Even as crude oil supply may rebound this week the tightening global oil supply is becoming more apparent. Global demand fed by low prices and OPEC compliance has seen the global overhang of oil practically disappear. We saw more support from geopolitical issues as Libya declared a force majeure after an attack at its southeastern oil field Al-Fil.
We also saw support in comments by Saudi Arabian oil minister Khalid al-Falih, who said that they would keep crude production in between January through March at less than seven million barrels a day, which is well below their OPEC quota. As Warren Buffet warns about company’s stock prices that have debt, as in many shale oil producers, the capital to ramp up shale may be limited in the near term. We should see shale output start to level off as costs rise and banks become stingier.
As we predicted long ago that demand would overtake production as major players cut spending too deep and now we are behind the curve when it comes to production versus demand growth, the oldest story in the commodity cycle handbook.
The market is strong even as we should see a combination of a jump in U.S. imports and lower refinery runs that could lead to a boost in U.S. crude supply. Imports may get a boost as ships are trying to make it through the weather challenged Houston Shipping Channel. Crude supply could build in the United States by three million barrels even as Cushing Oklahoma falls again by 1.5 million barrels. Distillates should fall by one million and gasoline should rise by two million barrels.
Yet, in Europe we should see more draws as a last blast of winter is forcing European refiners to put off maintenance to meet demand. That should open the export window for U.S. products again and should give both RBOB and Ultra Low sulfur diesel support.
Venezuelan President Nicolas Maduro bragged on Saturday that he would recover 70% of the country’s lost oil production in the first half of 2018. Maybe that cryptocurrency thing is working for him. Of course, it remains to be seen if his pollical cronies have the talent to raise production even if they had the cash. It is so sad to see the Venezulan people get robbed of their future from this type of regime.
Reuters reported that a powerful 7.5-magnitude earthquake struck Papua New Guinea’s Southern Highlands province early on Monday, the U.S. Geological Survey (USGS) said, prompting oil and gas companies to immediately suspend operations in the energy-rich interior.
Platts reported that the Trump Administration will not certify the Iran nuclear deal, according to U.S. Vice President Mike Pence, increasing the likelihood of re-imposition of U.S. sanctions on international sales of Iranian crude "The United States will no longer tolerate Iran's destabilizing activities across the region, and this country will no longer certify the disastrous Iran nuclear deal," Pence said during a speech at the Conservative Political Action Conference. Iran produced 3.83 million b/d of crude in January, according to the latest S&P 500 Global Platts OPEC survey, up about one million b/d from just before the nuclear deal went into force in January 2016.
Trilby Lundberg says drivers need to watch that price at the station when they fill your tank. After climbing more than 14 cents since early December, the regular grade retail gasoline price has dropped 6-1/2 cents in the past two weeks, to $2.59 gal. This first drop of the year may be the last for a while because in the same period, crude oil prices strengthened by about $4.50 bbl. depending on the grade. Translated into gasoline, refiners are paying the equivalent of a dime more per gallon for the raw material, but this has not yet manifested at the pump. Refiner margins on gasoline are suffering a tight squeeze, so refiners will have to attempt some recovery soon by hiking their wholesale gasoline selling prices to their various accounts. Further pressures on gasoline prices are coming as well, with March 11 the start of Daylight Saving Time that encourages demand, and the higher Spring/Summer gasoline blend costs fanning out soon to the rest of the country beyond Southern California, which each year is the first area affected by the federal regulation. In other words, buckle up on gas it is going to take us on a ride!
We should see a 60bcf withdrawal from storage on natural gas! The charts on gas look like we want to have one more pop this winter, yet the larger fundamental picture is wildly bearish. Be cautious.
I am very glad I was able to get many of you hedged in the right direction. The bearish bias that we fought all last year is now changing. The misperception by many on how shale oil output works, and the underestimation of OPEC resolve caught all the bears by surprise. As we go forward it is important that you see the new dynamic in the market. We have not been in a supply tightening cycle for many years and you have to believe that the market will react differently to news than it did when we were in a supply building mode!