Energy Prospectus

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Investing.com at 8:00 AM ET
Crude oil prices rallied to their best levels in months on Monday, as optimism that the market was well on its way towards rebalancing added to bullish momentum.

U.S. West Texas Intermediate (WTI) crude futures tacked on 45 cents, or around 0.9%, to $51.11 a barrel by 8:05AM ET (1205GMT), after reaching their highest level since May 25 at $51.19.
U.S. oil prices gained about 1.5% last week, their third-straight weekly climb.

Meanwhile, Brent crude futures, the benchmark for oil prices outside the U.S., rallied 75 cents, or about 1.3%, to $57.17 a barrel. It traded as high as $57.26 intraday, a level last seen since Jan. 3. The global benchmark closed last week with a gain of 2.2%, its fourth-consecutive weekly climb.

Major oil producers convening in Vienna for an OPEC-led committee meeting on Friday boasted record compliance with their production-cut agreement, but, as expected, decided to wait a bit longer to see if any further action was needed.

OPEC and non-OPEC compliance with the deal to curb output rose to 116% in August, the committee said, a strong increase from the 94% compliance achieved a month ago.

Russia’s energy minister suggested that January is the earliest date that an extension to the global accord can be considered, although other ministers suggested such a decision could be taken before the end of this year. The committee’s next meeting is set for November 29 in Vienna, just a day ahead of OPEC’s regularly scheduled meeting.

Elsewhere, in the U.S., market participants mulled over data showing the number of oil rigs continued to decline, suggesting a possible tightening in domestic production. Oilfield services firm Baker Hughes said its weekly count of oil rigs operating in the U.S. declined by 5 to 744, marking the third weekly decline in a row. The weekly rig count is an important barometer for the drilling industry and serves as a proxy for oil production and oil services demand.

Reuters: Oil prices rose on Monday to their highest level in eight months after major producers said at a meeting in Vienna the global market was well on its way toward rebalancing. The November Brent crude futures contract was up 79 cents at $57.65 a barrel, its highest since January 3. U.S. crude for November delivery was up 41 cents at $51.07 a barrel, close to recent four-month highs. The Organization of the Petroleum Exporting Countries, Russia and several other producers have cut production by about 1.8 million barrels per day (bpd) since the start of 2017, helping lift oil prices by about 15 percent in the past three months.

Winter Worries! Heating Oil Prices Will Rise by Phil Flynn at 8:30 ET

Brent crude is being driven higher as tight distillate supply in Europe and expectations of low U.S. exports of distillates are making the market look very tight going into winter. Distillate or Ultra Low sulfur diesel is the strongest petroleum market as strong global demand and the impact from refinery shutdowns is making that market the tightest it has been in years. This tightness should be another supportive factor for oil as refiners must keep running to keep up with demand. This comes as OPEC punts on a decision to extend production cuts until January as it is clear, the global oil market is already in balance.

John Kemp at Reuters points out that U.S. distillate stocks fell to just 139 million barrels by the end of last week, which was 25 million barrels below 2016 and 5 million barrels below the long-term seasonal average. As a result, distillate prices have moved to a significant premium over crude oil to encourage refiners to maximize crude processing and the yield to middle distillates rather than other products such as gasoline.

The refining margin for making distillate from U.S. crude oil for November delivery has risen to $25 per barrel up from $19 in late August and $15 in late June. Portfolio managers have also accumulated a record net long position in European gasoil in the expectation that U.S. diesel exports will be cut in the coming month. Kemp warns that if temperatures in the winter are closer to the long-term average that the last two winter distillate stocks could become very tight without very high refining runs.

We have spoken about this distillate dilemma which should be supportive to oil as US shale producers are still cutting back. Despite a post hurricane surge in production the US oil rig count fell by 5 rigs to 744 rigs according to Baker Hughes. The fall and peak in the U.S. rig count means that projections for U.S. crude production will once again have to be revised downward. The nation’s gas-rig count rose by four to 190 from a week ago, and offshore-rig count was up 2 from last week at 19, but down 1 rig from last year.

