Royal Dutch Shell (LON:RDSa) earnings missed expectations by a billion dollars and the result may be more cutbacks in capital spending. That was a 72% drop in profits. The big miss follows disappointing results from BP (LON:BP) as the Industry is feeling the effects from the collapse in refining margins which was the savior of big oil after the oil price crash. With the falling production at Shell from disruptions of supply in Nigeria and Canada and a hit on its natural gas business, it’s clear that Shell and most other oil companies are going to make more cut backs.
The crude oil market is not worried about that now because of the uncertain global economic outlook but it most certainly will in the future. The oil trade is having a hard time looking out to the future because it is so uncertain about the present. The Federal Reserve tried to raise its assessment of the economic outlook by telling us that near-term risks to the economic outlook have diminished, "but based on Fed fund future rate expectations the market is having a hard time buying it. Federal funds futures implied traders still see roughly even odds of a rate increase at the Fed's December meeting and about a 20 percent chance of such a move in September, a bit lower than before the decision," according to CME's FedWatch Group.
The oil trade is short-term focused as the market has seen a weakening of demand post Brexit and now is back to the lower for longer mode. The economic fallout from the Brexit was enough to slip the market back into a pessimistic mode as we are near bear market territory and will need some help as oil once again has become just a technical money game.
Once we broke through the major support of $44.00, it now becomes a game of what support lines will hold. Oil failed to break the $41.50 support but the lack of buying from that level may suggest that we may test it again. A breach of $41.50 should give a test of the psychological support of $40.00 a barrel and then $38.00. Of course if any of these levels hold that may be where we could start to bottom.
Seasonalities are also not helping as now the glut of gasoline and product supply looks even heavier. Some tried to suggest that the drop in refining runs from a record pace was a sign that refiners are throwing in the towel on production but they should start pulling back this time of year. The Energy Information Administration (EIA) showed runs fell to 92.4%. Crude supply still increased as oil imports increased and gasoline supply rose by 500k and distillates 93k. Of course, gas supplies are at a record even as the EIA lowered its gasoline demand growth forecast for the remainder of the year to 130,000 barrels per day, or 1.5 per cent, from 220,000 previously.
We also saw that for the third week in a row U.S. oil production increased. If other oil companies start announcing bad earnings like we saw from Shell and BP, then you better start looking for more Cap-X cut backs. This destruction in price and oil company earnings is a threat to our future energy security. We will see this market not only get in balance but are probably just a few years away from a major supply deficit.
That is a reason that many big money players are willing to buy oil and products to put in storage as it has more upside that keeping your money in bonds or cash. Oil may be a new currency when we start to see the unwinding of the biggest monetary experiment in history.
Natural gas will get its report on how the supply situation faired after record breaking heat. The next few weeks will have a major influence on my “Winter Natural Gas Report” that you can get signed up for. With expectations that La Nina may settle in in late September and October leading to perhaps a colder than normal winter, the numbers that go into storage in coming weeks will be key. We will test if above average is going to be sufficient in a world where our exports are rising and so is our demand.