Energy Prospectus

What the media is saying: Oil futures fell sharply on Monday, pressured by growing expectations that the Organization of the Petroleum Exporting Countries will decide to ease crude production curbs when it meets later this month (June 22). July West Texas Intermediate crude CLN8, -1.47% lost $1.06, or 1.6%, to settle at $64.75 a barrel on the New York Mercantile Exchange. Prices have now posted declines for three straight sessions and that was the lowest finish for a front-month contract since April 9, according to FactSet data.

Investing.com – Crude oil prices settled lower on Monday as signs of ongoing expansion in U.S. output and uncertainty over whether OPEC would ease production limits continued to weigh on sentiment.

On the New York Mercantile Exchange crude futures for July delivery fell 1.61% to settle at $64.75 a barrel, while on London's Intercontinental Exchange, Brent fell 2.03% to trade at $75.22 a barrel.

The number of oil rigs operating in the US increased by 2 to 861, its highest level since March 13, 2015, according to data from energy services firm Baker Hughes, pointing to signs of an expansion in U.S. output.

The uptick in drilling activity emerges as the Energy Information Administration said last week U.S. oil output rose 215,000 barrels per day to a record 10.47 million barrels per day in March.

Oil prices were also held back by uncertainty over whether OPEC and its allies would ease curbs on production limits to plug the gap from falling supplies in Venezuela and an expected drop in Iran oil exports as U.S. sanctions loom.

OPEC in its most recent report said the production-cut agreement had helped slashed excess global oil supplies to just above the five-year average.

In November 2016, OPEC and other producers, including Russia agreed to cut output by 1.8 million barrels per day (bpd) to slash global inventories to the five year-average. The OPEC-led deal was renewed last year through 2018 and is expected to come under review at OPEC's meeting on June 22.

The weaker start to crude prices arrived on the back of a 5% slump last week as traders continued to slashed their bets on further upside in oil prices, according to data released Friday.

CFTC COT data data last week showed speculative net long positions in WTI crude oil fell to 324,235 from 377,520 in the prior week.

The negative sentiment on oil prices comes despite analysts continuing to tout higher oil prices amid strong oil demand growth and robust fundaments.

"We continue to forecast 1.8 million barrels per day in 2018 global oil demand growth, ahead of the IEA forecast of 1.4 million barrels per day," Goldman Sachs said."Global GDP is tracking above 4.0%, supporting robust demand statistics in the US, China, India and Southeast Asia. Strong oil demand trends support our Brent forecast of $75 to $80 barrels for the remainder of the year," the bank added.
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MY TAKE
1. This is carryover of the FEAR trade from last week. Traders cannot get their arms around the mounting takeaway capacity issue for the Permian Basin (which should be bullish for oil supply/demand) and now the new fear that oil inventories at Cushing, OK will build.
Cushing is not a problem. Storage capacity at Cushing (where NYMEX futures contracts for WTI are settled) is now close to 75 million barrels. Crude stored there peaked at 69,420,000 barrels in April, 2017. Oil at Cushing has been falling steadily until recently. As of May 25, 2018 there was 35,544,000 barrels of crude oil stored at Cushing. Point: The tanks at Cushing have a lot of room and they will NEVER come close to capacity.
Confirm Cushing inventory here: https://www.eia.gov/dnav/pet/hist/LeafH ... K_MBBL&f=W

2. OPEC + Russia: Saudi Arabia is the only country in OPEC with significant excess production capacity. Raymond James estimates that Saudi Arabia + Russia have TOTAL excess production capacity of 600,000 barrels of oil per day. So... at most they can make up for the lost production from Venezuela.

3. The U.S. is the only other country with meaningful production growth. Per EIA: U.S. crude oil production is now 10.7 million barrels per day. U.S. crude oil production is expected to reach 12.0 million barrels per day by the end of 2019. So... U.S. production (barring the midstream issues discussed here earlier) will grow by 1.3 million barrels per day over the next 19 months. This compares to global demand growth that is estimated to increase by 1.8 million barrels per day in 2018 (per Goldman Sach) and another 1.5 million barrels per day in 2019.

4. BTW global demand for oil ALWAYS spikes in the summer. From May 31st to August 31st, global demand for transportation fuels alone will increase by AT LEAST 1.5 million barrels per day.

Everything points to a VERY TIGHT global oil market by the end of this summer.

Phil Flynn at 9:10 AM ET on June 4

OPEC backed from a strong commitment to raise oil production but only promised to work together and stressed the need for continued cooperation between oil producers, as opposed to signaling an actual number on an expected production increase. The sharp break in prices and concerns from smaller members about the increasing output from U.S. shale producers put the cartel back on their heels. While we heard reports that Russia’s largest oil producer Rosneft (LON:ROSNq) will be able to restore 70,000 barrels per day (bpd) of oil output in just two days if global production limits are lifted according to Reuters, the cartell will want to monitor market conditions before they break the news and break the market.

That along with trade war uncertainty kept pressure on oil as traders feared the possibility of weakening demand at a time of rising U.S. production. The EIA reported a record breaking 10.47 million barrels per day (bpd) last week that helped break prices even though oil inventories are still well below average.

Yet, warnings about demand also weighed on the sentiment. Bloomberg News reported that the International Air Transport Association (IATA) cut its profit target for the global aviation market this year, predicting lower returns than six months ago as rising fuel prices and labor costs eat into the industry. Net income for 2018 is likely to total $33.8 billion, 12 percent lower than a December forecast for $38.4 billion, due to higher fuel costs as well as labor shortages driving up prices. Even American Airlines is sending signals that if prices of jet fuel don’t normalize then prices for airline tickets could rise.

Yet, with stocks shaking off trade war fears, the fears of oil demand destruction may be exaggerated. If that is the case the possibility exists of underinvestment in future supply. While oil traders are pleased with record U.S. output, the reality is that pipelines and labor are reaching their point where supply will have to level out. Even OPEC is warning about the lack on investment that will tighten future supply.

Because we expect that supply will tighten more in the coming weeks, we feel that the oil price correction is close to being over. Even though we may see a few more bad days, buy the breaks. We should see new highs by the Fourth of July. Distillates are still very tight. We could see a spike as we get close to expiration.

Martijn Rats, CFA – Morgan Stanley
June 1, 2018 9:27 AM GMT
Martijn Rats is head of the European Oil & Gas Research team and lead analyst on key stocks including Royal Dutch Shell, BP, Total and Eni. He is also the strategist for Morgan Stanley Research’s oil price forecasts.

His report is based on actual date through March. EIA's weekly reports are "WAGs" (Wild Ass Guesses). EIA only gets actual data on a two month lag from the states and it continues to be corrected for several more months. March is the most recent "actual" data available.

US crude production reached a new record high of 10.47 mb/d in March, driven by growth in shale output. However, this production is increasingly light. Demand picked up, rising by almost 1 mb/d from February to March and 526 kb/d higher YoY, driven by gasoline and jet fuel.
US crude production rose by 210 kb/d MoM in March to 10.47 mb/d, a new record level. This was above the 10.4 mb/d we had been modelling for the month and higher than the 130 kb/d of MoM growth implied by the weekly data. On a year-on-year basis, production was up by 1.3 mb/d, of which 0.95 mb/d was from PADD 3. Production growth from 'shale' states continued to rise in March, up by 1.4 mb/d YoY and 224 kb/d MoM. This was driven by Texas and New Mexico, although Colorado and N.Dakota also showed strong YoY growth.