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
Has $40.00 a barrel oil ever felt so good? WTI breached that historically and economically critical level as we saw a combination of events drive prices. Economic and oil price pessimists are getting squeezed out, and I am sure they will be blaming Wall Street and evil speculators for getting it wrong. They fought the Fed, and they doubted OPEC and Russia’s resolve. They predicted that oil storage would overflow and there’d be oil running down the streets. Now oil bulls have everything going their way as the U.S. jobs report stunned the bears, and OPEC plus Russia extended the biggest oil production cut in history.
Non-farm payrolls grew by 2.5 million positions last month, the most significant increase ever, lowering the unemployment rate from 14.7 percent in April to 13.3 percent. Russia and Saudi Arabia came to the tables after convincing OPEC cheaters, like Iraq, Nigeria, and Algeria, to comply with reductions, thereby cutting a deal to extend cuts until the end of July, keeping 10% of the global supply in the ground.
The Saudis also sent a strong signal by spiking its selling price for oil by the most substantial increase in 20 years. That should force some refiners and countries to draw down stored supply. While there are reports of some shale producers coming back online, the U.S. oil rig count suggests that we will still see U.S. oil production fall as old wells deplete.
On Friday, Baker Hughes showed that there is still a continuation of historic retrenchment in drilling. According to the company, U.S. rigs drilling for oil declined by 16 to 206 this week. The total active U.S. rig count, meanwhile, also fell by 17 to 284, according to Baker Hughes. That is the 13th week in a row of falling rig counts, and that signals a continued drop in U.S. oil output.
We also saw output shut-in from tropical storm Cristobal, taking out 635,000 barrels of oil and 878 million cubic feet of natural gas. The Bureau of Safety and Environmental Enforcement (BSEE) estimates that approximately 34.30 percent of the current oil production in the Gulf of Mexico has been shut-in. BSEE estimates that roughly 32.41 percent of the natural gas production in the Gulf of Mexico has been shut-in as of yesterday.
Still, there is some OPEC drama. Reports from Reuters say that there are no plans for Gulf OPEC producers to continue with their 1.180 million barrels per day, voluntary deeper oil cuts beyond June according to OPEC industry sources. Yet remember the Saudis are using that as a threat to keep OPEC cheaters inline. The Saudi Oil Minister Khalid A. Al-Falih, “We have no stomach whatsoever for any country abstaining from their obligation under the OPEC+ agreement.” So if they cheat, get ready for more Saudi oil. If they don’t, then look for another extension of cuts beyond July.
Strong jobs data and the reopening of New York and other cities will see a continued recovery in gas and diesel demand. Natural gas demand will take a hit from tropical storm Cristobal.
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