Crude oil prices should be moving higher than they are, writes Phil Flynn, senior energy analyst at Price Futures Group.
Crude oil prices, based on the fact that oil supplies are falling against the seasonal trend, probably should be moving higher than they are, but rallies are still infused with apprehension due to the oil price crash of last year.
Oh, sure the market sold off after there were some reports that China was walking back from some commitments in the U.S. - China trade talks; yet even without a trade deal, oil supplies are tightening. The American Petroleum Institute (API) report should be somewhat disturbing for bears, as they reported a clean sweep of draws led by 2.133-million-barrel crude draw. This draw comes at a time when crude supplies should be rising as many refiners are in maintenance. This draw shows that the U.S. market is already feeling the impact from the OPEC + 1 (Russia) production cuts and a sign that U.S. shale producers can’t keep pace. Crude quality is also becoming a major issue for refiners as the lack of heavy Venezuelan and Saudi grades of crude is going to keep the market tight.
The impact of those cuts and higher crude costs are already being felt at the gas pump, and it is probably going to get a lot worse before it gets better. The API reported that U.S. gasoline supply fell by 2.794 million barrels with distillates down by 1.607 million barrels as well. Still despite being near four-month highs for crude, there seems to be a sense that the market is afraid to price in the growing oil shortfall reality. The national average price of gasoline has surged 35¢ per gallon in the last six weeks with motorists spending $135 million more every day than early January, according to GasBuddy.
Hedge funds and speculators really got burned and the investor class has been cautious in reflecting the increasing bullish supply versus demand fundamentals. While many may think that is a good thing, the reality is that if prices do not go higher soon it may keep OPEC + 1 in its cut mode for too long. Already the OPEC + 1 coconspirators are standing pat until June, which will leave the market undersupplied.
The lack of stronger prices will also have U.S. shale producers hold back. The shakedown in prices has caused a pause and is the reason we have seen the U.S. rig count pull back to the lowest level since 2015. It is also forcing smaller shale players out and bigger players in. The Wall Street Journal reported “that oil majors have spent an estimated $10 billion buying acreage in the top U.S. shale field since the beginning of 2017, according to research firm Drillinginfo Inc. The rising investment also reflects a recognition that Exxon (XOM), Chevron (CVX), Royal Dutch Shell (RDS) and BP Plc (BP) largely missed out on the first phase of the Permian shale bonanza, while more nimble independent producers, who pioneered shale drilling technology, leased Permian acreage on the cheap. Now that the field has made the U.S. the world’s top oil producer, Exxon and other majors are moving aggressively to dominate the Permian and use the oil to feed their sprawling pipeline, trading, logistics, refining and chemicals businesses. The majors have 75 drilling rigs here this month; up from 31 in 2017, according to Drillinginfo Inc. Exxon operates 48 of those rigs and plans to add seven more this year. The majors’ expansion comes as smaller independent producers, who profit only from selling the oil, are slowing exploration and cutting staff and budgets amid investor pressure to control spending and boost returns.”
Yet with all this foreboding from the investor class, the market fundamentals are still very bullish. Yes, there are concerns today about U.S.-China trade, and what the Fed won’t do today may be key. The so-called pullback from China trade commitments is a worry but more than likely just a negotiating strategy. The risks are still geared to the upside. As we have said before, if you have exposure, make sure you are hedged. The Fed is expected to keep rates steady yet give the market a revised dot plot. The market is expecting that the Fed will signal one more rate increase this year. The market will also try to garner how the Fed plans to unwind its balance sheet, the reason that the market freaked out a few months ago and caused the Fed to go back into dovish mode. The Fed Chair Jerome Powell will be giving a press conference that could add some volatility to a market that has been lacking.
Natural Gas
Andrew Weissman of EWB Analytics on natural gas is saying that bullish weather shifts prod natural gas. A sizeable late-winter bullish shift added 19 gHDDs and 36 Bcf of demand for natural gas, lowering the end-of-March storage trajectory to below 1,100 Bcf. The year-over-year gas storage deficit may begin turning lower as soon as this week, however, and could decline by 6.7 Bcf/d through early May. The second-lowest natural gas storage level exiting winter in the past decade is likely giving bears pause, potentially prolonging the current narrow $2.77-$2.88/MMBtu trading range established since April became the front-month contract. As the storage deficit declines in the weeks ahead, market sentiment is likely to gradually turn increasingly negative — potentially pushing NYMEX natural gas futures lower as spring progresses. Connecticut and Dominion reached an agreement to keep the Millstone nuclear plant online, mitigating key sources of price risk in New England.
