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
While bearish oil traders kept their focus on the supply side of oil, many forgot to focus on the demand side and it is the demand side that propelled oil back to a three-week high yesterday. That put oil back to the highest level since the big stock market correction drop. The catalyst was an unseasonal 1.16 million barrel drop in crude supply and continued to rip roaring demand.
Gasoline demand increased by 222k barrels last week and has averaged 9.1 million barrels a day, which is up 5.4% from year ago levels. That is a sign that consumers are feeling strong and are out driving and spending money.
Overall total oil products demand is averaging a very healthy 20.6 million barrels per day, up by 4.3% from the same period last year. Distillate demand has averaged 4.1 million barrels per day over the last four weeks, up by 4.3% from the same period last year. Jet fuel demand is also surging and is up a whopping 6.7%, compared to the same four -week period a year ago.
That strong demand helped draw down distillate inventories by 2.422 million barrels and led to a smaller than anticipated 261,000 barrels. The bottom line is that consistent strong demand has been the story on oil. Yes, OPEC cuts helped balance the market as we predicted would happen, but it would not have made a difference if the global demand story was strong.
Now you can talk about shale and it was impressive holding at a reported 10,270 million barrels a day, yet it is not helping U.S. supply. Because of strong demand and backwardation in the market, supply is being put into the market and not into storage.
Plus shale producers are still not making money in many cases. Reuters reports in a must read that “Shale producers have raised and spent billions of dollars to produce more oil and gas, ending decades of declining output and redrawing the global energy trade map. But, most U.S. shale producers have failed for years to turn a profit with the increased output, frustrating their financial backers.”
Reuters says that “Wall Street’s patience ran out late last year as investors called for producers to shift more cash to dividends and share buybacks”. ‘Give me some cash, please.’ That’s what investors have said,” said Anoop Poddar, a partner at private equity firm Energy Ventures. And yet, such calls for payouts remain a debate in the industry as oil prices have recently crept up to four-year highs. Investors demanding immediate returns could risk forcing firms to curb expansion that could have a higher long-term payoff if oil prices continue to rise. For now, share prices of shale producers have yet to fully recover from the 2014 oil price CLc1 collapse, when many investors took losses as hundreds of firms went bankrupt and those that survived struggled
This year, five of the 15 largest U.S. independent shale firms have started paying or raised quarterly dividends, the documents show. But six of the firms have never offered a dividend or have not restored cuts implemented since the 2014 oil price collapse. Recent oil price gains have eased the pressure from shareholders. In January, U.S. oil futures CLc1 jumped to $66.14 a barrel, up 56 percent from last year’s low and at a level not seen in four years.
Heltman has pressed shale firms to show restraint even amid rising prices. And despite higher revenues, spending increases have so far been restrained. Producers have pushed up spending plans for all of 2018 by 10 percent over last year, according to a tally of 41 of the 65 producers tracked by financial services firm Cowen & Co. Some companies have maintained conservative assumptions for the average oil price for 2018, budgeting for prices between $50 and $55 a barrel. That price will mean they can cover new drilling investments and still pay dividends.
Investors are searching for firms that can find the optimal balance between the conflicting goals of controlling costs, paying dividends and increasing production.
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