Oil Cracks
Oil prices are trying to recover on a weak dollar after selling off yesterday on the August oil future contract expiration. Also on a prediction by the Energy Information Administration (EIA) that US oil production would rise by 113,000 barrels a day to 5.585 million barrels a day in August from July, even as they overestimated Junes production by a wide margin.
There is also a report that tiny OPEC producer Ecuador is going to raise oil output as it desperately needs some money. This comes as the market should be preparing for another big drop in US crude supply and we'll keep an eye on the Atlantic where Tropical Storm Don has formed that will impact crude shipments going into and out of the Gulf of Mexico.
Let’s talk shale output first. The EIA says that it will increase by 64,000 barrels in August but they are probably overestimating that number again as it is not considering the rising amount of non-completed wells. Also, we are seeing the increase in oil rigs already start to slow as many independent operators have started putting on the breaks as capital dries up. Previous wells that were drilled in the beginning of the shale resurgence are already facing steep production decline rates so more rigs and more rig completions are going to be needed to keep shale production on this upward trajectory.
The challenges in the sector also caused a major failure of a private equity fund. The Wall Street Journal Reported yesterday that:
EnerVest Ltd., a Houston private-equity firm that focuses on energy investments, manages the fund. The firm raised and started investing money in 2013, when oil was trading at more than double the current price of about $45 a barrel. But the fund added $1.3 billion of borrowed money to boost its buying power. That later caused it trouble when oil prices tumbled. Now the fund’s lenders, led by Wells Fargo (NYSE:WFC) are negotiating to take control of the fund’s assets to satisfy its debt, according to people familiar with the matter. The outcome will leave investors in the 2013 fund with, at most, pennies for every dollar they invested, the people said. At least one investor, the Orange County Employees Retirement System, already has marked its investment down to zero, according to a pension document.
The point is that capital for energy projects is going to be harder to find until we see oil break back up into the $50’s. Even at that point the process of adding rigs and adding production is going to take time. Therefore, I predict that the EIA is overestimating production increases once again.
Of course that begs the question whether OPEC can keep their production cut agreement together. While the cartel looks to put a production celling quota on Libya and Nigeria, word comes that Ecuador wants to raise production. They have complied to their 26,000 barrel a day cut and said they had a deal with OPEC to be allowed to raise output if things got desperate. Looks like things are desperate but this should not really matter or upset the larger OPEC deal.
The healthcare bill is going nowhere and the dollar index took that as a negative. For commodities that is bullish and we are seeing the most increase from precious metals to grains and even oil. Probably overdue and our gold report is looking golden.
The API is out tonight. Last week U.S. crude inventories fell 7.6 million barrels last week, its biggest weekly fall in 10 months, according to the U.S. Energy Information Administration (EIA).
Tropical storm Don has formed in the Atlantic. Weather Underground reports that Don will continue to move west to west-northwest at 15 - 20 mph through Wednesday, which will bring the core of the storm over the southern Lesser Antilles Islands on Tuesday evening through Wednesday morning. Dry air will continue to interfere with development, and the 18Z Monday run of the SHIPS model predicted that relative humidity at mid-levels of the atmosphere would drop to 55 – 60% by Wednesday.
With wind shear expected to remain low to moderate through Wednesday, there is the potential that Don could strengthen to have top winds in the 55 – 60 mph range as it moves through the Lesser Antilles. On Thursday, when Don will be in the Eastern Caribbean, wind shear will rise to a high 25 knots, and the 70 members of the 12Z Monday European and GFS model forecasts predict that Don will weaken and meet its demise by Friday. However, Don could potentially affect the ABC Islands and make landfall in northwestern Venezuela late in the week before dying.