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
Oil prices continue to go on a wild ride as we are reminded that you can’t mix apples and oil. After oil put in an incredible comeback on data that OPEC had significantly lowered production and the Saudis severely cut oil exports, slowing growth fears again thwarted the oil rally. Apple CEO Tim Cook after the close warned that revenue for the current quarter was forecasted at $84 billion, way down from the $90 billion dollar forecast. He said that “While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China.” Or maybe it was partly because the Apple I-phone is getting more expensive, upgrading to a new phone where the features really are not that exciting over the previous phones is no longer a necessity.
The news sent oil back down. Who knew that I-phones ran on oil? Yet it really was the slowdown fears against a massive drop in OPEC production. Oil did pop off-key support after a Bloomberg tanker tracker report showed that “observed crude exports from Saudi Arabia fell to 7.253m b/d in December on lower flows to the U.S. and China. That confirmed reports from other private trackers and the drop is very significant. Bloomberg says that if this compares with a 7.717m b/d in November, which was the biggest drop in exports since Bloomberg began tracking shipments at the start of 2017.
Oil saw another boost after Bloomberg reported that OPEC oil production had the biggest monthly drop in 2 years. Bloomberg wrote that OPEC production fell 530,000 barrels a day to 32.6 million a day last month. It’s the sharpest pullback since January 2017, the last cut that the market underestimated.
In 2017 many were skeptical that OPEC and Russia could keep compliance going but they proved them wrong. There should be no doubt that OPEC is prepared to do whatever it takes to stabilize prices, even if it means losing some market share to the shale oil producers.
The market is still very optimistic that the shale oil producers will continue to add barrels in the next few months even as there are more signs that some producers are struggling and perhaps there are also signs that some of the shales more lofty production expectations may have to be lowered somewhat. The Wall Street Journal wrote a piece called “Fracking’s Secret Problem—Oil Wells Aren’t Producing as Much as Forecast.” The Journal says that data analysis reveals thousands of locations are yielding less than their owners projected to investors. The Journal says in this must read that “Two-thirds of projections made by the fracking companies between 2014 and 2017 in America’s four hottest drilling regions appear to have been overly optimistic, according to the analysis of some 16,000 wells operated by 29 of the biggest producers in oil basins in Texas and North Dakota. Collectively, the companies that made projections are on track to pump nearly 10% less oil and gas than they forecast for those areas, according to the analysis of data from Rystad Energy AS, an energy consulting firm. That is the equivalent of almost one billion barrels of oil and gas over 30 years, worth more than $30 billion at current prices. Some companies are off track by more than 50% in certain regions. While U.S. output rose to an all-time high of 11.5 million barrels a day, shaking up the geopolitical balance by putting U.S. production on par with Saudi Arabia and Russia. The Journal’s findings suggest current production levels may be hard to sustain without greater spending because operators will have to drill more wells to meet growth targets. Yet shale drillers, most of whom have yet to consistently make money, are under pressure to cut spending in the face of a 40% crude-oil price decline since October.”
We keep reading headlines about surging supply in the market and talk of slowdowns, yet really based on where we are at now that is still speculation. We get the American Petroleum Institute report tonight and we will get our first indication of this week’s version of the so-called surging supply. The API is still way out of whack with the Energy Information Administration report so who knows what adventure they will have in store for traders tonight. But whatever it is, the most likely outcome is that it will be totally different from the EIA.
While we are seeing the benefits of low gasoline prices, truckers are not feeling as lucky. Transport Topics reports that while the U.S. average retail price of diesel dropped 2.9 cents to $3.048 a gallon, diesel still costs 7.5 cents a gallon more than it did a year ago. Still on the positive side the drop in diesel marked the 11th consecutive weekly decline in the cost of trucking’s main fuel. The price has fallen 34.6 cents during that period, the average national gasoline price fell 5.5 cents to $2.266 per gallon. The biggest regional drop for gasoline was in the Midwest, where prices fell by 7.6 cents, dropping to $2.005, according to EIA. The national average price for gas is 25.4 cents lower than one year ago.
Natural gas continues to be weak as predictions of a polar vortex gave way to warmer than normal temperatures. The long-term forecast now suggest a very light winter, reducing natural gas demand expectations. At least until they change the forecast again.
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