Global Oil Market - June 22

[dan_s]

By Phil Flynn, June 22:

Meltdown Madness!

Crude oil prices have plunged far below what the oil fundamentals might suggest and even hardened bears are starting to question this selling madness. The price drops and current levels will destroy the myth that U.S. oil production will rise regardless of the price and we are already seeing downgrades of those energy stocks across the sector. Downgrades are coming fast and furiously.

Barron’s reported that Seaport Global Securities downgraded 51 energy-related stocks in the exploration and production arena, as well as offshore space. Morgan Stanley also reportedly lowered its outlook for the oil services industry to “in-line", citing increasing odds of a bearish outlook that sees a 30%-50% downside to historical valuation support. Macquarie Energy downgraded Chesapeake, BP (LON:BP), Chevron (NYSE:CVX), Royal Dutch Shell (LON:RDSa) saying that global oil majors will slip back into deficits and suffer additional painful cost reductions.

Seaport Global Securities issued a report this week predicting that U.S. oil production will reach 12 million barrels per day by the end of 2018. If you read the EPG Flash Alert that I sent out yesterday, you know that U.S. production growth has recently slowed to a crawl and that I disagree with this predictions. - Dan

I think you get the picture. This sell off will have choking ramifications on future oil production at a time when we are seeing oil inventories start to fall. While global data is hard to decipher, we do know that the U.S. does see another drop in U.S. crude supply adding to the biggest trend in falling supplies in our history.

Sure, we are coming off extremely high levels of supply to begin with but the trend of falling supply in the U.S. is not an argument. Crude inventories fell by 2.5 million barrels more than the 2.1 million barrels decrease that was expected. Even gasoline stocks fell by 578,000 barrels at a time when they normally rise and at a time when refiners are cranking out near record amounts of the stuff.

What is an argument is what does this mean for our future. Talk of oil floating in storage is making the rounds again and talk that shale output will reach 10 million barrels a day will be put to the test. Unhedged shale producers better hope that their line of cash does not dry up and hope the money men have the vision to see through this epic price collapse.

Yet with the rash of downgrades, the sense may just be that they would be throwing good morning after bad. Shale producers will stop adding rigs and production, that while we saw at new highs yesterday, should start to moderate and fall back. Prices need to bounce back quickly or we'll see another round of energy job cuts as well as Cap X cuts across the sector. Price collapses like we have seen too often will make it harder and harder for many oil companies to raise capital.

In the meantime, Tropical Storm Cindy is shutting down gulf oil production. The Bureau of Safety and Environmental Enforcement (BSEE) says that as of yesterday, based on data from offshore operator reports submitted as of 11:30 CDT, personnel have been evacuated from a total of 40 production platforms, 5.43% percent of the 737 manned platforms in the Gulf of Mexico. Production platforms are the structures located offshore from which oil and natural gas are produced. Unlike drilling rigs, which typically move from location to location, production facilities remain in the same location throughout a project’s duration. Personnel have been evacuated from one rig (non-dynamically positioned (DP) rig), equivalent to 6.67% percent of the 15 rigs of this type currently operating in the Gulf. Rigs can include several types of offshore drilling facilities including jackup rigs, platform rigs, all submersibles and moored semi-submersibles. There will be another update later today.

Sharp sell-offs have ramifications. The last time we sold off like this in early May we snapped back. Even as the mood is negative, we expect a similar snap back. While U.S. output did rise by 20,000 barrels a day last week to 9.35 million barrels a day, the increase for the month is still below what was expected. We really think that this selloff is being driven by emotion rather than fact and we should see a snap back. Great time to buy some cheap calls.

Natural gas has been pressured by cool weather forecasts but production shutdowns in the Gulf of Mexico is going to raise real concerns about meeting demand and building storage when temperatures go back to normal. You want to buy calls when the market looks this bad. As the old saying goes, the market always looks worst at its bottom.

[dan_s]

From Reuters: https://www.investing.com/news/commodit ... ice-498254

[dan_s]

Energy industry consultancy Wood Mackenzie said that the average North American shale play's breakeven price had fallen below $50 a barrel, with break-even prices in some fields (the Wolfcamp formation in the Permian Basin, for example) below $30 a barrel. A new report from Rystad Energy noted that break-even costs now average around $38 a barrel for 13 producers in the Bakken shale play, with the lowest cost producer being Continental Resources Inc. (CLR) at around $28 a barrel.

The improved economics are a function of two main factors: new drilling and well completions have been focused on the core areas (called high-grading in the industry) and more stimulation (fracking) stages. These factors have yielded improved initial (30-day) production (IP) rates per well to more than 1,500 barrels a day for Marathon Oil Corp. (MRO), nearly 1,200 barrels a day for ConocoPhillips (COP), more than 1,400 barrels a day for Continental and more than 1,300 barrels a day for Whiting Petroleum Corp. (WLL).

[dan_s]

Good article on why the big U.S. oil producers will adjust their capital programs: http://oilprice.com/Energy/Oil-Prices/T ... encer.html

I worked for Hess Corp. for 18 years and was part of the capital budget process for U.S. E&P. The capital budget is layered. As the commodity prices come down, money for some marginal projects will be cut.

[dan_s]

What are the charts telling us?

WTI Crude bounces from just below the 4310/05 target. We are severely oversold with very minor bullish signals that may indicate a good chance of a small recovery today. I cannot suggest longs in the bear trend without more solid buy signals but I can say it could be a good time for profit taking on all shorts. A recovery targets 4375/80 then strong resistance at 4420/30. Gains are likely to be limited in the bear trend so watch for a high for the day. Bears are still in full control. Shorts need stops above 4460 to targets a selling opportunity at 4505/15. Try shorts with stops above 4540.

Bears are still in full control so a break below 4290 targets the November low at 4230/20. However in such severely oversold conditions the downside is likely to be more limited at this stage. We are likely to see sideways trading sooner rather than later to ease these conditions
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My Take is that there support for Brent at $45 and WTI will trade in a tight range of $2.00 to $3.00 below Brent. - Dan

Keep in mind that the Bears are in control for now and that there is always "headline risk" on both the upside and downside. As I have posted here many times, realized commodity prices in the 2nd quarter will be just slightly lower than they were in the 1st quarter. Combined with higher production, all of our Sweet 16 and Small-Cap Growth Portfolio companies should report Q2 results very close to the results that they reported in Q1, which were very good. Operations updated and revised guidance should calm the nerves of investors. What we need is for fund managers to rotate money into this grossly oversold sector.