Snapback after a whack

August 3, 2018 08:28 AM
Daily Energy Market Analysis

Snapback after a whack, give a dog a bone, this old man comes rolling home. It looked doomy and gloomy in crude oil for a while as trade war fears and reports of increases in OPEC and Russian oil production weighed on market psyche. Yet, after a report about another drop in supply in the Cushing, Okla., delivery point, and talk that U.S. oil production is not what it was reported to be, the mood quickly shifted.

To top that off the Trump Administration is going to roll back Obama emission rules that require carmakers to increase fuel efficiency to 50 miles a gallon on average by 2025, to 37 miles per gallon, raising the potential demand expectations for oil and gas down the road. Besides, it is unclear that the higher tariffs proposed by the Trump Administration will ever be imposed and if they are that they will have a major detrimental impact on oil demand.

Cushing Is draining! Genscape Inc. reported that supply at the biggest U.S. storage hub fell by 1.1 barrels--the lowest level in almost four years. The Energy Information Administration’s (EIA) data showed Cushing stockpiles fell last week for an 11th straight week to the lowest level since October 2014, according to Bloomberg. This is a bigger concern for markets as we are now realizing that the U.S. is not producing as much oil as the EIA reported. The EIA now says that U.S. oil production fell by 30,000 bpd in May, compared to a month earlier. 

The shale revolution is hitting some major roadblocks as pipeline capacity and declining production rates in the shale patch are making it harder to increase production. As we have said before, EIA methodology tends to overestimate shale production giving the markets a false sense of security.

So it is probably a good thig that OPEC and Russia are using up their spare production capacity to keep the market supplied. Bloomberg News reports that Saudi oil production increased by 230,000 barrels a day in July, to 10.65 million barrels per day. This is just shy of an all-time peak reached in 2016, according to a Bloomberg survey of analysts, oil companies and ship-tracking data.

Bloomberg says that “Higher crude output from the Saudis, along with Nigeria and Iraq, pushed up total production from the Organization of Petroleum Exporting Countries by 300,000 barrels a day, offsetting losses from a spiraling economic collapse in Venezuela, political clashes in Libya and the onset of U.S. sanctions against Iran. The group’s 15 members, which now include Congo, collectively produced 32.6 million barrels per day.”

Reuters reported Russian oil output rose by 150,000 barrels per day (bpd) in July from a month earlier, surpassing the amount Moscow had promised to add following a meeting of global oil producers in Vienna in June, energy ministry data showed on Thursday. Under an initial deal between OPEC and non-OPEC producers, Moscow had agreed to cut 300,000 bpd from the production level of 11.247 million bpd Russia reached in October 2016. When oil prices subsequently rose, the producers decided on June 22 to increase their combined output by 1 million bpd, of which Russia was to contribute 200,000 bpd starting on July 1. According to the ministry data, Russian oil production rose to 47.429 million tons in July versus 45.276 million in June. In barrel terms, output reached 11.21 million bpd, up from 11.06million bpd in June. That brings the combined Russian increase to 263,000 bpd compared to the initial cut agreed two years ago. 

The nation’s extreme heat is taking its toll driving Natural Gas storage to extremely low levels. Thank God for record U.S. production. The EIA reported that working gas in storage was 2,308 Bcf as of Friday, July 27, 2018, according to EIA estimates. his represents a net increase of 35 Bcf from the previous week. Stocks were 688 Bcf less than last year at this time and 565 Bcf below the five-year average of 2,873 Bcf. At 2,308 Bcf, total working gas is below the five-year average.

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.