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 chickens have come home to roost in the oil market. Or maybe its barrels, whatever. All this selling in recent weeks on talk of slowing demand because of turmoil in global markets seemed to make sense except someone forgot to tell oil consumers about it. Instead of a slowdown in oil demand, it appears to be flourishing as buyers look to sop up every barrel of oil they can get their hands on. The American Petroleum Institute (API) reported that U.S. Crude supply fell by 10.18 million barrels in the latest week as U.S. exports most likely surged to near record levels and U.S. refiners are kicking into high gear. What is scarier is that the big weekly draw in U.S. oil inventory may be the first of many as OPEC, Russian, Alberta production cuts and outages in Libya could remove 1.8 million barrels of oil a day from the global market.
This is not good as it is an inverse of the situation we had when oil was near $77 a barrel. Back then oil was rising because we were fearful that we could not replace Iranian barrels lost to sanctions. Then, President Trump granted waivers to Iranian buyers and then we thought we suddenly had a glut. After the waivers, oil prices could not get a bid and the thought then was that it was because the price action might be signaling a slowdown in demand. Surely the trade would slow Chinese oil demand and the weak economic data coming out of Europe would surely show a marked drop in demand. The U.S. would also cave and demand would plummet.
The problem is that did not happen. Chinese oil imports soared to a record. The slowdown in demand in Europe and the U.S. was not nearly recognizable and in part seasonally related. Yet, now you have OPEC making substantial cuts to offset a drop-in demand that is not happening. Sort of like when they raised production to offset the loss of Iranian barrels that did not get lost. Now with potential progress in U.S. China trade talks, it looks like we are going to have a undersupplied market going into the new year. President Trump will have to get ready to start tweeting again in the near year. The oil products did not fare much better in the API, as gasoline inventories fell by a much larger than expected 2.484 million barrels. Distillates were up by only 712,000 barrels, which is not going to make a lot of difference in the year over year supply deficit.
So the poor shale producers got rocked on the drop and already are making plans to slowdown drilling. Yet, the Energy Information Administration(EIA) is still very optimistic about U.S. oil production. Overall, according to the ‘Short Term Energy Outlook”, the EIA says that U.S. crude oil production will average 10.9 million b/d in 2018, up from 9.4 million b/d in 2017, and will average 12.1 million b/d in 2019.
As far as crude prices, the EIA says that Brent crude oil spot prices which averaged $65 per barrel (b) in November, down $16/b from October, the largest monthly average price decline since December 2014. The EIA expects Brent spot prices will average $61 in 2019 and that West Texas Intermediate (WTI) crude oil prices will average about $7/b lower than Brent prices next year. NYMEX WTI futures and options contract values for March 2019 delivery that traded during the five-day period ending December 6, 2018, suggest a range of $36/b to $77/b encompasses the market expectation for March WTI prices at the 95% confidence level.
The EIA also forecasts total global liquid fuels inventories will increase by about 0.3 million b/d in 2018 and by 0.2 million b/d in 2019. Global liquid fuels production is forecast to increase by 1.4 million b/d in 2019. EIA expects production growth in the United States to be partially offset by declining production elsewhere, notably in the Organization of the Petroleum Exporting Countries (OPEC), where EIA forecasts that liquid fuels production will decline by 0.9 million b/d in 2019. EIA expects global liquid fuels consumption to increase by 1.5 million b/d in 2019, with growth largely coming from China, the United States, and India.
As far as natural gas, the EIA says that the Henry Hub natural gas spot price averaged $4.15/million British thermal units (MMBtu) in November, up $0.87/MMBtu from the October average. Cold temperatures and low inventory levels contributed to the increase in price. Despite low inventory levels, EIA expects strong growth in U.S. natural gas production to put downward pressure on prices in 2019. EIA expects Henry Hub natural gas spot prices to average $3.11/MMBtu in 2019, down 6 cents from the 2018 average and down from a forecast average price of $3.88/MMBtu in the fourth quarter of 2018. NYMEX futures and options contract values for March 2019 delivery traded during the five-day period ending December 6, 2018, suggest a range of $1.85/MMBtu to $8.37/MMBtu encompasses the market expectation for March Henry Hub natural gas prices at the 95% confidence level.
EIA estimates that U.S. natural gas storage inventories were 3.0 trillion cubic feet (Tcf) at the end of November, which was 19% lower than the five-year (2013–17) average for the end of November.
EIA forecasts that dry natural gas production will average 83.3 billion cubic feet per day (Bcf/d) in 2018, up 8.5 Bcf/d from 2017. Both the level and volume growth of natural gas production in 2018 would establish new records. EIA expects natural gas production will continue to rise in 2019 to an average of 90.0 Bcf/d.
So record crude and natural gas production! Make sure you keep up with all of the breaking developments on the Fox Business Network! Call to get my daily trade levels at 888-264-5665 or email me at firstname.lastname@example.orgQuestions? Ask Phil Flynn today at 312-264-4364