Could WTI push over $75 next week?

[dan_s]

$75 Oil By July 4?
By Phil Flynn June 29, 2018 09:37AM ET

No Cushing Cushion

With the Trump Administration working towards zero Iranian exports by November, Libyan oil supplies at risk due to clashes with militias, and crashing supply from Venezuela, reports of tightening U.S. supply is keeping oil on edge. Oil prices continued its drive, hitting $74 a barrel for the first time since that fateful OPEC meeting in November of 2014. That was the meeting where OPEC declared a misguided production war that caused oil prices to crash. Now we are on the other side of the momentum indicator as prices are rising with a bullet.

Supply fears are rising after a report by private forecaster Genscape showed that supplies at the biggest U.S. storage complex in Cushing, Oklahoma drained once again falling by 3.215 million barrels to a multiyear low 29,956,463 million barrel. That drop means that we are getting close to a level where supply in the storage hub is so low that they will not be able to supply refiners with much oil. They need enough to stay operational. That lack of a Cushing cushion and U.S. refiners demanding more crude is causing prices to spike. The report caused a surge in oil prices and the Trump State Department tried to cool the passions.

Reuters reported that the United States is prepared to work with countries on a case by case basis to help them reduce imports of Iranian oil as Washington prepares to re-impose sanctions against Tehran in November, a State Department official said on Thursday, suggesting the Trump administration could offer waivers. A senior State Department official said this week that countries will need to cut their imports of Iranian oil to zero by November and exemptions are unlikely. Secretary Pompeo met with the Department of State with Saudi Minister of Energy, Industry, and Mineral Resources Khalid al-Falih. They discussed energy security and other issues of mutual concern.

Yet, that is not enough to ease concerns. Saudi Arabia is being asked to raise production to make up the difference. Also, the Trump Administration is asking Saudi Arabia to collude with Russia to fill the void of Iranian supply. In Fact, Russia and Saudi Arabia are together on oil policy, which is strange because Russia is a strong ally with Iran. Oil politics and regular politics creates strange bedfellows.

We said we could see new highs on oil by the Fourth of July! Normally we will see a correction around or just after the holiday. While our earlier prediction in the beginning of the year, that we would see oil at $80 is on track, we could see some pullback. Still with the dollar showing signs of a top oil could see a test of $75.

The dollar is falling on news of a deal on Migrants in Europe. As reported by Bloomberg, the Stoxx Europe 600 Index and U.S. futures both wobbled before recovering following a report from Axios that President Donald Trump has repeatedly told top White House officials he wants to withdraw the U.S. from the WTO. Treasury yields ticked higher, while the dollar declined a second day. The euro gained the most in a month and Italian 10-year government bonds rose after European Union leaders agreed to a package of measures to stem the flow of migrants, easing concern over a standoff between Italy and the rest of the trading block. A report that the ECB is considering reinvesting in longer-dated bonds also helped the mood.

Make sure you are hedged with gasoline and diesel. The products have lagged oil and will catch up. Small businesses may be hurt if they don’t have some protection. While seasonally, we should see some price relief the risks are still high for (transportation fuel) price spikes.

We are having a heat wave and it is showing in the Natural gas market. Air conditioners are humming leading to massive power burns. Thank goodness that we are producing a record amount of gas because we are seeing record demand. MarketWatch reported that the U.S. Energy Information Administration reported Thursday that domestic supplies of natural gas rose by 66 billion cubic feet for the week ended June 22. Analysts polled by S&P Global Platts had forecasts a climb of 74 billion cubic feet. The data, however, included an upward revision, so stocks for the week ended June 15 rose by 95 billion cubic feet, instead of the previously reported 91 billion. Total stocks now stand at 2.074 trillion cubic feet, down 735 billion cubic feet from a year ago, and 501 billion below the five-year average.

Platts reported that U.S. natural gas production surpassed 79.8 Bcf/d on Sunday, setting the new record high, S&P Global Platts Analytics data shows. Over the past week, U.S. production has been exceptionally strong, averaging 79.4 Bcf/d, with six of the highest output days on record. < Demand for gas is also at record levels for power generation, industrial demand and ever increasing exports as LNG and via pipeline to Mexico and Eastern Canada. - Dan

[dan_s]

New worries about oil supplies could drive oil prices much higher than their current mid-$70 level over the next several months, with analysts at Bank of America/Merrill Lynch believing crude could hit $90 a barrel by early next year.

Read: https://finance.yahoo.com/news/oil-pric ... 00506.html

The Wall Street Gang is like a herd of dumb buffalos. When the leaders of the "HERD" say it is time to run in a new direction, they all follow. No one on Wall Street wants to be left out of the HERD.

[dan_s]

Where a company sells their oil will have a BIG IMPACT during the second half of this year.

I am working on Evolution Petroleum (EPM) today. We will publish an updated profile on the company within a few days.

None of EPM's oil is hedged: In the quarter ending 3-31-2018 (EPM's 3rd fiscal quarter) they sold their share of the oil from the Delhi Field in Louisiana for $63.56/bbl. They got that high price because their oil is sold into the Gulf Coast market where oil is based on LLS prices, not WTI. LLS oil trades close to Brent because it competes directly with seaborne oil coming into the region.

So, EPM and lots of the Eagle Ford companies will sell their oil for close to $75/bbl in Q3 because Brent and LLS in now pushing up against $80/bbl.

EPM is in our High Yield Income Portfolio because it is virtually debt free and it pays a nice dividend. Another plus is that EPM recently retired all of their preferred stock. Very simple and clean balance sheet.

[ChuckGeb]

It’s about time for EPM to host a luncheon, isn’t it?

[dan_s]

I hope to announce a Houston luncheon early next week and we may have two in July. July is always hard to get a host company because of the 4th of July holiday, lots of vacations and quarterly closings in the 2nd half of the month.

EPM is on my list for a luncheon but Randy Keys (my primary contact) retired and now they are working to get the acquisition that they announced on May 15th closed.

We will send out the updated profile on EPM tomorrow. My valuation increases to $11.00, which compares to John White's valuation of $10.50. John's valuation is as of Mid-May, so it does not include the impact of higher oil prices. EPM is unhedged and sells their oil at a nice premium to WTI.

[mrbill]

Hello Dan, Trump tweeted again about the price of oil being too high. Saudi Prince responded that
KSA will pump more, be helpful, something along those lines. Is this wishful "jawboning" or will market tank right away?
mrbill

[dan_s]

1. Trump's tweets cannot produce more oil.
2. What very little remaining production capacity that Saudi Arabia has cannot offset the declines in Venezuela, Libya, Angola, Nigeria and very soon Iran.

You need to read the Raymond James report dated June 25. Send me an email and I will forward it to you. RJ will not let me post it to our website.

BTW even if Saudi Arabia could produce a million more barrels of oil per day starting July 1, it would not reach OECD inventories for at least 60 days.

IMO what Trump is attempting to do is shift the blame for higher fuel prices to OPEC, so the voters will not blame him for it come mid-term election time.

[mrbill]

Thanks Dan, I agree with you. You know the fundamentals and have real experience in this industry.
A big reason I am here. Just needed a sanity check.
What scares me is the "herd". Getting it's news from CNBC, etc. Will send a mail for the RJ report.

BTW, offshore marine business is stirring and people are hiring.

I don't think Trump can solve this with tweets. As always, thinking fundamentals.

mribll