It seems that the reality of energy production destruction is starting to sink in. After warnings from OPEC’s Secretary General and the International Energy Agency about the price impact of historic capital spending cuts in the energy space, the U.S. Energy Information Administration (EIA) reinforced those concerns by reporting that U.S. oil output fell to the lowest level in over a year. Formally bearish oil analysts are now turning bullish as the bearish doomsday scenarios are not reflected in falling oil inventories and signs that U.S. oil output may have peaked and is falling faster than many had predicted.
The Energy Information Administration continues to catch up with falling U.S. oil output and reported that U.S. crude oil production dropped 120,000 barrels a day from August to September. They also lowered their forecast for 2016 output to 8.8 million barrels a day. I think that number will actually be lower as the Energy Information Administration leans on the side of being conservative when they make their forecasts. Not only did the EIA lower their estimate for U.S. oil output but raised 2015 world oil demand forecast by 170k bpd to 1.34 million barrels per day.
Oil also is getting support from the American Petroleum Institute (U.S. oil output) report that showed another drop in U.S. crude oil supply. The API reported a crude oil inventory drawdown of 1.2 million barrels overall but more importantly, in Cushing, Oklahoma oil stocks fell 100K barrels. We are in the heat of refinery turnaround season and the ultra bears said that this could not happen. Instead of stocks rising in Cushing, Oklahoma like the bears predicted, they are falling because it is clear that U.S. oil output is falling. Instead of Cushing running out of storage space, there is plenty of room to store more oil. Later today we get the Petroleum Status report from the Energy Information Administration that may confirm the fact that U.S. oil output is helping level out the oil glut.
We have been saying that oil is in the process of putting in a long-term bottom and it looks like it is happening! We warned about production destruction. We warned about the impact that historic capital spending cuts would have on the market. We talked about the next super cycle in oil. We talked about putting on longer term bullish strategies.
The Energy Information Administration also gave more predictions in their much loved and anticipated, “Winter Fuels Outlook” report. It’s loved even more because of they predict the cost of heating our homes will be lower! The EIA projects the average U.S. household expenditures for natural gas, heating oil, and propane during the upcoming winter heating season (October 1 through March 31) will be 10%, 25%, and 18% lower, respectively, than last winter because of lower fuel prices and lower heating demand. Forecasts of lower heating demand and relatively unchanged prices contribute to electricity expenditures that are 3% lower than last winter.
The EIA also says that gas prices will be cheap. They say regular gasoline monthly retail prices averaged $2.37/gallon (gal) in September, a decrease of 27 cents/gal from August and $1.04/gal lower than in September, 2014. The EIA expects monthly gasoline prices to decline to an average of $2.03/gal in December, 2015 and forecasts U.S. regular gasoline retail prices to average $2.38/gal in 2016.
For natural gas working inventories were 3,538 billion cubic feet (Bcf) on September 25. This level was 15% higher than a year ago and 4% higher than the previous five-year average (2010-14) for this week. EIA projects inventories will close the injection season at the end of October at 3,956 Bcf, which would be the highest end-of-October level on record.