu in Jamaica to $10 for small volumes sent on container ships to Haiti, the Bahama Islands, and Barbados.
More than half of U.S. LNG exports were destined for South Korea, Mexico, Spain, Chile, Japan, and the Netherlands, DOE said.
Natural Gas today is still be driven by the fact that we are going to see January temperatures in November. Go find that warm hat today!