Off Balance
Despite a record drawdown from US oil inventories and the fact that Saudi exports to the US are at a 30 year low, the International Energy Agency (IEA) is backtracking their prediction of a global oil market rebalancing because of an increase in OPEC oil production. This comes as the agency, famous for underestimating demand, raised it and now predicts that global demand will increase by a historically strong 1.5% this year to 98 million barrels a day. Still with disappointing market action, it seems the pressure on OPEC is rising even as the market is ignoring the longer-term impact of under investment and signs that we are going to see a shale oil production pullback in the next few months.
The IEA blasted OPEC's compliance with production cuts which they say fell to 78 percent last month from 95 percent in May. While this production number is disputed by other sources, the fact of the matter is that the IEA believes that not only will OPEC have to go back to full compliance to get the global oil market back under control, they will need to reign in OPEC members Libya and Nigeria that have no quota. The IEA seemed to ignore improvement from non-OPEC oil producers that joined in the pact that saw their compliance improve.
The IEA did warn about the possibility of a shale oil pullback. The IEA warned that, ”Financial data suggests that while output might be gushing, profits are not and recent press reports quoted leading company executives saying that oil prices need to be around $50 per barrel to maintain production growth." It like I said before, losing money on every barrel and trying to make up for it in volume is not a sustainable business plan.
Even as the Energy Information Admintation (EIA) reported that US oil production had risen, most of that gain was from Alaska and the Gulf of Mexico. U.S. oil production was up by 59,000 barrels a day to nearly 9.4 million barrels a day but it was not all shale. There was a 34,000 barrel increase from Alaska.
The EIA also lowered their outlook for US oil production that might become more sever as shale procures are losing millions and can’t find the money to complete rigs and that means there could be another round of shale bankruptcies in the making. Other well capitalized shale producers I have talked to say they are completing rigs not because they want to but because they contractually have to. They must use it or lose it.
Yet the evidence of a market balance is right before our eyes if we want to believe the EIA data. The EIA reported another 7.6 million barrel oil draw. That was the biggest supply drop since September. It was larger as the US released over 3 million barrels of oil from the Strategic Petroleum Reserve which means the drop would have been over 10 million barrels of oil lost in a week.
Crude oil stocks at the Cushing, Oklahoma delivery hub for U.S. crude futures fell by 1.9 million barrels to 57.6 million barrels, the lowest level since November 2015. The SPR has been giving the market a false sense of security that oil supply is not draining as quickly as it is but is the market paying attention.
The EIA also reported that gasoline supply fell by 1.6 million barrels as demand for gas surged again last week and cut the deficit year over year by half. We expect to see gas demand continue to rise and exceed expectations. We also expect to see upward revisions in EIA gas demand data that was under reporting demand earlier in the year.
Get ready for the IEA natural gas report! The consensus is 59 which is well below the five-year average for this week. Any warm up in temperatures at this point will heat up natural gas prices that may see storage come in at the end of the season at the lowest level in five years.