Oil traders are starting to fear the talking Fed. While no one expects the Federal Reserve to raise interest rates, the statement and comments by Janet Yellen could cause a selloff in commodities as fears that a divergent path in interest rates will cause further slowing in the emerging markets. Oil rallied last week on the back of oil demand optimism and OPEC restraint. The rally is now retreating on fears that OPEC will continue to flood the market with oil in a world where demand may falter.
Overnight the Bank of Japan left its monetary policy unchanged which was not a surprise, but downgraded its assessment of the economy. So if Japan’s outlook is weakening and the Fed is looking to raise rates, that is causing some traders to take some longs off of the table. Traders remember the January price collapse that came after a late December interest rate increase and weakness in China.
Crude-oil prices are also uncertain about a deal to freeze output even after Russia’s oil minister said that Iran should be exempt from an oil output freeze. Iran’s oil minister, Bijan Zanganeh, said that the country would only join discussions after its own output reached 4.0 million barrels a day. This came as OPEC seems to suggest that the demand for OPEC is falling and a freeze in production may not be enough to overcome supply. OPEC reported that their output fell by about 175,000 barrels a day last month to 32.28 million barrels on lower output from Iraq, Nigeria and the United Arab Emirates, the cartel said in its monthly market report. Iran’s production increased by 187,800 barrels a day to 3.132 million barrels a day last month. OPEC said it expects its crude demand will stand at 31.5 million barrels per day, 100,000 barrels a day lower than last month’s report but an increase of 1.8 million barrels a day from last year.
Tim Koltek, the CEO of Terrapin Energy Services, agrees and wrote me. Tim said that, "While oil prices are pulling back there has been a lot of talk that as soon as prices in oil go back up, the shale producers will come back on line and crash prices again. Well not so fast. As I said before don’t look for that to happen as quickly as the market believes because they are cash strapped. Mr. Koltek continued, there are “the challenges of putting rigs back on line and increasing production. My company had all the directional work on 4 rigs in North Dakota last year (Unit rigs 117, 118, 122 and Boss 402) and all but the last are laid down - only because 402 is on a contract. Nothing is going back anytime soon. Also, the costs and mechanics of rig mobilization without a contract are too high.
Mr. Koltek also said, “One other indicator of an expected rebound in oil prices is in oilfield auctions. Just like home foreclosures, this is usually a bank forcing a liquidation to pay off debt. I bought two drilling rigs in June and August of last year at about 25 cents on the dollar. About 45 minutes after I was the winning bidder on the first rig someone representing an overseas buyer offered me $80K more than I paid for it - which I turned down! However, the past few auctions that I've watched recently have seen final bids closer to 50 cents on the dollar. There aren't as many bottom feeding opportunities because drilling companies like mine or wholesalers expecting to flip the equipment are bidding up prices.
Tim Koltek is not alone questioning the ability of shale producers to come back on line in a significant way. Dow Jones news writes, “The U.S. was supposed to be the world's new swing oil producer, able to nimbly open and close the taps in response to market forces, thanks to its bounty of shale fields. But as oil prices show some signs of stabilizing, American producers and oilfield-services companies are warning that they may not be able to jump-start drilling. The reason: Many independent companies are too financially strapped, have let go too many workers, or have idled too much equipment to immediately ramp up again."
John Hess, the chief executive of Hess Corporation (NYSE:HES) said, "The balance sheets of these shale-only producers have to be repaired for them to get back to drilling”. "That's going to curb any recovery." Just as U.S. output fell more slowly than predicted - even as oil plunged from around $100.00 a barrel in 2014 to $30.00 -- it is likely to be slower in recuperating, even if prices rebound to $50.00 a barrel or more, some oil executives and analysts now say.
More than three dozen U.S. oil and gas producers plan to cut their capital spending for 2016 by nearly half, on average, compared with last year, according to a Wall Street Journal analysis of company financial filings. Some of the largest U.S. oil-field services firms have laid off 110,000 people in the past year, Evercore ISI analysts estimate, and many of those workers have no plans to return to the industry. Close to 60% of the fracking equipment in the U.S. has been idled during the downturn, according to IHS Energy, which estimates it would take two months for some of that equipment to return.
Still, even if prices return to levels where shale drillers can make money again, many companies are vowing to be cautious. Some are tempered by what occurred last spring when producers jumped back into drilling new wells after oil prices briefly hit $60.00 a barrel, inadvertently worsening a supply glut that ultimately made prices worse. "At $40, I doubt we're going to see a lot of acceleration," said Taylor Reid, president and chief operating officer of Oasis Petroleum Inc., at an energy conference in Denver last week.
One reason output remained robust last year is that drilling and fracking wells got cheaper. Producers leaned on services companies to cut costs, and certain wells were still profitable even at lower prices. But now many companies say they have cut as much as they can.
Gas prices are on the rise! Triple A says that gas prices have jumped by 12 cents per gallon this week, which is the largest weekly increase since early March, 2015. Prices increased by double digits due to a decline in gasoline supplies, relatively strong demand and continued refinery maintenance. The national average has moved higher for 18 of the past 20 days for a total of 23 cents per gallon and today’s price of $1.94 per gallon is the highest average in two months. Relatively low oil costs continue to provide drivers with year-over-year savings at the pump and consumers are saving 50 cents per gallon compared to this same date last year.
Summer in the City. Despite record supply, is natural gas poised to rally? Hot summer-time forecasts could catch the market by surprise.