Energy Prospectus

Investing.com – Crude futures settled higher on Wednesday, as a bigger than expected drop in gasoline inventories offset an unexpected build in crude output, easing investor concerns about a slowdown in demand for refined products.

On the New York Mercantile Exchange crude futures for August delivery rose 1.1% to settle at $44.74 a barrel, while on London's Intercontinental Exchange, Brent added 1.34% to trade at $47.55 a barrel.

Investors mulled over a mixed weekly inventory report from the Energy Information Administration, showing a surprise build in crude stockpiles while gasoline inventories fell by more than expected.

Inventories of U.S. crude unexpectedly rose by roughly 118,000 barrels in the week ended June 23, below expectations of draw of about 2.5m barrels.

Gasoline inventories, one of the products that crude is refined into, fell by 894,000 barrels against expectations of a draw of 583,000 barrels while distillate stockpiles declined by 223,000 barrels, compared to expectations of a rise of 453,000 barrels.

The bigger-than-expected draw in gasoline stockpiles eased investor concerns about a slowdown in demand for refined products, after data in June showed stockpiles of gasoline rose back above 2016 levels and well above their five-year average.

Crude prices extended gains for a six-straight day, after falling into bear-market territory last week amid fears that an uptick in output by Nigeria and Libya were undermining Opec and its allies’ efforts to curb oversupply.

Earlier in June, Libya's 270,000-bpd Sharara oilfield reopened while Royal Dutch Shell lifted force majeure on exports of Nigeria’s Forcados crude oil, bringing all of the West African country’s oil exports fully online for the first time in 16 months
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Not getting the attention it deserves, U.S. crude oil production declined by 100,000 barrels per day during the week ending 6/23/2017. This is at least partially due to Tropical Storm Cindy as more then 50 offshore production platforms were shut down as Cindy passed through the Gulf of Mexico.

As I reported in my last podcast (which you can view from the EPG website), my take is that the surge in U.S. production that we saw in the first quarter of 2017 is unsustainable. It happened because the upstream companies completed a lot of DUC wells at year-end 2016 to get more additions to their proven reserves. I also believe they "opened the values" late in 2016 and early 2017 to take advantage of higher oil prices. This big drop in U.S. oil production pushes the 6 week average into negative territory for the first time since last October.

Crude oil inventories rose because:
1. Inputs of crude oil to refineries declined by 262,000 BOPD (17,152,000 down to 16,890,000), probably due to tropical storm Cindy hitting the Gulf Coast last week.
2. Crude oil imports were up 140,000 BOPD (7,876,000 to 8,016,000). I thought Cindy would have an impact on imports, so this number looks a bit weird to me.
3. Exports of U.S. oil, primarily to Canada, were up 11,000 BOPD but they are less than half of where they were five weeks ago. Exports last week were 528,000 BOPD.

A lot more details from the EIA weekly report can be found here: https://www.eia.gov/dnav/pet/pet_sum_sn ... _nus_w.htm

Just remember that there is a lot of "WAG" in the EIA's weekly numbers. WAG = Wild Ass Guess

From new report on oil market from Credit Suisse:

We do not believe the strip, acknowledging our expectation of being in a tight
band of oil prices for some time. We see the range as $45-60. At the bottom end of the
that range, US oil production growth slows, budgets decline, but they also shift to the items
that best improve returns and reduce unit costs. At the upper end of the range, deepwater
doesn’t come back yet, but international begins to recover, US activity will be higher, and
OPEC will increasingly cheat on quotas as the price approaches $60, effectively capping
near-term oil prices. We are believers in the depletion/decline acceleration argument, one
we have been making for a couple of years. Many expected global conventional
production’s decline rate to accelerate in 2015 as budgets were cut. But the previous 3.5
years had seen significant over-investment spurred by a $115 average oil price, which
lowered and maintained decline rates around 4% for a few years. We are only now starting
to see the inevitable acceleration, which we think reaches ~7% over the next two to three
years. We see that as a positive backdrop to oil prices.

My Take: Upstream companies in the U.S. have gotten very good. D&C costs are much lower and well results are much better than they were three years ago. ROI at $60 oil is about where it was three years ago at $100 oil. "$60 it the new $100". Only the very best leasehold "Core of the Core" is economic to develop at $40 oil, so today's oil price is too low. IMO WTI should settle in the $50 to $55 range, but oil never seems to settle in at the right place. Cycles overshoot on both ends and this one will probably do the same. OPEC is in "deep crap" since 2/3s of the cartel members cannot survive at $50 oil.

BTW the U.S. depletion rate is already nearing 20% as we become more and more dependent on shale and other tight oil. We can NEVER stop drilling.