Oil is rising on peak oil concerns. OK, not the old failed ideology of “peak oil” but the fact that U.S. oil supply in the U.S. may have peaked as well as Exxon Mobil's (NYSE:XOM) proven reserve.
The American Petroleum Institute (API) in its weekly report said we had the first crude oil drawdown of the year and the biggest draw in Cushing, Oklahoma since April of last year. This comes as Exxon Mobil reported what was the deepest reserves cut in its modern history as the crash in oil and natural gas markets dramatically reduced the value of Exxon Mobi proven reserves. The odds are rising that oil has seen the low for this year especially if the Energy Information Administration (EIA) confirms data and we can now start moving toward are intermediate target of $60.00 per barrel and then our longer-term target of $73.00 dollars. Barring any major economic meltdown, oil supply will start to tighten globally solidifying a market floor.
The API finally reported a draw in crude of 884,000 barrels. Even though it seems like a small draw, it is a step in the right direction. Another big draw in Cushing, Oklahoma of 1.73 million barrels is showing that demand for oil in the county is gaining strength. While Gulf Coast inventories have become a dumping ground for global supply, we should start to see those supplies peak as the last shot of pre-OPEC cut supply has probably already been delivered. Now as U.S. refiners start to come slowly out of maintenance and the growing anticipation of the upcoming summer driving season approaches, not to mention record U.S. crude exports, we should start to reignite the bullish petroleum fires.
The API also reported that gasoline inventories fell last week signaling that perhaps gasoline demand is not as anemic as previous data might have indicated. Distillate inventories also fell by 4.23 million barrels as well, also signaling strong demand. So, we may have seen the peak of what was previously record petroleum inventories and that should continue to fall as we go forward.
Also, keep in mind that when you look at U.S. oil inventories, you cannot look at them through the same lens as you did before. Now that the U.S. oil export ban has been lifted we will see a new dynamic as oil and product supply should be viewed more in line with global supply. The market is evolving and what was true a few years ago, is no longer true today. The U.S. can export oil and OPEC can adhere to production cuts. The U.S. can be a major global energy hub. Even the former oil bears are starting to come to this realization. Welcome to the bull camp! There is plenty of room to jump on board.
Even as prices rise the oil industry is still trying to recover from what was one of the biggest oil crashes in history. Almost a trillion dollars in capital spending cuts will take its toll and the shale producers will not be able to replace that oil. Exxon Mobil’s announcement of reserve cuts is just one example from the fallout that is not going to be fixed even as oil heads back towards $60 a barrel. Bloomberg News reported that Exxon cut the equivalent of about 3.3 billion barrels of untapped crude and it was removed from the so-called proved reserves category. The revision came as low energy prices made it mathematically impossible to produce many oil and gas fields at a profit soon. The biggest cut came in de-booking Canada’s 3.5-billion barrel Kearl oil-sands project. Bloomberg reports that change amounts to the largest annual cut since at least the 1999 merger that created the company in its modern form. The previous record cut was a 3 percent reduction taken during the height of the global financial crisis in 2008.
Can natural gas make a comeback? Weather warming crushed the market as winter has taken a holiday and spring temperatures has covered for falling production and record non- heat related demand. We still believe that we have risk to the upside if the weather gets back to normal. The structural issues for gas have not been solved but we may have to get over this price collapse for a bit longer. The price crash in gas will lower production expectations going forward.