Is this the best time for the Fed to get more hawkish? Crude oil prices saw their biggest drop in 6 weeks after a large build in crude supply and hawkish talk from Fed officials which is almost unprecedented in the days after a terror attack. The flip-flopping Fed is back at it, causing more confusion than it needs to, by getting hawkish after the terror attacks in Brussels. The Federal Reserve, just last week, gave the market some support by acknowledging that the global economy was struggling. Now St. Louis Fed voting member President James Bullard to join non-voting Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams, talk about raising interest rates in April? Do Fed officials worry about adding to market instability by putting more pressure on the European economies right now? Even if they think they need to raise rates to slow burgeoning inflation, this is not the best time to bring it up.
This comes as U.S. Crude Inventories rose by 9.36 million barrels last week on the back of oil imports which shot up 9 percent to 8.9 million barrels a day. That was the highest level of crude oil imports that we have seen since June 2013. Yet despite the big import inspired build, the overall build in crude oil supply fell by 1.258 million barrels in the Cushing, Oklahoma delivery hub. We also saw U.S. oil production fall by 30,000 barrels a day to 9.04 million which was the lowest production number since November 2014.
Gasoline demand also is strong, averaging about 9.4 million barrels per day, up by 7.0% from the same period last year. This led to a big 4.62 million barrels drop in gasoline supply.
And while many are focused on short term over supply, looking down the road there are more fears that oil production will fall to dangerous levels in the future. The International Energy Agency warned about “historic” investment cuts (a term I have used) that are now taking place now. They warn that we will see the increased possibility of oil-security surprises in the “not-too-distant future”.
The head of the IEA’s Oil Industry and Markets Division, Neil Atkinson, warned that about $300 billion is needed to sustain the current level of production and nations including the U.S., Canada, Brazil, and Mexico are facing difficulty in keeping up investments. Bloomberg quotes him as saying.
“We need a lot of investments just to stand still. There’s danger as we are reaching a point where we are barely investing upstream. If investment doesn’t resume in 2017 and 2018, we can see a spike in oil prices as oil supply can’t meet demand.”
This came the day after the Energy Information Administration warns that shale wells can’t keep up because of sharp decline rates. One loyal reader of the Energy Report said,
“When it comes to drilling and completing here are some things that you may already know. It takes on average for most companies in the Eagleford Shale Field, 15-25 days to drill a well approximately 18,000 total feet. Of course before you can drill a well you have to build a pad. Most of the operators in any shale play do not build a one well pad. Large operators can build pads anywhere from 6 to 9 wells and smaller operators build 3 to 5 well pads.”
He continued,
"Once you have drilled the wells, it takes some time to move the rig off the pad and then bring in a frac crew. If you took an average of two weeks to frac per 4 wells, to include mobilization time, your total time before you are able to bring on one well onto production is between 110-150 days. Currently the industry has wells that have been drilled but are uncompleted (DUCs) and as the price of oil ticks up, you will see that inventory brought down."
This, he warns, is hitting the oil service companies. Major players like Halliburton (NYSE:HAL), Weatherford International Ltd (NYSE:WFT), Baker Hughes Incorporated (NYSE:BHI), Cudd, and Schlumberger NV (NYSE:SLB) have seen over 45 of the operators that they service, could go bankrupt.
Short tern oil is being weighed down by over supply against a backdrop of a historic retrenchment on oil investing. The next super spike is being born, assuming you can last through the trough. Call to plan on long tern strategies.