Crude oil ended the month of April with the strongest monthly gain in 7 years, adding 22% to the price. The low price caused “production destruction” and strong demand put the market on a trajectory of market balance. A study by Wood Mackenzie expects to see $91 billion in capex cuts across 121 upstream companies this year. Soon we will see the oversupply evaporate as global demand continues to blow away expectations and non-OPEC output is set to fall by more than 700,000 bpd this year, the biggest decline in around 20 years, according to the International Energy Agency. This is overshadowing the fact that it was reported that OPEC production in April hit 32.64 million barrels per day (bpd), close to the highest level in recent history according to Reuters. And Russian monthly crude exports increased 7 percent to 3.117 million bpd in April. The performance of the market is a strong suggestion that we have found our bottom. Now the next thing to figure out is how far the market can go.
Our contention all along has been the crash in oil prices was way overdone. The panic that started the year led to a price drop with long term ramification. The market was fearful that China’s economy was falling apart and that their demand for oil would dry up. We also saw a flight to safety for the dollar which probably overvalued the dollar and undervalued commodities.
Now we have seen more retrenchment in energy investment by producers both large and small even though we have seen demand actually rise. Even as some shale operators say that they may actually bring on rigs after we hit $50 a barrel, the truth is that many of the smaller operators will find it hard to bring rigs back on. With many bankruptcies looming and bank credit lines tapped out, the shale comeback will be slow and fall behind the growing oil demand curve.
Dollar weakness is also a major factor in the crude oil market's rebound as well as gold. For gold, Asian demand has been strong as Asian investors looked to gold as a safe haven away from China’s market turmoil and increasing Chinese regulatory actions. Traders ran to gold as opposed to being in the Chinese stock market where a short position or a sell order might make you a criminal. Gold also found support with negative interest rates.
We have said that oil prices have bottomed and the chief of the International Energy Agency (IEA) agrees. "In a normal economic environment, we will see the price direction is rather upwards than downwards," IEA Executive Director Fatih Birol said on Sunday during a G7 meeting of energy ministers in Japan as reported by Reuters. He took the words right out of my mouth. Barring any unforeseen economic catastrophes, the global oil market is at the low end of the cycle. We have said for some time that now is the time to start positioning for a long term bullish move. The low price that we saw in crude oil earlier this year may be the last time we see that for over a decade.
Low oil prices and record gasoline demand has prices at the pump jumping. AAA puts the national average at $2.217 up from $2.136 a week ago.
Natural gas rallied despite short term forecasts that seem to be a bit bearish due in part because of a major pipeline explosion. The FT reported that on Friday the Texas Eastern pipeline, a major artery in North America’s natural gas network, burst into flames outside Pittsburgh, Pennsylvania. The explosion seriously burned a man fleeing his house and carved a crater into the ground, authorities said. The blast occurred in the Marcellus and Utica shales, layers of rock, which since 2010 have grown to provide one-quarter of U.S. natural gas production. It came as new pipelines in the region faced protests from some residents, environmentalists and politicians. The Texas Eastern system runs from Texas to the New York metropolitan area. Spectra Energy (NYSE:SE), the pipeline’s owner, said the section that caught fire was built in 1981. An inspection in 2012 revealed no areas in need of repair, the company said.