The oil rally seemed to get blindsided by a rising dollar index that hit a 14-year high. And a report by Bloomberg that Libya will ramp up production in the southwest and will ship 1.9 million barrels at the end of the month from the Zawiya port near Tripoli.
Of course it is a shock to the trade about the shipment as Libya has said that it was going to happen and it is amazing that the market is so worried about this because in the past Libya has, since the fall of Gaddafi, failed to follow up on its promise in regards to oil. Whether it is rebel factions or Isis, the thought that Libya can hit that target is unlikely. Libya does not have an OPEC quota and overtime their production will be needed regardless. A bump up in Libya’s oil output really does not take away from the significance of the OPEC deal. In fact, because of Libya’s high quality crude, in some ways they really don’t compete directly with the big honchos Russia and Saudi Ariba. Falling North Sea output means that the increased Libyan output will be welcome in part fill that void.
So, in other words, I think the market overacted to the news but with the dollar soaring, the market was looking for an excuse to wipe out long positions that had surged the previous week. We still maintain our target of $60.00 and longer term to $73.00.
We also saw products take a beating even as we are seeing more predictions that the era of low gasoline prices is over. Strong U.S. demand and rising crude costs will keep retail prices on an upward trend. USA Today is reporting that Gas Buddy is predicting the highest gas prices since calling for a high of $2.49, which is in line with my forecast pretty much. They are predicting that U.S. drivers are projected to spend $354.6 billion on gas this year, a jump from the $302.5 billion and while that is 50 or so billion more that we are spending is not all bad because more Americans will have places to go like to their jobs. With the bump in the U.S. economic outlook, we should also see a bump in wages as well as job opportunities. With the bounce back in US shale, we can also see a huge rebound in energy production led growth that should make those higher gas prices easier to handle.
Oil prices will also watch inventories closely. The early expectations for both the Energy Information Administration and American Petroleum Institute supply reports are for crude to fall by 2 million barrels with a drop-in Cushing, Oklahoma of 900,000 barrels. Refinery runs are to increase by 0.5%. Gas is supposed to rise by 2.5 million barrels but I think it may fall. Same for distillates that are supposed to rise by 2 million barrels but I think they will fall.
Natural gas was way overdone on the moderating weather reports. Andrew Weissman of EBW AnalyticsGroup said that while natural gas prices may continue lower in the immediate term, elevated spot market demand is likely to materialize by this weekend, strengthening support. Because of Tuesday’s outsized declines, the gas market is left notably undersupplied at NYMEX closing prices. Under WDT’s most-likely weather scenario, $3.75/MMBtu gas may be required to keep end-of-March storage above 1,600 Bcf and the 2017 injection season could be under supplied by 0.8 Bcf/d. These figures are despite our projections for robust supply growth this winter. Our best case calls for a 1.7 Bcf/d production increase from October to March. Electricity demand is slated to rebound this week as the winter holidays end. Higher prices may be forthcoming later this week as very cold weather sets in.