Energy Prospectus

World oil demand will grow more than expected this year, helping to ease a global glut despite rising production from North America and weak OPEC compliance with output cuts, the IEA said on 8/11/2017. The agency raised its 2017 demand growth forecast to 1.5 million b/d from 1.4 million b/d in its previous monthly report and said it expected demand to expand by a further 1.4 million b/d in 2018. "Producers should find encouragement from demand, which is growing year-on-year more strongly than first thought," said the Paris-based IEA, which advises industrialized nations on energy policy.

"There would be more confidence that re-balancing is here to stay if some producers party to the output agreements were not, just as they are gaining the upper hand, showing signs of weakening their resolve," the IEA said. The IEA said OPEC's compliance with the cuts in July had fallen to 75 percent, the lowest since the cuts began in January. It cited weak compliance by Algeria, Iraq and the United Arab Emirates. In addition, OPEC member Libya, which is currently exempt from the output cuts, steeply increased output.

As a result, the overall global oil supply rose by 520,000 b/d in July to stand 500,000 b/d above year-ago levels. Adding to the challenges of oil producers to support oil prices is rising non-OPEC output, which is expected to expand by 0.7 million b/d in 2017 and by 1.4 million b/d in 2018 on strong gains in the United States.

IEA's Monthly Oil Market Report here: https://www.iea.org/oilmarketreport/omrpublic/


Reuters reported on 8/11/2017 that hundreds of Nigerian protesters stormed a crude oil flow station owned by Shell (RDS-NC) in the restive Niger Delta demanding jobs and infrastructure development. The protesters complained they were not benefiting from oil production in their area, a common refrain in the impoverished swampland that produces most of Nigeria's oil. They also demanded an end to oil pollution in the area. Soldiers and security guards did not disperse the crowd as it entered the Belema Flow Station in Rivers State, which feeds oil into Shell's Bonny export terminal. Militant attacks on oil facilities have largely stopped since the government started talks last year with community leaders to address grievances of poverty and lack of development in the neglected region.

Five rigs shut down

Activity in the oilfield may be softening a bit.

Drilling activity in the U.S. fell for the second week in a row, according to Baker Hughes’ Weekly Rig Count. There are now a total of 949 operational rigs in the U.S., five less than were active last week. Six land rigs shut down, meaning there are 928 land rigs active in the U.S. One offshore rig became active, slightly reversing the five offshore rigs that shut down last week.

The proportion of rigs targeting oil increased this week, with three oil rigs becoming active. Eight gas rigs also shut down this week, meaning nearly 81% of all U.S. rigs now target oil. The highest proportion of oil targeting rigs was 83.4%, set in 2014 before the downturn.

The number of horizontal rigs decreased for the second week in a row, falling by six. Horizontal rigs have been the main beneficiary of the recent activity resurgence, with horizontal rigs counts rising for 32 consecutive weeks from November to June. Vertical rig activity also decreased, with one rig shutting down. Two directional rigs, on the other hand, became active this week.

Texas drops 7 rigs

Texas, the heart of current oil and gas activity, saw seven rigs shut down this week. There are now 459 rigs active in the state, about 48% of all rigs in the U.S. Among the other major states tracked by Baker Hughes, California and New Mexico each added one rig, while one came offline in Louisiana.

Few of the major basins tracked by Baker saw changes this week, unlike the past few weeks. Three rigs became active in the Cana Woodford. Two rigs shut down in both the Arkoma Woodford and the Permian, and an additional three came offline in the Eagle Ford.

Were Still Standing by Phil Flynn, August 14, 2017

The world did not blow up over the weekend so the global markets are feeling a bit of optimism. A Trump Administration official over the weekend tried to assure us that we are not on the verge of a nuclear war so the markets felt a bit better. Fear that the short VIX trade could blow up in the markets face has eased, but the risk of it has not gone away. Reports about security threats at Libya's biggest oil field has caused the country to reduce crude production by more than 30%. Yet oil seems to be a bit worried about numbers on China’s oil demand and is not joining in the “I'm still standing” market.

Chinese July refining rate fell in July according to the national Bureau of Statistics which reported that runs fell to the lowest level since September of 2016. The drop is raising concerns about the demand for oil products such as gas and diesel where there already is plentiful supply in the region. There may be more if they decide to cut North Korea supply.

The US oil rig count is still rising but more slowly and not enough to make up for the lack of completions and the existing well production decline rate. Baker Hughes reported that oil rigs increased by 3 to 768 rigs, but natural gas rigs fell by 5 to 949. The slowing rig count will mean that US production will start to level off and drop.

Shale producers will continue to struggle as oil stays sub $50 a barrel. Many may be able to produce at sub $50.00 levels but can’t make money because of debt and well head economics such as rising costs. One shale producer has vowed to not make the same mistakes that other shale producers are making.

Reuters reported last week that Continental Resources Inc (NYSE:CLR), one of the largest U.S. shale oil producers, will fund future wells from cash flow and not take on any new debt, Chief Executive Harold Hamm said on Wednesday. The vow from one of the shale industry leaders and strongest advocates comes as prices mostly below $50 a barrel this year pressure oil companies to live within their means after overspending for years.

Heavy debt loads nearly decimated U.S. shale producers when oil prices started to tumble in 2014. The number of bankruptcies in the U.S. shale patch from 2014 through 2016 eclipsed the depths of the telecom bust of 2002 and 2003, a previous high-water mark. Continental, which operates in North Dakota and Oklahoma, famously stopped hedging in late 2014, expecting oil prices to rebound. They didn't, and the company's debt load jumped 15 percent to $6.54 billion, but that appears to be at an end. "Absolutely no new debt. That's part of our plan, the strategic plan going forward to knock our debt down," Hamm said on a conference call with investors. The company will forgo some growth opportunities as it curtails spending and spends only as much as it takes in, Hamm said. The announcement came the day after Continental cut its 2017 capital spending plans and raised its production estimate, essentially promising it could do more with less. "We actually have postponed some development in some very lucrative fields," said Hamm. "In the meantime, we believe that the long-term oil supply cannot be sustained at $50 WTI. There simply won't be adequate capital investment long term at this price to adequately supply market demand growth," Hamm said.

Capital investment will cut into production. Energy investment is at the lowest level in decades and if you do not think that is going to catch up with us, then you might be in for a big bullish surprise. As oil starts to consolidate we believe we are still on target for oil to end up near $80 a barrel when the winter rally begins.

Natural gas is on the rise. A return to summer is going to boost demand possibly driving supply in storage below the five-year average in the coming weeks for the first time in at least 3 years. This could set the stage for a big-time rally. Buy calls!
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Phil is one of the few energy sector analysts out there who seems to be getting what I have been telling you about natural gas. We have centuries of natural gas resources, but resources in the ground are much different than "production capacity". The Good Lord owes us a cold winter. If we get a cold December, it will be a very merry Christmas for the gassers.