Forget about Lower for Longer
The lower for longer oil price outlook is being put to the test as risng global demand and disappointing shale portion numbers are proving once again that the best cure for low prices are low prices. The surge in demand growth will soon erase the global oil glut as we are probably headed towards a supply versus demand deficit. Once again global economies are getting addicted to cheap oil. Cheap oil that creates global economic growth and eventually these economies will pay higher prices to feed that addiction.
Some thought the rules of supply and demand were suspended and tried to dismiss massive historic drop in oil investment because they believed that shale oil producer or OPEC would pump as much oil as needed. Unrealistic expectations for rising shale production failed to hold up and the lack of profitability for many producers could add up to billions of dollars of bad gas and oil loans.
The cumulative impact of billions of almost a trillion dollars in CapX cuts by big oil has meant that new oil discoveries are at the lowest level since the 1980’s, the adage that low prices cure low prices is once again true as demand is surging asanas consumers once again get addicted to low prices.
That demand surge was evident in the American Petroleum institute (API) report and a drop in Texas oil production in July is signaling a production peak. The API despite prediction of an increase in crude supply reported a draw of 761.000 barrels. While supply in Cushing Oklahoma, the NYMEX delivery point did increase a massive 4.527 drop in distillate supply is a major concern as we head into the peak demand period for those fuels. U.S. demand last week hit 4.26 million barrels a day the higest level in 20 years. With refinery problems here in the U.S. and in Europe the race to keep production high enough to meet demand will keep crude strong. While gasoline supply did increase by 1.470 million barrels the diesel dilemma that we have been writing about will continue to give the bulls an edge.
Crude oil production in Texas, fell less than 1 percent in July compared with a year ago. The UPI reported that Texas is the No. 1 oil producer in the nation and at least parts of four of the seven active shale basins in the country lie within its borders. The Railroad Commission of Texas, the state's energy regulator, reported total crude oil production from August 2016 to July 2017 at nearly 1 billion barrels.
The UPI reported that the same productivity report, dated July 17, show new oil produced per rig in the Permian shale is on the decline. A report dated Aug. 14 show the number of wells drilled, but not completed, in the Permian basin increased 6 percent between June and July.
Economists at the Federal Reserve Bank of Dallas said the rising number of drilled, but uncompleted, wells in the Permian basin could indicate the reservoir could respond with a larger increase in production when market conditions are more favorable according to UPI.
Yet with shale oil producers pulling back even a spike back to where they would consider drilling or uncapping wells it might be a few months down the road. It takes time as it will be hard to get crews and convince the bankers that this time they won’t get burned by a price setback.
Despite a crazy year filled with hurricanes and bad data on supply and demand we have kept our long term bullish outlook on oil all year. As oil looks to test the 2017 highs a break above that area should set the stage for a test of $60. Our long term bullish option strategies are starting to pay off and the biggest concern is that we are getting overbought and funds are heavy long. Still as we have maintained the market. We have never bought into the lower for longer arguments and we still fell that the lows that we set last year was a generational bottom and the rebalancing of the market is well underway.