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Phil Flynn

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 have been on the move, dipping then flipping on headlines about the progress of reopening the Suez Canal, one of the world’s most important waterways. It was 6 days ago that the world’s largest merchant ship, the Ever Given, got caught in a storm and it ended up getting wedged in sideways blocking the canal and effectively blocking 20% of the global supply chain. Reports that the ship had been refloated and partially freed caused a drop in oil but prices soon bounced back up as a larger reality sunk in. The truth is that oil and LNG and product supplies will be delayed and that will not help with a market that is on track to be undersupplied this summer as more covid vaccinations inspire more demand.

 

The damage from the Ever Given mishap has already been done so now it is on to the upcoming OPEC Plus meeting getting to see if they are moved to increase production while all signs suggest that they will not. So the oil market that has recently seen some wild swings and a correction jeopardizing the bull run, should right the ship once OPEC plus meets.

Reuters reports that, “Russia would support broadly stable oil output by OPEC+ group of leading global oil producers in May while seeking a relatively small output hike for itself to meet the rising seasonal demand, a source familiar with Russia’s thinking said on Monday. Russian energy ministry and the office of Deputy Prime Minister Alexander Novak, in charge of Moscow’s ties with OPEC+, have not immediately responded to requests for comments. So this should suggest a rollover is in the cards. The excuse they will use is rising covid cases but at the end of the day, it is all about making money and what they can get away with. OPEC Plus has no opposition from the Biden administration when it comes to cutting production. That silence will allow OPEC to increase the price of oil. That, in turn, is raising gasoline prices.

Now, the question is whether U.S. producers can increase production and ward off an oil price squeeze. Oil production in the U.S. did rise to 11 million barrels a day, still, 2 million barrels a day below the pre-pandemic peak. Yet there are some signs that shale producers might start to ramp up production but will it be too little too late to stop oil from surging to $80 a barrel.

The Dallas Fed Survey reported that, “Activity in the oil and gas sector expanded strongly in the first quarter of 2021, according to oil and gas executives responding to the Dallas Fed Energy Survey. The business activity index—the survey’s broadest measure of conditions facing Eleventh District energy firms—soared from 18.5 in the fourth quarter to 53.6 in first-quarter 2021, reaching its highest reading in the survey’s five-year history. Exploration and production (E&P) and oilfield services firms both experienced a strong expansion in activity. Oil and gas production increased, according to E&P executives. The oil production index rose from 1.0 in the fourth quarter to 16.3 in the first quarter. Likewise, the natural gas production index turned positive and increased 18 points to 15.9. The index for capital expenditures increased from 12.5 to 31.0, indicating an acceleration in capital spending among E&P firms. Additionally, the index for the expected level of capital expenditures next year came in at 49.5, signaling firms have increased their capital spending plans for 2022.

Oilfield service firms reported improvement in all indicators. The equipment utilization index surged, jumping 57 points to 63.2 in the first quarter. Operating margins improved, with the index moving into positive territory—increasing from -31.9 to 14.0. The index of prices received for services also turned positive, jumping from -29.7 to 20.0. However, the index for input costs also rose notably—from -4.3 to 36.0—suggesting mounting cost pressures.

After seven consecutive negative readings that indicated contracting payrolls, the aggregate employment index turned positive, rising from -11.7 to 8.4. Employment growth was driven primarily by oilfield services firms. The employment index was 23.5 for services firms versus 1.0 for E&P firms. The employee hours index moved into positive territory, rising from -6.9 to 22.8. The aggregate wages and benefits index also turned positive—from -12.4 to 14.8.

Six-month outlook improved notably, with the index rising from 21.6 last quarter to 70.6—the highest reading in the survey’s five-year history. Additionally, firms noted less uncertainty around their outlook this quarter than last; the aggregate uncertainty index fell eight points to -22.2. This is the lowest reading for the uncertainty index since its inception in the first quarter 2017.

On average, respondents expect a West Texas Intermediate (WTI) oil price of $61.00 per barrel by year-end 2021; responses ranged from $45 to $85 per barrel. Survey participants expect Henry Hub natural gas prices of $2.80 per million British thermal units (MMBtu) at year-end. For reference, WTI spot prices averaged $64 per barrel during the survey collection period, and Henry Hub spot prices averaged $2.59 per MMBtu.
Thanks,
Phil Flynn

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