Taking A Pause
Oil prices are in pause mode as the traders try to decide whether they should add to gains after the best upward move in a decade or take profits. While the fundamental picture is still very bullish, the market wants more information before they take prices to the next level.
The big 7.2-million-barrel increase in crude oil supply this week is the main reason for the pause. That number was impacted by the shutdown of The Houston Shipping Channel, so the trade wants to know how much of that supply increase was real and how much was due to transitory factors.
Today the jobs report will be the major news that could cause movement in the oil, but the larger issue of stagnating U.S. shale oil production may take center stage with the release of the Baker Hughes rig count. The Rig count has fallen 4 weeks in a row and oil rigs are at the lowest level since April 2018 to 833. Low oil prices have caused many shale producers to cut spending and many are not able to change from cut mode to expansion unless prices go substantially higher.
Oil traders also need to watch progress on the U.S.-China trade talks. Bloomberg reported that both China and the U.S. claimed progress in talks to end their trade war, with President Xi Jinping pushing for a rapid conclusion and President Donald Trump talking up prospects for a “monumental” agreement that may still be some weeks away.
While it seems like we are closer to a deal, at the same time it feels like the negotiations will never end. Still if the market gets a sense that a deal is in place, it will add 3 to 5 dollars to the oil price quickly. That may go even higher if the Trump Administration does not grant waivers to buyers of Iranian oil. While some of those buyers are finding alternatives, if Trump gets Iran to zero exports it will be very bullish. There are more signs that Trump will not extend waivers, but he has until May 5th to decide.
RBOB and Heating oil look solid. Demand for products are strong and should get stronger. Talk of a slowdown in the U.S. economy and global economy has been overstated. A good job report today may reinforce that and cause a rally in products next week.
It is a free for all! Yes, Free Natural Gas! Bloomberg’s Naureen S. Malik writes “Natural gas drillers in West Texas are getting some relief from negative prices after a key pipeline was repaired, but they’re still giving the fuel away. Gas for next-day delivery at the Waha hub in the Permian Basin, the world’s biggest oil patch, traded at zero cents per million British thermal units Thursday, according to Intercontinental Exchange Inc. That’s actually an improvement: Prices in the region plunged to minus $9 on Wednesday as work on a Kinder Morgan (NYSE:KMI). conduit choked off flows from the play to Southern California. Though Permian gas is paring losses after the pipeline was fixed late Wednesday, producers there aren’t out of the woods yet. Rising oil prices are poised to exacerbate the basin’s glut of gas, which is pumped as a byproduct of crude drilling in the play.”
Negative prices may persist until new conduits come online, and the next major project -- Kinder’s Gulf Coast Express -- isn’t slated to start up until October. While explorers can burn off some excess gas, the process is frowned upon by regulators and environmentalists.
Equity investors are now starting to show signs of concern about negative Permian prices. Shale driller Encana Corp. fell as much as 5.6 percent on Wednesday, and “the only fundamental factor of note was Waha gas prices,” Greg Pardy, a Toronto-based analyst for RBC Capital Markets, said in a note to clients. Encana didn’t immediately respond to a request for comment.
Additional pipeline maintenance may keep West Texas gas prices under pressure, RBC analyst Christopher Louney said in a separate note Thursday. NET Midstream LLC’s NET Mexico pipeline has reported that maintenance at the Agua Dulce gas hub in Texas may affect exports across the southern U.S. border.