It is amazing how quickly the global oil market can go from "glut" to under-supplied. As I pointed out in my last podcast and yesterday's "View From Houston" newsletter, it only takes a small (-1%) shortage to cause a BIG INCREASE in the price of oil. Large price swings are common because a steady stream of oil is necessary to keep the global economy.
WTI opened at $68.64/bbl today, but all of our Sweet 16 stocks are still trading as if oil was less than $50/bbl.
Q1 results will be coming out very soon. During Q1 WTI averaged $62.89/bbl, which compares to the $60/bbl price that I am using for all future periods in my forecast/valuation models. - Dan
Phil Flynn at 8:20 ET on April 24, 2018
The Great Tightening
While oil reacts to geopolitical headlines with more vim and vigor the real reason that this market is more sensitive to these headlines is because global oil supply is tightening. The combination of underinvestment in the industry during the recent price crash and a fundamental misunderstanding of how the shale patch works. That has now left the oil market fundamentally undersupplied. Oil set a generational bottom near $26 a barrel and when low prices and a strong economy set off demand, the producers fell behind the curve. Now it seems that even if OPEC and Non-OPEC start to edge up production it may be a little too late for this undersupplied market.
Of course I am not saying that a breakdown of the OPEC/Non-OPEC deal wouldn’t have an impact on price. We saw the market break yesterday over a dollar on a report that Iran was signaling that it might offer discounts on its oil to preserve market share ahead of potential sanctions on their supply. Traders feared after the report that Iran might flood the market with oil as it tried to raise cash ahead of what could be some very lean times for the country. The trade also feared for a moment that this discount by Iran could derail the larger OPEC-Non-OPEC alliance.
Yet the reality is that Iran would be hard pressed to raise output much and most of their floating oil has already been sold. Other members of the cutback alliance might cut Iran some slack because as soon as the sanctions are in place they will be able to pick up Iranian market share. Besides, with global demand growing over 2 million barrels of oil a day the market should be more worried about the loss of future Iranian supply.
Yemeni Houthis rebels, backed by Iran, shot more missiles at Saudi Arabia and were shot down. But that had consequence for the Houthis. MarketWatch reported that oil prices gave up earlier declines Monday to settle higher, as reports that a Saudi-led air strike killed the head of the Houthi rebels in Yemen raised the potential for disruptions to the flow of crude in the Middle East. The fear of geopolitical risk, and the reality that supply will tighten again this week, brought the market back.
Saleh al-Sammad, political leader of the Houthi rebels in Yemen, was killed in Saudi-led air strikes, Al Jazeera reported.
Now comes a report from “Oil Price“ that says that Yemeni Houthis have captured 19 oil tankers and are keeping them from entering the Hodeidah port, according to reports from Saudi media quoting Kingdom’s ambassador in Yemen. The ambassador suggested three possible reasons for the detention, including an attempt to extract money from the owners of the vessels, “the continued starvation of the Yemeni people,” and a plan to destroy the tankers, causing major environmental damage to the Red Sea. Tensions against a tight oil market is adding to the major moves. That tightness was reflected from a supply report from Genscape that shows that last week’s increase in Cushing Oklahoma crude supply may have been fleeting. The private forecaster says that supplies at the storage hub have fallen by 560,000 plus barrels in just the last few days. This is putting supply at that hub at dangerously low levels
The bottom line is that oil is in a very bullish mode. Oil is in a super cycle mode and may rally into the Memorial Day kickoff to the Summer Driving season before we take a break. Oil companies and oil service firms should start to benefit as will shale producers that are cash flow positive now in many cases. Hedgers need to be hedged against significant upside risk.
Even gasoline prices at the pump are on the rise. GasBuddy reports that the national average for a gallon of gasoline has risen 5 cents per gallon in the last week to $2.76 per gallon today, according to GasBuddy’s latest weekly survey of 135,000 gas stations. The gain comes as oil prices continue to surge, rising last week to a new multi-year high as global demand outpaces supply and OPEC maintains production cuts.
Diesel fuel is tight as farmers get a slow start to planting. When the planters ramp up, look for another spike in diesel prices.
Natural gas is still being lifted by mother nature. Still we think its days are numbered so buy puts.
