Oil prices are creeping back as global markets breathe a sigh of relief in the aftermath of the French elections. Crude oil sold off hard on geo-political risk and the perception that U.S. oil production is going to offset OPEC production cuts even if it's not true. Of course the market believes it, at least right now, because if you say something long and hard enough, even if it is not true, the market will react.
Baker Hughes reported that drillers added oil 5 oil rigs for a 14th week in a row, now to 688 rigs. Shale production will increase to the highest level in 2 years as warmer weather makes it easier to produce. Shale drillers better hope that prices do not collapse because most of these firms adding rigs are in debt up to their eyeballs. Many are leveraged to the hilt and banks may run for cover if there is any pullback in price.
Yet as OPEC is widely expected to extend its production cuts, the full impact of those cuts will start to be felt as demand starts to ramp up in the summer. OPEC and non-OPEC producers start to work towards better compliance. Reports that Iran's crude oil exports hit 14-month low in May is a sign that the country is falling in line with other OPEC members or that they are having a tough time raising output do to years of underinvestment. Russian energy minister Alexander Novak said a decision on extending a global pact to cut oil production had not yet been taken, but would be discussed with OPEC on May 24, according to Reuters. Still most believe that Russia will join the cuts because they will start to see the global oversupply drain.
The other side of oil is the demand side that we believe will exceed expectations. Take China for example. Reuters is reporting, “Policymakers in China are pushing a bullish message on the world's second-biggest economy after a solid first quarter, pointing to a slow-down in capital outflows and a stable yuan after a selloff last year stoked fears of instability.
China’s finance minister Xiao Jie said an increasing number of positive signs were seen in the Chinese economy in the first quarter gross domestic product report. China is confident of reaching the government's 6.5 percent GDP growth target this year. Separately, People's Bank of China (PBOC) adviser Sheng Songcheng said the improving economy has been matched by a stable yuan, with signs that capital is starting to return to China. "After breaking and even reversing expectations for yuan depreciation, there are signs of a trend of capital returning to China," Sheng wrote.
India imported about 33 million tons of oil products over April 2016 to February 2017, up nearly 24 percent from the same period a year ago, government data showed. Most of the imports compromise petroleum coke and LPG according to Reuters. Energy consumption in India, the world's third-biggest oil consumer, is expected to grow as it targets between 8 to 9 percent economic growth this fiscal year from around 7 percent in 2016/17. Even as India tries to wean itself off oil, this trend of strong demand growth is not going to change overnight.
We believe the global oil market is tightening. While traders can’t see through the current short term data, a major sea change of global supply changes are underway. I am not alone with this thought as others like Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) are agreeing with my call for higher prices. Hedgers must use price weakness to protect themselves from upside risk which could become frantic once the market sees inventory start to tighten. Overall products, not just crude, have fallen for nine weeks in a row. Crude will be the next to fall. Geo-political risk may become more of a factor as tightening supply increases the chances for upside price spikes.
Usually shoulder season is a quiet time for the natural gas market but not this year. Reuters is reporting that hedge fund managers have accumulated a near-record bullish position in U.S. natural gas futures and options as gas stocks have remained at a modest level despite an exceptionally mild winter. They say that hedge funds and other money managers have boosted their net long position in the two main futures and options contracts for seven consecutive weeks by a total of 1,313 billion cubic feet. By April 18, fund managers had accumulated a net position equivalent to 3,511 billion cubic feet, the highest for three years, according to data published by U.S. Commodity Futures Trading Commission.
Fund managers show a strong bullish bias for the natural gas market, with long positions outnumbering short positions by 4.3:1, up from a recent low of 2.2:1, and the highest ratio since February 2014. Funds have reacted to signs of tightness in the gas market because of sluggish production, strong exports and a structural increase in gas demand from new combined-cycle power plants. Working gas stocks have finished the winter around 380 billion cubic feet, or 15 percent, below the same point last year even though temperatures have been slightly warmer. But the concentration of long positions has increased the risk of a sharp correction if funds try to take profits following the recent increase in prices according to Reuters.