Oil Price - Jan 4

[dan_s]

Oil prices open higher this morning as fundamentals support higher prices, but FEAR of a global recession is fuel for the Bears. My take is that there are clear signs that OPEC+ rapidly cutting exports, which should push the global oil market into a deficit in Q2. - Dan

FWIW: The American Petroleum Institute reported late Thursday that U.S. crude supplies fell by 4.5 million barrels for the week ended Dec. 28.

Strong U.S. employment report (an increase of 312,000 more jobs added in December) and very strong retail sales reports helping to chill the fears of a global recession; at least for today.

Earlier today, China's Commerce Ministry announced that the U.S. and China will hold vice-ministerial level trade talks on January 7 and 8 to revive optimism and help the market sentiment improve, which provided a much-needed boost to the risk-sensitive crude oil prices.

Baker Hughes reported that the total number of active oil rigs in the U.S. fell to 877 from 885 this week to ease concerns over high oil output from the U.S. and allowed the WTI to cling to its gains.
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Oil Prices Continue To Go An A Wild Ride
By Phil Flynn (Jan 04, 2019 12:03AM ET)

Oil prices continue to go on a wild ride as we are reminded that you can’t mix apples and oil. After oil put in an incredible comeback on data that OPEC had significantly lowered production and the Saudis severely cut oil exports, slowing growth fears again thwarted the oil rally. Apple (NASDAQ:AAPL) CEO Tim Cook after the close warned that revenue for the current quarter was forecasted at $84 billion, way down from the $90 billion dollar forecast. He said that “While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China.” Or maybe it was partly because the Apple I-phone is getting more expensive, upgrading to a new phone where the features really are not that exciting over the previous phones is no longer a necessity.

The news sent oil back down. Who knew that I-phones ran on oil? Yet it really was the slowdown fears against a massive drop in OPEC production. Oil did pop off key support after a Bloomberg tanker tracker report showed that “observed crude exports from Saudi Arabia fell to 7.253m b/d in December on lower flows to the U.S. and China. That confirmed reports from other private trackers and the drop is very significant. Bloomberg says that if this compares with a 7.717m b/d in November, which was the biggest drop in exports since Bloomberg began tracking shipments at the start of 2017.

Oil saw another boost after Bloomberg reported that OPEC oil production had the biggest monthly drop in 2 years. Bloomberg wrote that OPEC production fell 530,000 barrels a day to 32.6 million a day last month. It’s the sharpest pullback since January 2017, the last cut that the market underestimated.

In 2017 many were skeptical that OPEC and Russia could keep compliance going but they proved them wrong. There should be no doubt that OPEC is prepared to do whatever it takes to stabilize prices, even if it means losing some market share to the shale oil producers.

The market is still very optimistic that the shale oil producers will continue to add barrels in the next few months even as there are more signs that some producers are struggling and perhaps there are also signs that some of shale's more lofty production expectations may have to be lowered somewhat. The Wall Street Journal wrote a piece called “Fracking’s Secret Problem—Oil Wells Aren’t Producing as Much as Forecast.” The Journal says that data analysis reveals thousands of locations are yielding less than their owners projected to investors. The Journal says in this must read that “Two-thirds of projections made by the fracking companies between 2014 and 2017 in America’s four hottest drilling regions appear to have been overly optimistic, according to the analysis of some 16,000 wells operated by 29 of the biggest producers in oil basins in Texas and North Dakota.

Collectively, the companies that made projections are on track to pump nearly 10% less oil and gas than they forecast for those areas, according to the analysis of data from Rystad Energy AS, an energy consulting firm. That is the equivalent of almost one billion barrels of oil and gas over 30 years, worth more than $30 billion at current prices. Some companies are off track by more than 50% in certain regions. While U.S. output rose to an all-time high of 11.5 million barrels a day, shaking up the geopolitical balance by putting U.S. production on par with Saudi Arabia and Russia. The Journal’s findings suggest current production levels may be hard to sustain without greater spending because operators will have to drill more wells to meet growth targets. Yet shale drillers, most of whom have yet to consistently make money, are under pressure to cut spending in the face of a 40% crude-oil price decline since October.” (A few things to keep in mind: (a) this world consumes three billion barrels of hydrocarbon based liquids per month and (b) didn't everyone know that upstream companies will need to drill more wells each year to keep U.S. production flat? - Dan).

