Oil Prices - May 21

[dan_s]

At NYMEX the July futures contract is now the front month for WTI. That is the price you are seeing quoted in the news. It made a nice run to $60.15/bbl this morning, but there is obviously a lot of resistance at $60. Fundamentals supporting the move higher for oil prices are (a) the big draw from U.S. crude oil storage (over 2.7 million bbls) reported Wednesday morning and (b) U.S. daily oil production fell last week by 112,000 barrels to 9.26 million BOPD, the largest decline since last July, according to an estimate by EIA. [Keep in mind that weekly production estimates by EIA are just that, "estimates". Actual production information takes months to be confirmed. Today, February is the most current "actual" production data I can find.]

IMO if we see WTI close above $60/bbl for several days in a row, it will be the new support level.

When the NYMEX contract rolls to a new month there is always a lot of movement, so don't read too much into this. However, I think the supply / demand fundamentals are improving for oil.
1. The weekly storage reports should be large draws week after week through the end of July. This is the period when refiners are drawing more "raw material" from storage to produce gasoline and diesel fuel. Summer is the highest demand period for transportation fuels.
2. U.S. oil production has peaked and is now on steady decline. I am expecting more than 100,000 barrel per day declines month after month starting in June.
3. Each Friday, Baker Hughes will report a decline in the number of active rigs drilling for oil. I follow a lot of companies and most of them intend to lay down more rigs this summer. It takes 1,000 rigs drilling for oil in this country to maintain current production and last week we had only 660 rigs drilling for oil. With over 50,000 horizontal shale wells on steep decline, there is no way we are completing enough new wells to offset the decline. In 2014 an estimated 20,000 horizontal wells were completed in the U.S. Those wells decline by an average of more than 50% in the first year.

I have seen several articles saying that U.S. upstream companies will ramp up production if oil hits $65/bbl. IMHO that is a bunch of BS, just like "the sky is falling" articles about crude oil inventory at Cushing topping out. There are a few companies delaying completions (EOG is one), but there are not thousands of oil wells that are intentionally not being completed. My guess is that the number is less than 300 and all of those wells will not be completed the day after oil hits $65/bbl.

On the many conference calls that I have listened to, what I'm hearing is that when oil prices "firm up" (somewhere north of $65) the upstream companies will consider increasing capital expenditures. Public companies do not increase or decrease their capital programs on a whim. It takes a lot of planning and it takes board approval. If WTI jumped to $70/bbl tomorrow, the earliest we will see a significant increase in drilling activity will be in 2016.

On June 5 we have the next OPEC meeting. What happens at that meeting will have an impact on oil prices. The good news is that all of the OPEC countries are producing at close to max rates today, so IMHO there is more upside for oil prices coming from that meeting than downside. Most analysts expect Saudi Arabia (who controls OPEC) to say they will keep production high. I think there is a good chance they do something to get Brent back to $80/bbl. Since the U.S. military is no longer supporting Saudi Arabia, they need a lot more money for their military budget. This is all pure speculation on my part.