Oil Price - April 24
Oil Price - April 24
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Price - April 24
Raymond James has officially increased their oil price forecast as follows. If you would like to see the full report, send me an email at dmsteffens@comcast.net
West Texas Intermediate (WTI):
2017:
Q1 A = $51.78
Q2 A = $48.13
Q3 A = $48.18
Q4 A = $55.28
2018:
Q1 A = $62.89
Q2 E = $65.00 < WTI opened at $68.64 on April 24
Q3 E = $70.00
Q4 E = $75.00
2019:
Q1 E = $75.00
Q2 E = $70.00
Q3 E = $70.00
Q4 E = $65.00
Raymond James:
"Underpinning this more bullish near-term oil price outlook is the overarching fact that our global supply/demand model over the
next year yields very upbeat conclusions regarding inventory draws despite two conservative (i.e., bearish) modeling assumptions:
(1) a cumulative 2018-2019 U.S. oil supply growth forecast of 3.3 million bpd (or 1.8 million bpd in 2018 and 1.5 million bpd in 2019)
that is at least 400,000 bpd above consensus; and (2) growth (rather than declines) in non-OPEC, ex-U.S. supply over the next two
years. Simply put, our model says that if WTI were to match our old price deck, it would set the stage for a significantly
undersupplied global oil market not only in 2018 but well into 2019. The simple oil supply/demand math means that long-dated oil
prices must move higher in order to balance the market – inventories cannot shrink forever!"
West Texas Intermediate (WTI):
2017:
Q1 A = $51.78
Q2 A = $48.13
Q3 A = $48.18
Q4 A = $55.28
2018:
Q1 A = $62.89
Q2 E = $65.00 < WTI opened at $68.64 on April 24
Q3 E = $70.00
Q4 E = $75.00
2019:
Q1 E = $75.00
Q2 E = $70.00
Q3 E = $70.00
Q4 E = $65.00
Raymond James:
"Underpinning this more bullish near-term oil price outlook is the overarching fact that our global supply/demand model over the
next year yields very upbeat conclusions regarding inventory draws despite two conservative (i.e., bearish) modeling assumptions:
(1) a cumulative 2018-2019 U.S. oil supply growth forecast of 3.3 million bpd (or 1.8 million bpd in 2018 and 1.5 million bpd in 2019)
that is at least 400,000 bpd above consensus; and (2) growth (rather than declines) in non-OPEC, ex-U.S. supply over the next two
years. Simply put, our model says that if WTI were to match our old price deck, it would set the stage for a significantly
undersupplied global oil market not only in 2018 but well into 2019. The simple oil supply/demand math means that long-dated oil
prices must move higher in order to balance the market – inventories cannot shrink forever!"
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Price - April 24
Zacks on April 24, 2018: Primary Drivers of Crude Recovery
One of the main reasons why the U.S. oil benchmark soared revolved around expectations that OPEC and other major producers agreed to expand their output-cut deal beyond March. The coalition prolonged the agreement for another nine months to the end of 2018 in an attempt to clear the supply gut.
Meanwhile, reports have emerged that Saudi officials are looking to push oil prices even higher ahead of the launch of the Aramco IPO to bolster its valuation.
Another major factor fueling higher oil prices is fast-growing demand for the commodity, which continues to tighten the market. Per the International Energy Agency (IEA), global oil demand is likely to grow by 1.5 million barrels a day this year to average 99.3 million barrels a day.
Sharp inventory drawdowns have also helped the commodity tread on a growth trajectory. Oil stockpiles have shrunk in 36 of the last 51 weeks and are down more than 100 million barrels since April last year. The gradual fall – stemming from a combination of lower imports and spiralling exports – has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 429.9 million barrels, current crude supplies are 20% below the year-ago period.
However, not just these factors but other Middle-East tensions also led to this huge rise in oil prices.
Other Factors Behind the Uptick
Fueling the rally in oil prices over the last few weeks are concerns that geopolitical tensions in the Middle East could disrupt crude supplies. Crude prices have been soaring lately on expectations of the reintroduction of sanctions on Iran, expansion of sanctions against Venezuela and strikes on Syria.
Iran Nuclear Deal: Industry watchers are waiting to see if the Trump administration decides to impose sanctions on Iran once again, post the May 12 deadline. Following the lifting of sanctions in 2016 as part of Obama-era agreement, Iran’s crude oil production and exports have been rising. However, the return of sanctions would put pressure on Iran’s energy industry and affect the oil market in general. A disruption to Iranian oil exports and investments in the country might cut off some of its supplies to the global market, thereby boosting prices.
