Fundamental Shift
There are more signs that the fundamentals are changing for oil and natural gas. Not only has Saudi Arabia raised prices for their oil in a sign that they have confidence they can maintain market share, but natural gas had its best move all year last week. On top of that, a tropical storm in the Gulf of Mexico could shut down or slow operations which could impact imports, exports of oil and gas production. The mood has shifted so much that both the United Arab Emirates and Saudi Arabia said that $60.00 a barrel is coming soon.
Saudi Arabia must feel confident that they have won the oil production war as they raised prices on most oil grades for sale to Asia and the U.S. for July after the nation’s energy minister said demand was robust. State-owned Saudi Arabian Oil Co. increased its official selling price for Arab light crude by 35 cents a barrel to 60 cents more than the regional benchmark for sales to Asia, it said in an e-mailed statement according to Bloomberg News. The company, known as Saudi Aramco, was expected to raise the premium for shipments of Arab light crude by 40 cents a barrel to 65 cents a barrel more than the benchmark for buyers in Asia, according to the median estimate in a Bloomberg survey of five refiners and traders in the region last week.
Andrew Weissman of EBW Analytics says that the oil market does not yet appear to be fully pricing in the likelihood of a sharp decline in Canadian imports in June. Due to the four to five week pipeline transit time between Fort McMurray and Cushing, the full impact of Canadian shutdowns (which began May 3rd) is not likely to be felt until this week’s EIA Report. Once it begins U.S. crude inventories could drop sharply for several weeks, pushing prices higher.
Of course some showed some worry after Baker Hughes reported a big jump in oil rigs last week. Fears that U.S. shale producers would thwart the rally after increasing rigs for only the second time this year may be a concern to bulls. Yet what might be more disturbing is they also reported a sharp drop in natural gas rigs. Rigs targeting crude in the U.S. rose by 9 to 325, but natural gas rigs fell by 5 to 82 which is near an all- time low.
Natural gas production could soon start to fall dramatically as some natural gas rigs get reclassified as oil rigs because oil is fetching a better price. Of course this summer that could cause big problems especially if we have a hot summer or if this active tropical storm season reduces production at a time when natural gas consumption is soaring to a record high.
The International Energy Agency says that consumption of natural gas for power generation, after hitting a record in 2015, is already exceeding 2015 levels by an astonishing 8.6%, or 2.0 Bcf per day (Bcf/d). They also say that this trend will continue and you can see why. The forced retirement of coal plants, the relative expense of nuclear power, is going to drain more gas than ever at a time when it seems that production might crater. In Illinois, Chicago based Exelon Corp (NYSE:EXC)., the largest U.S. generator of power from nuclear energy, said it will close two Illinois reactors after the state failed to pass legislation to cut their financial losses.
The Energy Information Ageny forecasts that for the year, natural gas generation as a share of total generation, will exceed coal for the first time on record. Much of the growth in power burn is coming from the Southeast, the largest consuming region in the United States. The Southeast showed a 10.4% increase in power burn from May, 2015 to May, 2016. With less coal backup and the loss of more nuclear plants, we could see sharp weather driving spikes.
We are having a weather issue in the Gulf of Mexico. Tropical Storm Colin has strengthened in the Gulf of Mexico and will bring the threat of heavy rain to parts of Florida and the Southeast Monday and Tuesday. This system was first named Tropical Depression Three late Sunday morning and strengthened into a tropical storm late Sunday afternoon according to the Weather Channel. Colin has become the record-earliest third named storm of the Atlantic hurricane season. This early activity may mean we are in for a long summer of activity as the breakdown of El Nino and the settling in of La Nina may cause a hotter than normal summer and more tropical storm activity, both of which means upward price spikes in natural gas and oil are possible.
We are looking for a 3-million-barrel drop in crude supply this week. We should also see Cushing, Oklahoma fall by 700,000 barrels. Gasoline supply should fall by 2 million barrels and distillates by 2.5 million barrels. For natural gas we should see an injection of 83 billion cubic feet.