A New Horizon
Crude oil prices closed at the highest level since last July and could be getting ready for a breakout run. The oil market, which just a few months ago was given up for dead, is now surging on global supply concerns, surging demand and Federal Chairperson Janet Yellen.
We are seeing signs that this market may already be in balance due in part to demand that is exceeding expectations and because of falling oil production in some key producing regions. Not only does U.S. oil production continue to fall, but supply shocks in Nigeria, Canada, Libya is causing global spare production capacity to dwindle. Even with increases in Iraqi oil production, lost investment in the private sector is leading to production losses or as I call it “production destruction”, that is already starting to be felt.
More news on that trend as Royal Dutch Shell (LON:RDSa) said it will exit oil and gas operations in up to 10 countries. This is an effort to further cut costs and narrow its focus following its $54 billion acquisition of BG Group. Oil is clearly in a new bull market, assuming we don’t see any major economic disasters.
Janet Yellen really had to try to regain credibility after Friday’s job report was such a disappointment. Janet said, “although this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report. Other timely indicators from the labor market have been more positive.” Yet when this comes after Fed officials, including Yellen, tried to browbeat traders into raising the odds for a June interest hike, basically saying the traders had it all wrong. Well let’s just say that the big miss does not really bode well for Fed credibility. So instead of the Fed rising rates in “coming months” it seems that the best chance for a Fed rate hike might be September. That is assuming that we are not suffering fallout from the Brexit vote.
Oil traders are also getting ready to see tighter U.S. supply. Genscape, the private forecasters, said that supply in Cushing, Oklahoma, the NYMEX delivery point, fell by over 1 million barrels. That may be because we are only starting to see the impact of the Canadian wildfires on supply. That could lead to further drops in supply in the future. U.S. oil output is also falling and even though we saw a jump in U.S. oil rig counts, we do not expect that trend to change anytime soon.
Natural gas hit a 5 month high as concerns about falling U.S. production and weather are supporting this market. Hot temperatures are on the way as U.S. exports rise. Tropical Storm Colin in the Gulf Of Mexico is another potential supportive factor but is not expected to have a large impact.