Long-Term Damage
Oil prices are struggling on short-term fundamentals but we continue to get a disturbing outlook for our long-term energy future. Weakness enveloped crude oil driving it down for the fourth day in a row on reports of oil disruptions getting back on line. Yet a report from Rystad Energy says that global oil discoveries fell to the lowest level in 63 years as oil companies slashed spending on oil exploration by the most in history.
According to a report by Rystad Energy as reported by Bloomberg News and Morgan Stanley (NYSE:MS), oil discoveries fell to the lowest level since 1952. The report said that only 12.1 billion barrels of oil reserves were found in 2015, more than three-quarters of which were in the U.S. The report citied drilling capital expenditure cuts on searching for new oil to about $95 billion last year, down 45 percent from 2013. The impact of today’s lack of discovery will be felt for decades as it takes 5 to 10 year to bring discoveries online. It takes a lot longer if you haven’t even discovered it yet.
Oil prices were weak on reports that Canada’s oil-sands producers re-entered evacuated sites raising hope that we will see oil sands production restart in Alberta. Yet as far as inventory damage in the U.S., we may be just starting to see the impact. Oil prices recovered after private forecasters saw oil inventories drop of 978,862 barrels in Cushing, Oklahoma. The oil sands production losses will weigh on U.S. inventories for at least the next couple of weeks. We should see supply fall by 3.0 million barrels in today’s API report.
We also had pressure on crude oil from reports that Libya's oil production hit 300,000 barrels per day (bpd) after the re-opening of the Marsa al Hariga export terminal in the east of the country late last week, a spokesman for the Tripoli-based National Oil Corporation (NOC) said on Monday.
Yet we are seeing signs that Iraq’s output has peaked. It was reported that crude exports from Iraq's southern oil fields have fallen by more than 200,000 barrels per day (bpd) to around 3.15 million barrels so far in May, according to an industry source and loading data. That followed the previous month's near-record of 3.36 million bpd.
Despite near-term weakness, oil prices rebounded from the lows and have been very impressive. We still believe that this market is consolidating for another leg higher. Oil demand is surging around the globe. The oil market has had to fight the Fed and the dollar but I think that trade may have run its course. New polls are showing that it looks like the Brits will vote to stay in the Eurozone which would raise demand expectations. Look to buy breaks and also look to the back end of the curve.
Natural Gas is the biggest bargain on the board. If we get a hot summer look out! While short term heat forecasts moderated longer term, we believe that natural gas prices could surprise. The Wall Street Journal reported that the summer months often bring higher demand for gas-fired power to run air conditioners, which had helped push prices to a 10-day high in early trading. But Monday’s midday weather forecasts showed cooler temperatures in the southeast than the overnight updates showed, and that weakens demand expectations in the biggest region for gas-fired power, said Zane Curry, a gas analyst at Mobius Risk Group in Houston. The gas market may need an extreme amount of heat to drive enough demand for air conditioning and gas-fired power to burn off a glut left over from winter, analysts have said. Storage levels as of May 13 hit 2.8 trillion cubic feet, 40% above levels from a year ago and 41% above the five-year average for the same week.
“Storage inventory is still extremely bloated,” Mr. Curry said. “So any time the market sees cool - below normal - temperatures in the southern tier of the country ... then you’re going to have a tendency to push prices back to the bottom of the trading range.”
Overnight weather updates have shown the beginning of summer-like weather in large parts of the country. Futures jumped as soon as electronic markets opened Sunday evening, often a sign gas traders are reacting to weather updates. MDA Weather Services in Maryland forecast highs of 70-degrees Fahrenheit from Chicago to New York throughout this week and into early next week, and 80-degree highs in Dallas and Houston. High temperatures in Chicago and New York will at times be more than 10-degrees above normal and feeds an increase in national energy demand, according to MDA and Commodity Weather Group.
“We haven’t had a hot summer in a few years, but if we do get one, people might be shocked about how much gas we use in the summer,” said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “Natural gas is looking more and more like it’s hit bottom.”