The Venezuela Issue: Fast falling production in Venezuela have added to the jitters. With the country tethering on the verge of an economic collapse, oil output has shrunk almost 50% since 2005. As it is, Venezuela currently churns out less than 2 million barrels per day, much lower that its pledge per the OPEC-led supply cuts. U.S. sanctions have further aggravated the situation. Further, Trump is likely to increase sanctions on Venezuela, which will further tighten the markets. A prolonged slump in Venezuela production could result in higher prices.
Syria Strike and Russian Involvement Also Pushes Oil Higher: The conflict in Syria heightened after a joint air strike by the United States, France and the United Kingdom, post which crude started marching north. The rally will continue as the United States is likely to take strong measures against Iran and Russia for backing Syria’s chemical attack.
Also, the Russian market has seen increased volatility after Moscow was slapped with new American sanctions on Apr 6. Trump will take a strong stand against Russian players, who reportedly helped Syria to carry out the chemical attack. Since, Russia is one of the largest producers and exporters of crude in the world, any sanction on the country will lift crude price.
One of the main reasons why the U.S. oil benchmark soared revolved around expectations that OPEC and other major producers agreed to expand their output-cut deal beyond March. The coalition prolonged the agreement for another nine months to the end of 2018 in an attempt to clear the supply gut.
Meanwhile, reports have emerged that Saudi officials are looking to push oil prices even higher ahead of the launch of the Aramco IPO to bolster its valuation.
Another major factor fueling higher oil prices is fast-growing demand for the commodity, which continues to tighten the market. Per the International Energy Agency (IEA), global oil demand is likely to grow by 1.5 million barrels a day this year to average 99.3 million barrels a day.
Sharp inventory drawdowns have also helped the commodity tread on a growth trajectory. Oil stockpiles have shrunk in 36 of the last 51 weeks and are down more than 100 million barrels since April last year. The gradual fall – stemming from a combination of lower imports and spiralling exports – has helped the U.S. crude market shift from year-over-year storage surplus to a deficit. At 429.9 million barrels, current crude supplies are 20% below the year-ago period.
However, not just these factors but other Middle-East tensions also led to this huge rise in oil prices.
Other Factors Behind the Uptick
Fueling the rally in oil prices over the last few weeks are concerns that geopolitical tensions in the Middle East could disrupt crude supplies. Crude prices have been soaring lately on expectations of the reintroduction of sanctions on Iran, expansion of sanctions against Venezuela and strikes on Syria.
Iran Nuclear Deal: Industry watchers are waiting to see if the Trump administration decides to impose sanctions on Iran once again, post the May 12 deadline. Following the lifting of sanctions in 2016 as part of Obama-era agreement, Iran’s crude oil production and exports have been rising. However, the return of sanctions would put pressure on Iran’s energy industry and affect the oil market in general. A disruption to Iranian oil exports and investments in the country might cut off some of its supplies to the global market, thereby boosting prices.
The Venezuela Issue: Fast falling production in Venezuela have added to the jitters. With the country tethering on the verge of an economic collapse, oil output has shrunk almost 50% since 2005. As it is, Venezuela currently churns out less than 2 million barrels per day, much lower that its pledge per the OPEC-led supply cuts. U.S. sanctions have further aggravated the situation. Further, Trump is likely to increase sanctions on Venezuela, which will further tighten the markets. A prolonged slump in Venezuela production could result in higher prices.
Syria Strike and Russian Involvement Also Pushes Oil Higher: The conflict in Syria heightened after a joint air strike by the United States, France and the United Kingdom, post which crude started marching north. The rally will continue as the United States is likely to take strong measures against Iran and Russia for backing Syria’s chemical attack.
Also, the Russian market has seen increased volatility after Moscow was slapped with new American sanctions on Apr 6. Trump will take a strong stand against Russian players, who reportedly helped Syria to carry out the chemical attack. Since, Russia is one of the largest producers and exporters of crude in the world, any sanction on the country will lift crude price.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Price - April 24
Mission accomplished for OPEC as oil moves from slump to boom: Kemp - Reuters News
24-Apr-2018 14:28:07
John Kemp is a Reuters market analyst. The views expressed are his own
By John Kemp
LONDON, April 24 (Reuters) - The slump that characterised the oil market between the middle of 2014 and the middle of 2016 has been replaced by what looks like the beginning of a boom.
Benchmark Brent prices have already risen by more than $45 per barrel or 170 percent from their cyclical trough in early 2016.