There is still some oil drama. Reuters reports that Iraq on Sunday urged foreign countries to stop importing crude directly from its autonomous Kurdistan region and to restrict oil trading to the central government. The call, published in statement from Prime Minister Haider al-Abadi’s office, came in retaliation for the Kurdistan Regional Government’s plan to hold a referendum on independence on Monday. < IMO this has the potential to be a big deal. The Kurds want their own country and may be willing to fight to get it. - Dan

The central government’s statement seems to be directed primarily at Turkey, the transit country for all the crude produced in Kurdistan. The crude is taken by pipeline to the Turkish Mediterranean coast for export. Baghdad “asks the neighboring countries and the countries of the world to deal exclusively with the federal government of Iraq regarding entry posts and oil,” the statement said.

Oil bears are coming out of denial. The peak in oil rig counts and the continued compliance by OPEC and Non-OPEC has shifted the market from a glut to a more balanced market. In fact, when it comes to distillates globally we may be in a supply deficit. The glut is gone or soon will be as global demand exceeds the bearish estimates.

Looking at the charts, there is resistance around $52. Above that, there is no resistance until $54.

Notes from John White at Roth Capital 9/25/2017 John has BUY ratings on: CPE, EPM, ESTE, FANG, GDP, HK, LONE, MCF, PQ, REI, RSPP and SRCI


Oil prices have gained more than 15% in three months, suggesting OPEC led output cuts of 1.8 million b/d have reduced the global crude glut. Rising demand has also helped balance the market. Tony Headrick, energy market analyst at CHS Hedging LLC said "the market is moving toward balance." He cited strong demand for distillates, especially European gas oil. This, he said, "is supporting Brent and in turn is supporting U.S. products and WTI as well."

Also on 9/22/2017, Bloomberg reported oil traders are emptying one of the world’s largest crude storage facilities, located near the southernmost tip of Africa, as the physical market tightens amid booming demand and OPEC production cuts. Vitol Group and Mercuria Energy Group Ltd. are selling crude they hoarded in Saldanha Bay, South Africa, during the 2015-2016 glut, according to people familiar with the matter. Crude demand is now seasonally outstripping supply, tightening the physical market for some crude varieties to levels not seen in the last two years and encouraging traders to sell their stored oil. “The market is selling inventories from everywhere,” Mercuria Chief Executive Officer Marco Dunand said in an interview in Geneva. Mercuria’s Dunand said he expects oil prices to move "in a $50-to-$60 a barrel price range" for the time being.

Although largely unknown outside the oil trading industry, Saldanha Bay is one of the world’s largest crude storage facilities, with the capacity to hold 45 million barrels in just six gigantic concrete tanks. By comparison, Cushing, Oklahoma, the better-known U.S. oil storage center, can hold about 75 million barrels in more than 125 tanks.

The structure of the Brent crude oil market has strengthened into so-called backwardation -- when near-term prices are more expensive than those in later months, indicating tighter supply. For most of 2015, 2016 and earlier this year, the Brent market was in the opposite condition, known as contango, which encourages stockpiling. Contango allows traders to buy crude, put it into storage and lock-in a profit for a future sale by hedging forward.

On 9/24/2017, Reuters reported Iran halted flights to and from Kurdish regions in northern Iraq on Sunday in retaliation to a plan by the autonomous Kurdistan Regional Government (KRG) to hold a referendum on independence. Iran also started war games at the Kurdish border. The air embargo is the first concrete retaliatory measure against Monday's Kurdish referendum which is rejected by the government in Baghdad and by Iraq's powerful neighbors, Iran and Turkey.

Tehran and Ankara fear the spread of separatism to their own Kurds. Iran also supports Shi'ite groups who have been ruling or holding key security and government positions in Iraq since the 2003 U.S-led invasion which toppled Saddam Hussein.

Turkey, meanwhile, said on Sunday its aircraft launched strikes against Kurdistan Workers Party (PKK) targets in northern Iraq's Gara region on Saturday after spotting militants preparing to attack Turkish military outposts on the border.