Energy Prospectus

Based on my limited understanding of technical indicators, there is strong support for WTI at $51 and strong resistance at $52.50.

From CME Group on 10/26/2017: Short-Run Supply Pressures Keeping Prices Elevated

There are some key supply disruptions impacting oil prices in the short-run. Venezuela’s economy has imploded and production has been sharply reduced with no sign of improvement on the horizon. The Kurdish independence vote caused some analysts to worry that Turkey would shut off the pipeline that takes oil from the Kurdish region of Iraq to markets in Europe. Saudi Arabia has a strong incentive to cut production to push oil prices higher in the short term in an effort to boost the Initial Public Offering (IPO) price of state-owned ARAMCO. Indeed, with the U.S. pulling back from a world leadership role, the Saudis are now talking with Russia, and a key theme is about how to keep oil prices above $50/barrel and maybe push them towards $60. Our perspective is that the short-term supply constraints are temporary yet they may impact markets through 2018 or until the IPO for ARAMCO is completed. And, these temporary factors appear to widen the Brent-WTI spread.

Also a positive for oil prices is the modestly improving tone of global economic activity. China is emerging from its leadership conference with new enthusiasm and aggressive global economic and political objectives. Brazil’s recession is over and growth is slowly returning. Indeed, around the world, economic confidence and growth is getting just a little bit stronger, which gives oil and other industrial commodities a nice tail wind for moving higher in their trading ranges.

Consequently, short-term supply factors and improved global economic growth are pushing oil prices higher and may even possibly expand the trading range toward $60 per barrel. And, as is common, the next downdraft in oil prices coming from long-term technology developments may be delayed for years until the transportation efficiencies are more fully realized. Still, when oil prices rise to the top of the trading range, the maturity curve typically displays backwardation – higher short-term prices and lower long-term prices, offering very interesting and enticing risk management opportunities.

Comments below from Bloomberg 10/26/2017

Saudi Arabian Crown Prince Mohammed bin Salman backed the extension of OPEC production cuts beyond March 2018, making it all but certain the cartel and its allies will rollover the curbs at a meeting next month. The prince, who’s become the kingdom’s dominant political force, said in an interview with Bloomberg News that "we need to continue stabilizing the market."

ConocoPhillips kicked off earnings season for the world’s biggest oil companies with a bang, more than tripling analyst profit estimates on the strength of higher crude prices and a crash diet of asset sales. The explorer reported a 3Q profit of $400 million, or 34 cents a share, more than three times the average estimate of analysts surveyed by Bloomberg. Conoco also maintained its projection for oil output and natural gas production this year.

Suncor Energy produced more crude in 3Q than analysts estimated after restoring its Syncrude operation to full capacity. Total output climbed to a record 739,900 b/d, the Calgary-based company said Wednesday. Analysts projected 712,700 b/d. Suncor has been working to restore output at its Syncrude operation in northern Alberta after a fire disabled the facility in March.

Oil steadied near $52/b as an increase in U.S. crude supplies was countered by a plunge in gasoline inventories, showing the rebalancing of the global market remains a slow process. Futures were little changed in New York after falling 0.6% on Wednesday. Crude inventories climbed by 856,000 barrels last week while gasoline supplies lost 5.47 million, the first drop since mid-September, according to the EIA. < All that happened was that crude oil moved from floating storage to onshore storage. In my opinion, the big drop in refined product inventories is more important because it confirms my belief that demand is actually higher than most people think it is.

Statoil lowered spending forecasts as it benefits from an efficiency drive initiated during the industry’s three-year slump, while predicting production will rise at a faster pace. Statoil expects to invest about $10 billion in 2017, down from the $11 estimated earlier, it said in a 3Q report. That would put the company back at the same spending level as last year, after it reduced expenditure by half from 2014 to adjust to lower oil prices.

Chart of the Day: Big draws of 5.5 million barrels and 5.2 million barrels for U.S. gasoline and distillates, respectively, more than offset a build of 856,000 barrels in U.S. crude stockpiles in the week ended Oct. 20, EIA data showed on Wednesday. This brought down total U.S. inventories of crude and products — including the SPR — by 12.54 million barrels to 1.943 billion barrels, the data show. That's the sixth straight week of falling inventories, bringing the decline since mid-September to 46 million barrels.

Iraq Spat With Kurds Is Oil Market's Vital Variable

By Julian Lee at Bloomberg

To purloin a phrase from Donald Rumsfeld when he was U.S. Secretary of Defense, the most important known unknown right now when it comes to the immediate supply of oil is what happens next in Iraq’s conflict with its semi-autonomous Kurdish region.

While Iraqi and Kurdish oil companies were working together on resuming pumping at two fields on Wednesday, a conflict is rumbling on: the Kurdish Security Council today reported shelling by Iraqi forces of Peshmerga positions northwest of Mosul.

The difference between a smooth resolution to tensions and deeper escalation could be as much as 600,000 b/d, which is what typically gets shipped to international markets from or through the region when operations aren’t impeded.

To put that into context, it's the same as:

One third of the entire output cuts pledged by OPEC and its allies
Almost as much output as U.S. shale drillers are expected to add to global markets in 2018
Daily crude production of Qatar
Already the tensions have cut Iraqi/Kurdish flows from the Turkish port of Ceyhan by about 300,000 b/d, leaving almost the same amount getting loaded onto tankers.

WTI closing at more the $52.50 is significant. If it closes higher on Friday, that would be very bullish as next resistance is at $54. A break above $54 puts $60 in range by year-end.