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 are rising because while oil supply is here today, it might be gone tomorrow. Not only do we have the real possibility of U.S. sanctions on Venezuelan oil, you have OPEC, led by Saudi Arabia working to drain excess supply. You also have warnings from a shale pioneer that U.S. shale growth could plummet. These worries had traders look past a bearish Energy Information Administration (EIA) status report that showed a nearly 8-million-barrel increase in crude supply, a 4.1-million-barrel increase in gasoline supply. Yet with the ongoing concerns over the possible loss of Venezuelan heavy oil, they reported a 600,000-barrel draw in distillates. The distillate fuel inventories look oh so much bigger, as refiners need heavy oil to beef up distillate supply that is currently about 2% below the five-year average.
Get Out of Venezuela. The embattled President Nicholas Maduro has told U.S. diplomats to leave and the U.S. government is warning that all Americans get out of Venezuela after the U.S. recognized Juan Guaido, president of the opposition-led National Assembly, as the rightful constitutionally elected President of Venezuela for a new presidential election. The AP reports that the U.N. human rights chief is calling for independent investigations into violence linked to protests in Venezuela, allegedly involving excessive use of force by security or pro-government forces that reportedly left at least 20 people dead. You see in a socialism system; your life is worth nothing if the people in power with the guns think you are not in the best interest in the state. You see in a socialism system; you are just a pawn that the government can dispose of if they think you’re not in their best interest. It is also in their best interest to keep all the food and medicine for the people who oversee the state because you need those people to be well feed and happy so they can decide whose life is expendable next.
U.S. sanctions may soon follow on Venezuelan oil. One question will be as to whether the sanctions are just U.S. sanctions, or the U.S. will force trade partners to join in. The FT reports today that “One possibility is that the U.S. freezes assets through an executive order, as it did in Libya in 2011,” quoting Francisco Rodríguez, chief economist at Torino Capital in New York. “PDVSA would then lose the ability to sell oil in the U.S. If Europe does something similar, it becomes very difficult for PDVSA to sell oil. Another option is for Mr. Guaidó to appoint a PDVSA or Citgo board. “U.S. courts would have to recognize those appointees,” Mr. Rodríguez said. “According to established jurisprudence in the U.S., the judiciary defers to the executive branch in matters of recognition of governments.” The Trump administration might consider “an extension of December’s executive order targeting the mining sector, or targeted oil sections”, said Risa Grais-Targow, director for Latin America at the Eurasia Group. “An all-out oil import ban is still on the table, but the U.S. is more likely to start with a milder option like a diluent ban.” Venezuela needs diluents to process its heavy crude oil and currently imports them from the U.S. The EU and the Lima Group nations might also consider further sanctions.
Oil will be looking at the U.S. rig count for further evidence of a shale oil pullback. Zero Hedge reports “On one hand the U.S. shale industry has never had it better: following dramatic technological and efficiency improvements in recent years, U.S. oil output is not only at an all-time high at 11.9MMb/d, but is the highest of any OPEC or non-OPEC nation in the world. Oil production is so high, in fact, that as of October 2018, the U.S. is now energy independent. Alas, this production glut blessing is also a curse, and according to one industry titan, U.S. production growth could slow by as much as half this year. Continental Resources’ Harold Hamm said that shale growth could decline by as much as 50% this year compared to 2018, Oil Price reported. Hamm said that a lot of shale E&Ps are trying to keep spending within cash flow. This newfound mantra of capital discipline has been imposed on the shale industry after a decade or so of a debt-fueled drilling frenzy.
“Producers have become more disciplined in their approach to capex,” Hamm said at the Argus Americas Crude Summit in Houston this week. “Several years back growth was a huge consideration. That consideration has been much less. The peak consideration now has been — are you overspending cash flow? Are you living within cash flow?”
Another shale man, Hess Corporation CEO John Hess thanked OPEC for its help in raising prices, saying that U.S. shale oil producers need help with higher prices and oil price stability.
But still, U.S. oil production Is 23 Years ahead of schedule. Bloomberg News reports that “A year ago, the U.S. government saw American crude production averaging 11.95 million barrels a day in 2042. Shale drillers are set to exceed that this year. The Energy Information Administration now estimates output will top out at 14.53 million barrels a day in 2031, according to its Annual Energy Outlook report released Thursday. Why such a big difference? Near-term prices are higher than what the agency assumed last year, boosting the baseline production, according to the EIA.
The U.S. will be a net exporter of petroleum — and energy in general — next year, years sooner than previous annual estimates, something the EIA flagged in its short-term outlook earlier this month. That’s due to the faster increases in crude and natural gas liquids production, combined with slower demand growth, according to EIA Administrator Linda Capuano.
For crude, the longer-term chart formations look very bullish. A potential reverse head and shoulders is signaling a move back to the $70 WTI handle, with the fundamentals outlook suggesting a major tightening of supply that will be enhanced by potential Venezuelan sanctions. Long term strategies, with futures hedged with options should be the best way to take advantage of this coming move and help you ride out the turbulence.
More from the EIA. The United States becomes a net energy exporter in 2020 and remains so throughout the projection period as a result of large increases in crude oil, natural gas, and natural gas plant liquids (NGPL) production coupled with slow growth in U.S. energy consumption.
Of the fossil fuels, natural gas and NGPLs have the highest production growth, and NGPLs account for almost one-third of cumulative U.S. liquids production during the projection period. Natural gas prices remain comparatively low based on historical prices during the projection period, leading to increased use of this fuel across end-use sectors and increased liquefied natural gas exports.
The power sector experiences a notable shift in fuels used to generate electricity, driven in part by historically low natural gas prices. Increased natural gas-fired electricity generation; larger shares of intermittent renewables; and additional retirements of less economic coal and nuclear plants occur during the projection period.
Increasing energy efficiency across end-use sectors keeps U.S. energy consumption relatively flat, even as the U.S. economy continues to expand.
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