Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
There is a temptation to attribute the recent rise in oil prices to just the uncertainty of the political purge that we have seen in Saudi Arabia, but if you think that you are missing the larger point. There is a reason why we have seen oil prices hit a 2 and a half-year high and a reason why they are up from a of 26.05 in in 2016 to a high yesterday 57.69. It is because the crash in oil prices caused one of the biggest oil investment pull backs in history and at a time when low oil prices spurred demand and which now is at one of the fastest growth rates and fastest global growth rate since 2012 leading to the fastest drain in global oil and petroleum supply drains in history. The Energy Information Administration reduced their outlook for U.S. shale and OPEC put to rest the myth of “peak demand” as the oil supply drain is speaking volumes.
The American Petroleum Institute added to that record supply drain by reporting that U.S. crude supply fell for the eighth week in a row by 1.56 million barrels. They also said the supply deficit in reporting that distillates supply fell by 3.13 million barrels. They say gasoline supply did rise by 720,000 barrels but that followed a API 7 million barrel drop a week ago.
Shale Oil producers continue to disappoint and while we did see the prolific Permian Basin add production in the other basin production is flat to declining. Why well capitalized forms can lock in hedge, yet smaller firms would be hedging in losses at this point, but mat do so just to get banks to lend them capital. This caused the Energy Information Administrations (EIA) to once again lower its outlook for U.S. shale production in yesterday’s Short Term Energy Outlook.
For the second month in a row the EIA lowered its estimate for production to a growth of just 81,000 barrels a day in November, putting total shale output at just hit 6.12 million barrels a day next month. Many in the industry think the EIA is still overestimating output and based on the big drops, week after week in U.S. inventory, it seems that they probably are. In Fact, in some basins shale production is going in a decline. Estimates are that shale oil producers will have to double their capital spending to regrow output by a million barrels a day, that would be almost impossible unless oil stabilizes in the $60 a barrel handle. Even at that they can’t match OPEC production costs and growing global oil demand growth.
OPEC says forget about peak demand at least until 2030. The FT reported that OPEC raised its forecast for oil demand in the coming decades despite a global push in energy policies that promotes cleaner fuels and a rise in technologies such as electric cars. OPEC say that world consumption will rise from 95.4m barrels a day in 2016 to 102.3m b/d in 2022, which is an upward revision of almost 2.3m b/d, the cartel said on Tuesday. Longer term oil demand has been revised upward by 1.7m b/d to 111.1m b/d by 2040.
Still OPEC believes that Shale can come back. OPEC says that the outlook for non-OPEC liquids growth has “changed quite considerably as the U.S. tight oil sector’s resilience and ability to bounce back.”
Nat Gas could also make history.
Bloomberg News Reports that “Cold snap seen spurring demand for heating fuel across U.S.” An early cold snap may deliver natural gas traders the most bullish inventory report heading into the winter heating season they’ve seen in more than a decade.
On Thursday, the U.S. government will issue its weekly estimate of gas stockpiles. And based on a Bloomberg New Energy Finance analysis, the report may show a gain of only 8 billion cubic feet. That’d be the smallest increase for this time of year since supplies of the heating fuel declined in 2006. (Back then, a combination of nuclear shutdowns and an early chill had power plants plowing through gas.)
A small inventory gain would be a rare win for bulls this time of year, when gas suppliers are typically racing to store the fuel in preparation for the peak demand season. A cold snap to thank for stoking demand sooner. Temperatures are forecast to continue to dip well below normal from the U.S. Pacific Northwest to the Northeast through Nov. 10. As a result, natural gas burn may jump 24 percent in the Midwest alone from a year earlier, according to Bloomberg New Energy Finance.
The early demand surge threatens to exacerbate already-tight supplies and could lead to price spikes during the heating season, should cargoes of liquefied natural gas continue to leave U.S. shores.
“We’re seeing a lot more demand than anticipated, and you’re probably going to see some pullback in production as well on seasonal maintenance,” Phil Flynn, senior market analyst for Price Futures Group, said by phone. “When you compare that to the five-year average, it makes it look a lot more bullish.” Natural gas has continued to flow out of massive shale formations in the eastern U.S. at record-high levels, and that should help prevent major supply constraints, Bloomberg New Energy Finance Analyst Het Shah said. But several pipelines proposed to carry gas out of those reservoirs are facing setbacks.
On Monday alone, TransCanada Corp. delayed the startup of its Leach Xpress gas project, which will ship Appalachian supplies, to January from Nov. 1, and Williams Partners LP was forced to temporarily halt construction on its Atlantic Sunrise project, also planned to deliver shale gas, due to a court order.
Questions? Ask Phil Flynn today at 312-264-4364
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