Trying to Find That Feeling
Oil prices sputter into August crude oil expiration as volume dries up. The oil market seems to lack any real conviction as it faded to a 10 week low.
The dollar is soaring to the highest levels since last March and that seems to be offsetting the fact that we saw another drop in U.S. crude oil inventories, according to the American Petroleum Institute (API) and a surprise drop in gasoline supply.
Oil did not get much support from export glitches due to a strike in Libya and a pipeline attack in Nigeria as the market felt that the impact would be short lived. Brent crude is a bit stronger as a strike threat will shut some North Sea platforms for periods of time in what may be a bit of coming attractions for North Sea oil as low oil prices will cause many North Sea platforms permanently.
Let’s start with the dollar. Strong housing data and reports that the Federal Reserve might actually consider raising interest rates this year is giving the dollar strength. The dollar also seemed to gain more support from a report out of the UK that seemed to suggest that the investment retrenchment post-Brexit might not be as large as some people might have feared. While that does bode well for oil demand expectations, it also provides headwinds as the dollar breaks out higher.
Oil inventories also suggest that from an oil demand standpoint the U.S. economy is gaining strength. The API reported that crude oil supply fell 2.3 million barrels which was slightly more than anticipated. We also saw a surprise drop of 804,00 barrels of gasoline supply and a larger than expected drop in distillate supply.
We get the EIA version which as we have found out in recent weeks can be totally different from this report but more than likely should reflect the spirit of strong demand. Traders will also focus on U.S. oil production which surprisingly ticked up last week after a big drop the week before. Another drop would suggest that the trend of U.S. oil production will continue to fall.
Libya's eastern oil export terminal of Hariga resumed operations after a strike by guards was settled. Over the weekend a pipeline attack in Nigeria seemed to not rattle the market that is already expecting more problems in Nigeria and has largely priced in more disruptions.
For crude oil we continue to believe that $44.00 is a key support and turning point for oil. Today, because it is the last trading day for August on the rollover, $44.00 some how looks further away. While August may test $44.00, September is now the front month and we will use September as the new benchmark for the $44.00 support.
While we do have headwinds for oil, it is unlikely that prices will see a major breakdown like we saw a year ago. One reason is that we can’t lift sanctions on Iran again because they have already been lifted. It is also unlikely that we will repeat last year's stock market crash in China as there seems to be more stability.
On top of that we continue to see strong demand growth in India and Chinese demand remains strong. On top of that the risks to supply are growing. With the economic collapse in Venezuela and more cutbacks in Cap X energy spending, the long term production outlook is close to a peak.
In the North Sea a strike by oil workers that will cause a 24-hour stoppage will take place on July 26, and will be followed by a series of further stoppages over the coming weeks. Long term Bloomberg News reports that, “the pace of North Sea oil-field shutdowns is picking up as the impact of the market slump is compounded by the uncertain investment environment created by Brexit." Bloomberg says that projected spending on decommissioning in the British sector in the decade to 2024 has risen to 16.9 billion pounds ($22.2 billion), according to Oil & Gas U.K., an industry group. That’s 16 percent higher than a 10-year forecast in 2014 as more sites are targeted for closing, it said. The rout in crude to less than $50.00 a barrel has left about 30 percent of fields in the U.K. North Sea, one of the world’s highest-cost regions, operating at a loss, according to consulting firm Wood Mackenzie Ltd. The collapse was pushing more producers to hasten plugging wells on the sea floor even before the U.K. decision to leave the European Union.
Bloomberg says that about a third of operating platforms in the U.K. are more than 30 years old, which is beyond their original design life, Legate said. While $100.00 oil justified technological upgrades to keep them running, that’s changing. Oil production in the region averaged 965,000 barrels a day last year, down from a peak of 2.9 million in 1999, according to BP Plc data.