The Feral Reserve Open Market Committee will make their announcement on their decision about interest rates and no matter what they say, they will have egg on their face. The FOMC cajoled traders that they were underestimating the odds of a June rate hike and that June was a “live meeting” but now we know it is dead on arrival. The Federal Reserve has to worry about the UK Brexit vote where odds are increasing that it may happen but also signs that the U.S. Economy is slowing. Not only did we see signs of a slowdown in the feeble jobs report but also in last night’s American Petroleum Institute report that may suggest that oil demand and the U.S. economy may be slowing rather quickly.
The oil gage on growth is worrisome if you look at last night’s API report. The expectations going into the report was that oil supply would fall by 2.3 million barrels as strong demand and restraints on supply would reduce supply. Yet the API reported not only did crude supply increase by 1.2 million barrels but we also saw supply increase in the all-important delivery point in Cushing, Oklahoma. That is a surprise because it was thought that we would still be feeling the impact from lost Canadian oil production. But big increases in gasoline and distillate supply may be signaling a bigger than expected drop in demand. Distillate inventors shot up a prodigious 3.7 million barrels. Gasoline supply also increased by 2.3 million barrels at a time when strong demand should have them falling.
Perhaps part of the slowdown was due to tropical storm Collin that may have disrupted driving plans and imports and exports but if I were the Fed, I would have to be a bit worried by the warning signs on the oil gage.
While in the short term oil traders will fret about the Fed and the possibility of a slowdown, in the big picture the oil market has fundamentally changed for a generation because of the crash in oil prices. Bloomberg News is reporting that capital investment in energy will drop by a whopping 22% from 2015. That means the oil and gas industry will cut 1.0 trillion dollars from planned spending on exploration and development because of the slump in prices, leading to slower growth in production, according to consultant Wood Mackenzie Ltd.
World wide investment in the development of oil and gas resources from 2015 to 2020 will be 22 percent, or $740 billion, lower than anticipated before prices plunged in 2014, with the deepest cuts in the U.S., Wood Mackenzie said in a report Wednesday. A further $300 billion will be eliminated from exploration spending. Global production this year will be 3 percent lower than previously forecast, the consultant said.
And if oil prices crash again, that will only make that number larger. Which means that long term we will see supply get squeezed and demand will outpace supply. I know it is hard to keep the eye on the long term when oil trading and most other markets are being driven by fear and high volatility. Yet if history is a guide, we are only at the beginning of what is the next big bull phase in global oil markets.
Gas production is falling but how fast. Natural gas is risng as output falls and demand is at record highs. Naureen Malik of Bloomberg writes that U.S. natural gas output is slowing from shale formations, just not as fast as forecasters had thought. The top six shale deposits will produce 46.2 billion cubic feet a day of gas this month, or 0.5 percent more than the previous forecast, the Energy Information Administration said in its drilling productivity report Monday. Production estimates have been revised upward every month this year as the agency incorporates actual market and weather conditions, according to Jozef Lieskovsky, a senior analyst with the agency in Washington. “In any environment it is difficult to have accurate estimates,” Lieskovsky said in an interview Monday. “With the current market dynamics, it is almost impossible given that we do not consider weather and infrastructure impact.”
The government data now shows that shale gas output will decline 2.6 percent this month from December after rising to an all-time high in February. Last month’s forecast showed a 3.3 percent decline during the first six months of 2016 from December. June production from the Marcellus deposit, primarily in Pennsylvania and West Virginia, has been stronger than previously expected. This follows a “huge revision” in January and February output after the completion of a pipeline expansion, Lieskovsky said. The affect of new takeaway capacity is difficult to predict and “there were a lot of drilled but uncompleted wells” waiting to come online, he said. Output surprises are not limited to the Marcellus, the most prolific shale gas deposit. In recent months, higher-than-expected gas yields from oil-rich deposits such as the Bakken and Eagle Ford prompted the EIA to boost estimates, Lieskovsky said. More revisions may be on the way in places such as West Virginia, which has yet to release 2015 production data. “We make the best estimate we can at the time when the new data comes in,” Lieskovsky said. “We are not going to be delusional and say this doesn’t happen, but with every revision, we believe we are closer to the reality.”