Energy Prospectus

Problems within OPEC cartel members are contributing to rising oil prices.

On March 29 Reuters reported about one million people took to the streets of Algiers on Friday to demand the resignation of President Abdelaziz Bouteflika, police officers at the scene said, in the biggest demonstration since unrest erupted six weeks ago. In at least one location, police opened fire with tear gas and rubber bullets, chasing and beating demonstrators, after youths hurled stones at them, a Reuters journalist said.

On March 28 Reuters reported the United States has instructed oil trading houses and refiners around the world to further cut dealings with Venezuela or face sanctions themselves, even if the trades are not prohibited by published U.S. sanctions, three sources familiar with the matter said. As recently as this week, the U.S. State department has called up foreign firms to say that the scope of the sanctions is wider. The sources said that the State Department made clear that any kind of oil trade, whether it be direct, indirect or barter, would be considered a breach. Russia, however, remains a staunch supporter of Maduro's government which has plunged Venezuela into an economic and humanitarian crisis. In an escalation of tensions, U.S. President Donald Trump called on Moscow to remove all its soldiers from Venezuela after a Russian military contingent arrived just outside of Caracas, saying "all options" were open to make that happen.

On March 27 Reuters reported Venezuela's four heavy crude upgraders remained halted on Wednesday afternoon after a blackout earlier this week, two industry sources said. Workers were expected to attempt to restart the upgraders, needed to convert heavy oil from the Orinoco belt into exportable grades.

On March 25 Reuters reported the United States on Monday accused Russia of "reckless escalation" of the situation in Venezuela by deploying military planes and personnel to the crisis-stricken South American nation that Washington has hit with crippling sanctions. The Russian planes and military personnel arrived outside the Venezuelan capital Caracas on Saturday, according to local media reports, two months after the Trump administration disavowed President Nicolas Maduro.

Other stuff supporting oil price:

BAKER HUGHES U.S. rig count fell -10 to 1,006 last week. The number of rigs drilling for oil was down -8 to 816. Oil rigs have fallen for six weeks running and are down by a total of -69 (-8%) since the start of the year.

Fear of a global recession is way over-blown: On March 29 Reuters reported Germany's unemployment rate hit a new record low in March and retail sales rose in the month in February, data showed on Friday, in a boon for expectations that private consumption will support growth in Europe's largest economy this year. Data from the Labour Office showed the unemployment rate dropped to 4.9 percent in March from 5.0 percent, hitting the lowest since German reunification in 1990. Separate data from the Federal Statistics Office showed retail sales rose by 0.9 percent on the month in February, confounding expectations for a drop of 0.9 percent.

U.S. Oil Production was DOWN in January (based on actual state reports not EIA's weekly guestimates)

January U.S. production was down 91mbpd m/m to 11.9mmbpd, largely driven by lower volumes in Texas (down 64mbpd m/m) and Colorado (down 13mbpd m/m). Lower TX/CO barrels were somewhat offset by production growth in North Dakota (up 9mbpd m/m), while New Mexico and GoM finished flat m/m. Additionally, December production was revised higher; it was previously down 56mbpd m/m, now up 36mbpd m/m at ~12mmbpd. Although this is the first monthly decline in production since May-18 (down 11mbpd m/m), it shouldn't come as a big surprise, as January has experienced seasonal declines in the recent past (3 of the prior 5 years) with subsequent February increases in volumes. That being said, the drop was 2x the drop in Jan-18, likely driven by joint impact of Q4'18 budget exhaustions/completions softness (Dec-18 activity down ~15% m/m), and typical seasonality. As of January, production was up 1,877mbpd y/y (vs. up 1,155mbpd in Jan-18).

By Luke Burgess @ Energy & Capital
Written Apr. 01, 2019

Two bullish factors pushing oil higher last week were a decline in both U.S. active oil rigs and inventories.

Data from Baker Hughes last Thursday showed the number of active U.S. oil rigs declined by eight to 816 for the week ending March 29. This is the lowest number of active oil rigs in the U.S. in almost a year.

Meanwhile, the latest inventory data shows U.S. crude stock 1.6% below the five-year seasonal average right now.

These headlines, as well as a rally in the global equity market and positive Fed comments, helped push oil prices higher last week.

But the big news last week was larger than expected cuts to Russian oil production.

New data from Russia's Energy Ministry showed crude production was down 153,000 bpd to 11.265 million bpd. Analysts had expected a smaller decline of 97,000 bpd.

These cuts were part of a deal made by OPEC (of which Russia is not a member) and other oil-producing nations that make up the 24-nation alliance known as OPEC+ (of which Russia is a leading group).

Back in December, OPEC+ agreed to cut production by 1.2 million bpd during the first six months of this year (800,000 bpd for OPEC members).

So these cuts were no surprise to the market. Instead, it seems the real surprise was that Russia actually made the cuts (or at least reported it did).

See, OPEC and other oil-producing nations don't have a great history of keeping their word on oil production. They often say one thing and just turn around and do the other.

Meaning...

If crude prices end up getting closer to $80 per barrel in the near term, countries like Russia are certainly going to reconsider those production cuts, despite whatever agreement they might have.

At $100 per barrel, they'll have the taps wide open. And all that new supply would push prices down again.