Oil Market Commentary by Phil Flynn - Dec 27

[dan_s]

Post by Phil Flynn at 11AM ET on 12/27/2017

What good is it for someone to gain a pipeline, yet lose another? The Forties pipeline is coming back but a loss of a Libyan oil pipeline has the oil bears in a less than festive mood. WTI oil hit $60 a barrel yesterday for the first time in 2 and a half years and Brent Crude over $67 a barrel on reports that armed men blew up a pipeline pumping crude oil to Es Sider port on, cutting Libya’s output by up to 100,000 barrels per day (bpd).

That daily catalyst for the spike in price is just another example on how the bearish arguments for oil are going up in smoke. Remember it was Libya along with Nigeria that the bears said would flood the global oil market and keep the global glut of oil at record highs.

It was Libya and Nigeria that was supposed to break the will of OPEC and cause massive cheating. None of that has turned out to be true. OPEC compliance is better that it ever has been in history and global oil inventories continue to fall at a record pace.

U.S. Inventories have fallen over 100 million barrels and oil in floating storage has plummeted. Libya has yet to prove it can be a reliable supplier over the long run and Nigeria has struggled not only with rebel groups but with a potential oil worker strike that could happen in the beginning of the new year. And, oil inventories in the U.S. will fall again and the surplus over the five-year average will soon be totally wiped out. U.S. oil exports and strong global demand, inspired by low oil prices and better U.S. economic policies, have set the demand surge.

Phantom barrels of shale oil, that is supposedly being produced by U.S. shale oil producers, don’t seem to be showing in inventory. Perhaps it is because they are not being produced at the rate that the EIA says that it is.

The Texas Railroad Commission reported earlier this month that oil production in the Permian Basin is down from a year ago. Texas pumped 69.2 million barrels (bbl) of oil in September, compared with an adjusted 81.3 million bbl a year ago, the Railroad Commission (RRC) of Texas said. That drop in Texas production is more evidence that the EIA data is over inflated.

It was a lot of bad data that misled the oil market earlier this this year, but we will pay the price for those mistakes in the new year. How were the bears wrong this year?
Let me count the ways.
> They said that OPEC and Non-OPEC would cheat on production. That was wrong.
> They said that demand would be lackluster per the International Energy Agency. That Was wrong. Demand growth is at the highest rate in over a decade.
> They said that the U.S. would be producing over 10 million a barrel of oil a day. That was wrong.
> They said that if Donald Trump won the Presidency the market would crash. That was wrong. Stocks are on a tear and that is foreshadowing more oil demand in the coming years.
> They said that over a trillion dollars in capital spending cuts wouldn’t matter but already we are seeing a need for those 8 million barrels of oil that were going to be produced.

I could go on. Yet, what the bears really missed is a generational bottom in oil. I wrote that after oil double bottomed at $26 that was like when oil double bottomed at $10. We are now in a new super cycle if you will on oil and we will try to have to rush to keep up with surging global oil demand. We said it was the bottom of a long- term cycle and the evidence is becoming clearer, that is exactly the case. History is repeating itself (as it always does). Those that said that this time is different are now finding out it is not. Those that said that oil would never trade above $40, then $50, then $55 because of shale oil production better go back to the drawing board. Even with projection of a one million barrel increase next year will find it won’t be fast enough to keep up with growing global demand.

Oil products are on fire. Heating oil is surging as winter sinks its teeth into the U.S. and Europe. Many buyers are scrambling and under hedged because they believed a lot of the bearish arguments. The heating oil and gas-oil spread versus the RBOB-gas has soared as weather is going to keep the market supply tight. Shale oil output may fall as cold temperatures may shut in some wells. If the cold weather stays around we still have significant upside risk in distillate as supply is tight around the globe.

Its still not cold enough for natural gas, it is a war between record demand versus record U.S. production. That battle played out yesterday and so far, it seems like record production and new pipelines are giving the bears a bit of an edge, yet that may change as the U.S. draws will start to rise. Buy cheap calls.
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MY TAKE: It is crystal clear (to me at least) that demand for oil is now much higher than supply. Per EIA, U.S. crude oil inventories declined almost a million barrels per day during the four weeks ending 12/15/2017 and we know European inventories are also falling. This is not the high demand period of the year. Winter demand for refined products is lower. If we get a demand spike in the 2nd quarter like we did last year (2.3 million barrels per day), we should see much higher oil prices. HISTORY REPEATS itself and big declines in the oil price cause increased demand (i.e. record SUV sales) and decreased supply. It has happened again and the rebound phase of this "Super Cycle" may be quite a ride.

PS: The U.S. is exporting more crude oil and refined productions to Europe because those cats are in big trouble. Distillate inventories in Europe are dangerously low and they count on light oil from Libya. Just think how stupid it is to depend on a country run by gangs for critical oil supplies. Oh, I forgot, we are still doing the same thing!

[John.A.Hunt]

Dan, how big is the Heating Oil market?
Watching the temperature maps makes me think of my boiler and radiator heating system in the 1940's vintage row house we rented in PA several years ago. The home heating oil trucks were busy in this kind of weather. The radiator heat was even and quiet. I kinda liked those big radiators under the windows.

[dan_s]

It is big in the Northeast and in Europe. Hard to believe that many areas of New England are still off of the natural gas grid.

In the winter, heating oil demand in the U.S. is 3.5 to 5.5 million barrels per day.

See: https://www.eia.gov/petroleum/heatingoi ... itn-tabs-2

When I worked at Hess Corp. we sold a lot of heating oil in the winter. I remember that residential customers always wait until the first major cold wave to order a load and are then pissed when they are put on a waiting list.

They are going to burn a lot of heating oil in New England this week.