Energy Prospectus

I believe the "Right Price" for crude oil is near $60/bbl.

Famed hedge fund manager Pierre Andurand is betting that oil will rise to $100 per barrel, going against the conventional wisdom within the oil industry, which says that prices will remain depressed for years to come. Andurand’s hedge fund has lost 15 percent so far in 2017, but he still believes prices will spike before the end of the decade. “In 2014, after four years at being around $110 a barrel, most analysts were saying we’d never see prices go back below $100,” said Andurand, according to the FT. “Now everyone is arguing we’re never going back there, but I don’t really buy that the cost of production has gone down structurally or that electric cars will have a big enough impact on demand.” He argues that shale producers need much higher prices to grow over time, and in any event, shale won’t be enough to meet global demand in several years’ time. “There will be cost inflation on the way. Will [shale] be profitable one day? Only if prices go up significantly.”

A small shortage of oil will cause a big price increase. I believe U.S. oil production will not grow enough to meet global demand, especially if oil stays below $50 much longer. Oil Cycles typically overshoot.

Friday, August 11, 2017

Oil prices were down at the end of the week on fears of lingering oversupply. The U.S. reported a strong drawdown in crude inventories and flat production, although those bullish figures were outweighed slightly by an uptick in gasoline inventories. Investors chose to focus on rising OPEC supply, which led to a selloff in crude on Thursday and Friday.

IEA: Oil demand up; oil market rebalancing. In its latest monthly report, the IEA revised up its forecast for oil demand this year to 1.5 mb/d, up 100,000 bpd from last month. Oil demand growth continues into next year, expanding at an annual rate of 1.4 mb/d. The IEA also said that the rebalancing effort is continuing – the OPEC cuts, combined with demand growth, will erase the supply glut. Still, the agency said that the process is a stubborn one, and the growing signs of tightness in the market are being offset somewhat by the faltering compliance from OPEC.

Shale hiccups emerge in the Permian. Last week, Pioneer Natural Resources (NYSE: PXD) reported a worrying increase in the gas-to-oil ratio from some of its Permian wells, a development that has alarmed investors. Pioneer’s stock price plunged on the news, and the sheen on U.S. shale is suddenly looking a little tarnished. Goldman Sachs backed up this sentiment when it wrote in a report that it has fielded calls from investors looking to “reallocate capital” out of shale E&Ps and into other parts of the energy industry. Some analysts think there isn’t much to see here, but judging by the recent stock declines from some top Permian players, the market has suddenly grown worried about the Permian.

OPEC upgrades oil demand projection. In a new report, OPEC boosted its oil demand estimate for the rest of this year and next. The group said that the global market would demand 200,000 bpd more than expected from the cartel this year, as consumption appears stronger than anticipated. At the same time, however, rising Libyan production has pushed the group’s output in July to its highest point so far this year. Libya added more than 150,000 bpd in July, pushing output above 1 mb/d. Saudi Arabia, surprisingly, also added 30,000 bpd, although some of that is surely to meet peak summer demand.

Oil futures flip into backwardation. The contango in the oil futures market has all but disappeared, with a slight backwardation emerging in the futures structure, which is when near-term contracts trade at a premium to futures further out. The backwardation is an indication that the market is tightening and the extreme bearishness drowning the market earlier this summer has diminished.