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
The Trump Administration has done everything it can do to drive down oil prices including throwing in the kitchen sink, and while oil prices have plummeted, supplies are still short. Even with a weekly release of a million barrel plus of oil from the Strategic Petroleum Reserve and getting Saudi Arabia to do his bidding by saying they will raise oil production, the bottom line is that despite those best efforts there is still not enough oil in the market right now to replace Iranian oil supply once the sanctions go into place.
The Trump Administration basically acknowledged that when Bloomberg News reported that the U.S. has agreed to let eight countries — including Japan, India and South Korea — keep buying Iranian oil after it reimposed sanctions. Four of the countries are not named, and Bloomberg says that the US is in discussions with China on terms, but is among the eight countries that can get a pass. Those countries need oil and its clear they can’t find enough anywhere else.
The move by Trump to crash oil prices and then allow some waivers on Iranian oil will look like pure genius ahead of Mid term elections. Even with some oil being sold out of Iran the amount the Iranians will get paid is substantially less. Now with the possibility of a China trade deal looming and a break in price we should see oil snap back as the drop-in price will spark demand to get the ball rolling again.
Still in the short-term there is this perception of all this oil in the market even if US supply with all the SPR Releases and increasing Shale output is still just 2% above the five-year average with demand almost 5% above average. Soon US oil inventories will go back into withdrawal and with the reported OPEC production increase it will remove almost all of the globe’s oil production spare capacity. Maintenance season is ending and while the BP plant in Whiting is in extended maintenance adding some supply to the market, we will soon see record refining runs ahead of winter as margins with the Crude price break look great. Yet a big build in Cushing Oklahoma did also weigh on crude prices yesterday.
Besides if the oil price falls much further, you can forget about increasing shale oil output in the future. Most shale oil producers were having a hard time making money when prices were above 70, if prices fall into the 50s, the rig counts will start to drop, and we will again see a drop in US shale oil production forecasts.
Remember the Wall Street Journal reported that even when oil was above $70 a barrel, that out of the top 20 U.S. oil companies that focus mostly on fracking, only five managed to generate more cash than they spent in the first quarter. They spent by market capitalization collectively almost $2 billion more in the quarter than they took in from operations, largely due to bad bets hedging crude prices, as well as transportation bottlenecks, plus labor and material shortages that raised costs, according to the Journal. Now with prices breaking so dramatically, many of those firms are going to have to pull back again reducing future production gains. Remember shale output was flat until last week’s big jump to 11.2 million barrels of oil a day. To maintain that, you need prices to go back up.
The EIA reported that U.S. crude oil production reached 11.3 million barrels per day (b/d) in August 2018, according to EIA’s latest Petroleum Supply Monthly report, up from 10.9 million b/d in July. This is the first time that monthly U.S. production levels surpassed 11 million b/d. U.S. crude oil production exceeded the Russian Ministry of Energy’s estimated August production of 11.2 million b/d, making the United States the leading crude oil producer in the world.
Even though this 15% sharp break from the recent highs has this market looking terrible, beware for the inevitable snap back. This might be a great time to buy calls because the global oil market is still tight and the talks of a slowdown in demand are not showing up in the actual data.
The Energy Information Administration (EIA) reported a 48 Bcf injection into Natural Gas storage, below survey averages, and raising concerns about supply going into winter.
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