Front-month futures prices, at almost $75 per barrel, are now trading close to the inflation-adjusted average for the last price cycle, which started in 1998 and finished in 2016.
So far this year, futures prices have averaged nearly $68 per barrel, which is well above the post-1973 real average price of $50-$55.
Futures prices have shifted from a big contango during the slump into an increasingly wide backwardation since the middle of 2017, which is consistent with a shift from over-supply to under-supply.
Global oil consumption is predicted to increase by more than 1.5 million barrels per day (bpd) in 2018, the fourth consecutive year of very strong growth.
Non-OPEC oil production is forecast to increase by 2.0 million bpd or more this year, mostly as a result of a large increase in U.S. shale plus other output increases from Canada, Brazil and Norway. But with steep declines in output from OPEC member Venezuela as a result of unrest and mismanagement, and continued curbs on production by other OPEC and non-OPEC members, global production is failing to keep pace with consumption.
OECD inventories have dropped sharply and are now in line with the five-year average, eliminating the surplus of over 300 million barrels inherited from the slump.
If inventories are adjusted for the rise in consumption, which gives a more accurate picture of the market balance, stocks are now well below the five-year average and continue to tighten.
So on every indicator, from spot prices and spreads to consumption, production and inventories, the oil market is now well into the boom phase of the cycle.
But booms are always followed by slumps. If OPEC allows the oil market to tighten too much in 2018/19, it will create the conditions for the next downturn a few years later.
LAGGING INDICATOR
Senior OPEC officials insist the organisation’s work on rebalancing the market has not yet been completed and they resist the characterisation of "mission accomplished".
In particular, they point to the relatively low level of investment in exploration and production to justify the need for continued production curbs and even higher prices.
But investment is a lagging indicator. Investment was slow to pick up during the early stages of the last boom (1998-2008) then proved stubbornly resilient in the first stages of the slump (2014-2016).
Lagging upstream investment is one of the principal causes of cyclical instability in the oil market and has been since the beginning of the modern petroleum industry.
If OPEC members wait for an acceleration of upstream investment before relaxing their production curbs, as ministers have indicated, they will almost certainly over-tighten the market in the meantime.
The oil market is already tight and the increasingly wide backwardation indicates traders expect it to become even tighter during the second half of the year, when oil consumption moves seasonally higher.
If OPEC maintains its current output curbs through December, the market is set to become exceptionally tight, which will push prices and spreads towards unstable levels.
The resulting increase in prices and spreads will accelerate production growth even further and start to restrain consumption growth.
OPEC ministers profess to be unconcerned about the impact on either supply or demand, but they have often misjudged market responses in the past.
The number of rigs drilling for oil in the United States has already resumed its upward trend over the last three weeks in response to higher prices, which will increase shale output even further by the end of 2018.
Consumption changes are harder to measure in real-time, and tend to lag behind changes in oil prices, but the rise in prices will restrain demand too, as it has always done during every previous period of rising prices.
BLAME GAME
OPEC members deny that they are principally responsible for the increase in oil prices over the last year or that they should adjust their production policy in response.
They can point to unplanned outages in Venezuela and other producing nations, as well as unexpectedly strong demand from consumers, for drawing down inventories faster than they predicted at the end of last year.
They can also point to growing concern among traders about the imposition of U.S. sanctions on Venezuela and re-imposition of sanctions on Iran for accelerating price increases.
All these arguments are true. And all these factors are outside OPEC’s control. But production policy is something OPEC controls directly and for which it is responsible.
OPEC's current production levels were set back in November 2016, when the market was heavily oversupplied, inventories were rising, and prices had only risen modestly from cyclical lows.
What was appropriate then is arguably no longer appropriate now. If OPEC members decide to extend current levels through to the year-end, they will probably be held responsible for the price increase likely to follow.
U.S. President Donald Trump has already indicated he holds OPEC responsible for rising oil prices via a message on his Twitter account.
If oil and fuel prices continue rising, the political pushback from consumer countries against OPEC will only intensify.
But what should concern the organisation more is the very real risk that further price increases will prove counter-productive.
By over-tightening the market in 2018/19, OPEC will be creating conditions for the next cyclical downturn in 2020/21.
John Kemp
Senior Market Analyst
Reuters
24-Apr-2018 14:28:07
John Kemp is a Reuters market analyst. The views expressed are his own
By John Kemp
LONDON, April 24 (Reuters) - The slump that characterised the oil market between the middle of 2014 and the middle of 2016 has been replaced by what looks like the beginning of a boom.
