More folks are joining the call for $80 a barrel of oil in the new year, a level I had previously predicted would happen, assuming OPEC and Non-OPEC would keep their production cuts in place. Now with news coming out of the World Economic Forum, in Davos Switzerland, there is a lot of things happening that bolsters that case.
Not only that, but now we are hearing from the Saudi Oil minister Khalid Al-Falih wants to extend production cuts "beyond the current agreement." He is opening the possibility that the framework that they put in place to control supply with Non-OPEC nations and Russia could last for “decades and generations.” It appears the long-term U.S. ally is feeling cozy working with Russia as they both have a vested interest in keeping oil prices higher.
Then you have Treasury Secretary Steven Mnuchin, who in a speech in Davos was singing the praises of a weaker dollar and its impact on the U.S. economy, which he says is open for business. That led to a break in the dollar giving commodities more support.
This comes as global oil supplies are near the tightest levels we have seen since the global financial crisis, if you compare supply to daily global demand. The reason why shale can’t keep up with demand is simple math. By the best estimates, shale oil output is going to rise by 1.5 million barrels a day. I think on the low-end global demand will rise by 1.5 million barrels a day. OPEC and Non-OPEC are continuing to remove at least 1.8 million barrels of oil a day. That removal is likely to get larger as Venezulan production continues to collapse. Iraqi and Iranian production stall out and Nigerian and Libyan production is not steady. That means the global draw on global oil inventories is going to continue and another 1.5 million barrels of new shale output is not going to change that.
The American Petroleum Institute (API) showed a big build in overall crude supply but a big drop in supply in Cushing, Okla. The build in supply was probably caused by winter weather as refineries went to circulation mode down south and used less oil. The API reported that crude was up +4.755 million barrels, but we saw a drop of 3.572 million barrels in Cushing Oklahoma. Another major drop after last week’s record drop.
Gas supplies surged by 4.117 million barrels as southerners stayed home because of snow and the tight distillate market got tighter falling by 1.280 million barrels.
To add to that excitement, you had bullish squeeze in natural gas that sent that market into its circuit breaker territory. MarketWatch Myra P. Saefong Markets/Commodities Reporter wrote “Natural-gas futures continued to rally in electronic trading, after settling at a more than one-year high on the New York Mercantile Exchange. Trading was so volatile that a circuit breaker was triggered in natural-gas futures at around 2 p.m. Central, prompting a five-minute pause in electronic trading, according to Phil Flynn, senior market analyst at Price Futures Group. He referred to the move as a "big short squeeze on a changing weather forecast, as well as expectations for another big drawdown in supply" in Thursday's weekly Energy Information Administration report. Richard Hastings, Macro Strategist at Seaport Global Securities said, "contract prices associated with early February were just trending too low, and now that very big regional demand is coming back, "so "the futures contract went crazy."
February natural gas NGG18, +2.53% was at $3.545 per million British thermal units in electronic trading, up from the Nymex settlement at $3.444.