A more dovish Fed, U.S. sanctions on Venezuela, a shutdown of Libya’s largest oil field and large OPEC production cuts are bullish factors supporting crude oil prices, notes Phil Flynn, Senior Energy Analyst The PRICE Futures Group.
Crude oil bulls are the comeback kids of the commodity world as crude prices hit new highs for 2019 and gave us more confirmation that lasts years plunge was way overdone. While WTI crude oil is coming into some stiff technical resistance near $56 per barrel (see chart), the bullish fundamentals that are supporting the rally are only getting more bullish by the hour.
Source: BarCharts.com
For a quick recap of those bullish fundamentals, you start with a more dovish Fed, then move onto U.S. sanctions on Venezuela and their coveted heavy crude, to a shutdown of Libya’s largest oil field, then also add OPEC production cuts that saw the biggest one moth drop in two years. A survey from Bloomberg showed OPEC production fell by 930,000 barrels a day in January, to stand at 31.02 million barrels-per-day. You also saw a big jump in U.S. gasoline demand last week along with a refinery fire that could spike gas prices around the East coast for a few days.
U.S. shale producers are also showing signs of pulling back on production after weak prices crimped drilling plans. Baker Hughes reported that the U.S. rig count fell by 15 rigs and 14 of those were oil and one of those rig count cuts was for natural gas. The trend of falling rigs should continue in coming weeks, along with some lowered projections for U.S. shale oil production.
Yet deep water production is hitting impressive new records. Rystad Energy reported that it expects global deep-water production to reach record high levels and surpass 10 million barrels-per-day. With new fields starting up in Brazil and Gulf of Mexico, we expect the total deep-water liquid production to reach 10.3 million barrels-per-day in 2019. This is an increase of 700,000 barrels compared to 2018. In addition to Brazil and the United States, Angola, Norway and Nigeria are the largest deep-water producers.
It ain’t heavy, its shale oil
The ongoing sanctions in Venezuela continue to challenge U.S. refiners that need heavy oil to mix and make many products. While light shale oil condensate is nice to have, refiners need heavier grades and unless the situation changes in Venezuela it will start to raise prices for both gasoline and diesel at the pump.
This may come as a surprise, as many people think that because of the shale oil revolution we would have plenty of crude oil to offset any loss from Venezuela. Yet the truth is that the quality of crudes varies widely, and many U.S. refiners rely on the type of oil that Venezuela produces.
For simplicity, there are two main categories of oil, heavy and light. While the United States is awash in light shale oil, we are short of the heavier grades of crude oil needed to produce diesel and other high-margin products. In 2018, Venezuela exported about 500,000 barrels of heavy crude per day to the United States. That has now fallen to about 350,000 barrels, but this is still needed by U.S. refiners to create certain types of products. Any disruptions could force them to slow down their operations, because those barrels won’t be easily replaced. A slowdown in operations by refiners would lead to higher prices for your gas and diesel.
Over the weekend, Fox News Channel reported that a top Venezuelan air force general said he doesn’t recognize President Nicolas Maduro as the legitimate leader and backed opposition leader Juan Guaido as the interim head-of-state. A video disavowing Maduro’s rule circulated across social media on Twitter on Saturday, just as Venezuelans hit the streets across the country in support of Guaido, who declared himself the country’s temporary leader weeks ago. General Francisco Yanez, a member of the air force’s high command, urged others in the military to defect, according to Reuters. He is reportedly the air force’s head of strategic planning. In response, the high command accused the general of treason on its Twitter account. Yanez is the first high-ranking general to publicly support the opposition leader.
The Wall Street Journal reports that speculators are coming back into oil. Speculators have been increasing their net-long positions in Brent, buying 29,769 lots over the last reporting week. That brings total net long lots to 232,707, the largest position since early November. Bloomberg News reports that in Norway, the Norwegian Petroleum Directorate now expects output to fall to a 31-year low in 2019, with production expected to be almost 60 million barrels short of its previous forecast for this year. That’s 80,000 barrels-per-day less than expected.
Nat gas is selling off more as spring weather returns. Plus, the groundhog said only six more weeks of winter.