We keep reading headlines about surging supply in the market and talk of slowdowns, yet really based on where we are at now that is still speculation. We get the American Petroleum Institute report tonight and we will get our first indication of this week’s version of the so-called surging supply. The API is still way out of whack with the Energy Information Administration report so who knows what adventure they will have in store for traders tonight. But whatever it is, the most likely outcome is that it will be totally different than the EIA.

While we are seeing the benefits of low gasoline prices, truckers are not feeling as lucky. Transport Topics reports that while the U.S. average retail price of diesel dropped 2.9 cents to $3.048 a gallon, diesel still costs 7.5 cents a gallon more than it did a year ago. Still on the positive side the drop in diesel marked the 11th consecutive weekly decline in the cost of trucking’s main fuel. The price has fallen 34.6 cents during that period, the average national gasoline price fell 5.5 cents to $2.266 per gallon. The biggest regional drop for gasoline was in the Midwest, where prices fell by 7.6 cents, dropping to $2.005, according to EIA. The national average price for gas is 25.4 cents lower than one year ago.

[dan_s]

The last time oil did this, it surged 80 percent by Keris Lahiff at CNBC•January 4, 2019

FEAR and GREED drive the markets

Crude oil could be on the verge of a big comeback.

Since surging to four-year highs in October, the commodity has plummeted 39 percent down to levels not seen since mid-2017.

The last time it saw these lows, it had a massive rally, says Matt Maley , equity strategist at Miller Tabak.

"It got down to the $42.53 level, or $42.50, and that was the low it saw back 18 months ago in June 2017. Now after we saw that low, crude oil rallied 80 percent," Maley said on CNBC's " Trading Nation " on Thursday. "It got right exactly to that level on Christmas Eve and has bounced almost 10 percent since then."

Crude oil now has to clear one critical level for Maley to have faith in this rebound.

"We're not out of the woods yet. We need to see more upside follow through and what we want to see is it get above $50," said Maley.

Crude oil bounced around the $50 level in November and December, forming a layer of resistance. That price had previously acted as support for the commodity.

"If we can break above that and hold, that'll show that we got a real nice double bottom, much like we got in 2016, and should give us a nice upside rally. It may not be 80 percent but it should be a good rally," said Maley.
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Michael Bapis, managing director at Vios Advisors at Rockefeller Capital Management, also sees a rally ahead for crude oil.

"It's a supply-and-demand issue," Bapis said on "Trading Nation" on Thursday. "We saw OPEC cut production by the most in two years, and it's starting to work this month. The U.S. oil production is also much lower than people expected."

OPEC posted its biggest drop in output in December in nearly two years, according to Reuters. Production dropped by 460,000 barrels per day last month, the steepest decline since January 2017.

One name in particular stands out to Bapis as a stock that could rally off of a crude comeback: EOG Resources, a petroleum and natural gas exploration company.

"EOG: they've outperformed the commodity between 15 and 20 percent over the past 12 to 18 months and we think they'll continue to outperform," said Bapis.

While crude oil slumped 36 percent over the past six months, EOG fell by a smaller 27 percent. Its shares were up nearly 3 percent this week as of Thursday's closing.
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EOG is one the "Elite Eight" in our Sweet 16 Growth Portfolio. It is the larger well-known companies that will draw the most "love" from hedge fund managers that decide to rotate more money into the grossly over-sold energy sector. The Elite Eight are highlighted on the main Sweet 16 spreadsheet. EOG and CLR have the most exposure to rising oil prices because do very little hedging.

[dan_s]

We are off to a good start. WTI finished higher for the 4th day in a row.
$45.33/bbl close on Friday, December 28
$48.11/bbl close on Friday, January 4
$ 2.78/bbl gain or 6.1% higher during the year.

It is a good start, WTI is still a long way from the "Right Price". MY TAKE is that a resolution of the Federal Government Shutdown and some real progress on the Trump/China trade disputes will push WTI well over $55/bbl.

Note that my forecast/valuation models are based on WTI at $45 in Q1, $50 in Q2, $55 in Q3 and $60 in Q4 and all of 2019.
For natural gas I am assuming $3.00 in Q1 and Q4 with $2.50 in Q2 and Q3.
Commodity price assumptions for each company are adjusted by their hedges and regional price differentials.