Benchmark Brent prices have already risen by more than $45 per barrel or 170 percent from their cyclical trough in early 2016.
Front-month futures prices, at almost $75 per barrel, are now trading close to the inflation-adjusted average for the last price cycle, which started in 1998 and finished in 2016.
So far this year, futures prices have averaged nearly $68 per barrel, which is well above the post-1973 real average price of $50-$55.
Futures prices have shifted from a big contango during the slump into an increasingly wide backwardation since the middle of 2017, which is consistent with a shift from over-supply to under-supply.
Global oil consumption is predicted to increase by more than 1.5 million barrels per day (bpd) in 2018, the fourth consecutive year of very strong growth.
Non-OPEC oil production is forecast to increase by 2.0 million bpd or more this year, mostly as a result of a large increase in U.S. shale plus other output increases from Canada, Brazil and Norway. But with steep declines in output from OPEC member Venezuela as a result of unrest and mismanagement, and continued curbs on production by other OPEC and non-OPEC members, global production is failing to keep pace with consumption.
OECD inventories have dropped sharply and are now in line with the five-year average, eliminating the surplus of over 300 million barrels inherited from the slump.
If inventories are adjusted for the rise in consumption, which gives a more accurate picture of the market balance, stocks are now well below the five-year average and continue to tighten.
So on every indicator, from spot prices and spreads to consumption, production and inventories, the oil market is now well into the boom phase of the cycle.
But booms are always followed by slumps. If OPEC allows the oil market to tighten too much in 2018/19, it will create the conditions for the next downturn a few years later.
LAGGING INDICATOR
Senior OPEC officials insist the organisation’s work on rebalancing the market has not yet been completed and they resist the characterisation of "mission accomplished".
In particular, they point to the relatively low level of investment in exploration and production to justify the need for continued production curbs and even higher prices.
But investment is a lagging indicator. Investment was slow to pick up during the early stages of the last boom (1998-2008) then proved stubbornly resilient in the first stages of the slump (2014-2016).
Lagging upstream investment is one of the principal causes of cyclical instability in the oil market and has been since the beginning of the modern petroleum industry.
If OPEC members wait for an acceleration of upstream investment before relaxing their production curbs, as ministers have indicated, they will almost certainly over-tighten the market in the meantime.
The oil market is already tight and the increasingly wide backwardation indicates traders expect it to become even tighter during the second half of the year, when oil consumption moves seasonally higher.
If OPEC maintains its current output curbs through December, the market is set to become exceptionally tight, which will push prices and spreads towards unstable levels.
The resulting increase in prices and spreads will accelerate production growth even further and start to restrain consumption growth.
OPEC ministers profess to be unconcerned about the impact on either supply or demand, but they have often misjudged market responses in the past.
The number of rigs drilling for oil in the United States has already resumed its upward trend over the last three weeks in response to higher prices, which will increase shale output even further by the end of 2018.
Consumption changes are harder to measure in real-time, and tend to lag behind changes in oil prices, but the rise in prices will restrain demand too, as it has always done during every previous period of rising prices.
BLAME GAME
OPEC members deny that they are principally responsible for the increase in oil prices over the last year or that they should adjust their production policy in response.
They can point to unplanned outages in Venezuela and other producing nations, as well as unexpectedly strong demand from consumers, for drawing down inventories faster than they predicted at the end of last year.
They can also point to growing concern among traders about the imposition of U.S. sanctions on Venezuela and re-imposition of sanctions on Iran for accelerating price increases.
All these arguments are true. And all these factors are outside OPEC’s control. But production policy is something OPEC controls directly and for which it is responsible.
OPEC's current production levels were set back in November 2016, when the market was heavily oversupplied, inventories were rising, and prices had only risen modestly from cyclical lows.
What was appropriate then is arguably no longer appropriate now. If OPEC members decide to extend current levels through to the year-end, they will probably be held responsible for the price increase likely to follow.
U.S. President Donald Trump has already indicated he holds OPEC responsible for rising oil prices via a message on his Twitter account.
If oil and fuel prices continue rising, the political pushback from consumer countries against OPEC will only intensify.
But what should concern the organisation more is the very real risk that further price increases will prove counter-productive.
By over-tightening the market in 2018/19, OPEC will be creating conditions for the next cyclical downturn in 2020/21.
John Kemp
Senior Market Analyst
Reuters
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group