Crude oil prices are trying to determine whether they should focus on historic compliance to a OPEC/non-OPEC cut or signs that shale producers may start to make a comeback. Despite comments over the weekend at the OPEC compliance meeting that cuts in OPEC/non-OPEC production were ahead of schedule, a sharp rise in U.S. rig counts and talk of large increases in capital spending seem to be souring the bullish mood.
One would think the OPEC doubters would be scrambling when the Saudi energy minister, Khalid al-Falih, said OPEC's 13 nations and 11 producers outside the cartel had made production cuts totaling 1.5 million barrels and are ahead of schedule in meeting its 1.8 million barrels a day target. OPEC officials reported its compliance level at 80%, meaning about four-fifths of the oil it pledged to cut has ben cut and is the best start to an OPEC cut in history. The key will be to see if they can stick to it as other oil producers start to respond to what looks like a bottom in the price of oil.
Oil prices though are shaken from a much larger than expected jump in U.S. oil rigs. MarketWatch reported that, “Data from industry group Baker Hughes shows the number of working oil rigs in the U.S. climbed by 29 in the week ended Jan. 20 to a total of 551. The oil rig count stands at its highest level in 14 months, per Price Futures Group’s Phil Flynn. “Assuming the U.S. oil rig count stays at the current level, we estimate U.S. oil production would increase by 315,000 barrels a day between fourth quarter 2016 and fourth quarter 2017 across the Permian, Eagle Ford, Bakken and Niobrara Shale plays,” Goldman Sachs (NYSE:GS) said in a note. "Dow Jones reported that the past week's gain of 36 rigs overall marked is the biggest one-week surge in land rigs since 2011. Earlier this month, U.S. oil production surpassed 8.9 million barrels a day, its highest level in nine months, and has stayed roughly at that level, per the latest weekly federal data.” Of course 315,00 barrels a day is still a far cry from 1.8 million barrels a day but they are signs that we may start to see oil production move upward and the demand side should help level out the playing field.
Gasoline prices have fallen by 2 cents a gallon per the dean of gas price surveys, the Lundberg Survey. Regular unleaded has fallen to $2.36 a gallon as ample supply and softening demand has brought prices down. Demand this past weekend may be weak as rain and tornados impacted much of the south and cold weather in Californian kept drivers close to home.
The cold weather in California is also creating the strong possibility of a natural gas shortage. The City News Service reported that the Southern California Gas Co. warned Sunday that cold weather -- and the loss of its main local storage resource -- may put normal electric and natural gas deliveries at risk across Southern California next week. The company did not specify how large that risk is. The utility asked its customers to reduce natural gas use, turn down their thermostats and take other steps, "to help lower the risk of possible natural gas and electricity shortages," according to a news release.
More than 95 percent of Southland homes use natural gas for heat, and 60 percent of the electricity used in the area is generated using natural gas. The company had in past years stored gas brought in by pipeline in the Aliso Canyon storage area, but that was ended when a massive natural gas leak spewed the fuel into the air above Porter Ranch. The company said it and San Diego Gas & Electric -- also owned by Sempra Energy (NYSE:SRE) – were issuing a, "system-wide curtailment watch" for the firms' "non-core" customers, including electrical generating stations and large commercial or industrial suppliers. In the statement, SoCalGas said it and SDG&E are currently meeting system demands utilizing gas flowing in from interstate pipelines, plus the limited local storage facilities it has available. In a statement issued to reporters, the company said the loss of its Aliso Canyon storage facility has led to concerns by state regulators that the company would not have enough pipeline capacity and local storage to handle demand on very hot or cold days. Local electric companies use natural gas generators to supplement electric supplies, and state regulators last year had voiced concern about the potential for rolling blackouts. A limited program to resume some natural gas shortage at Aliso Canyon has been approved.