Energy Prospectus

As I have been telling you in my weekly podcasts for the last few month, U.S. oil production growth has slowed SIGNIFICANTLY since March.

The Energy Report: Tanker Trap
By Phil Flynn (Jul 22, 2019 08:57AM ET)

Iran’s seizing of a U.K. oil tanker as well as a report by the U.S. military accusing a Venezuelan fighter aircraft of “aggressively” shadowing a U.S. Navy EP-3 Aries II plane over international airspace, created a bear trap for oil traders. Iran’s tanker tit for tat, that started with the U.K. seizing an Iranian tanker, now is raising risk factors for the global oil market as tankers from the U.K. are being told to avoid the Strait of Hormuz. Longer routes mean higher prices and slower delivery times. The rising geopolitical risk is a major factor. The U.K. and the U.S. both want to avoid a war with Iran but the risks keep going higher as Iran continues to act more desperate.

Speaking of desperate, let’s talk about Venezuela. For some inexplicable reason, a Venezuelan pilot flying a Russian made jet buzzed a U.S. jet. Venezuela’s military claimed the U.S. jet was in their airspace and was violating “security of air operations and international treaties.” This comes as the U.S. drilling Activity Reports is also showing a big drop in Permian Basin oil production, raising concerns about the U.S. oil production outlook.

Forbes points out a major slowdown in U.S. shale oil growth. In its most recent Drilling Productivity Report, each of the six regions tracked by the Energy Information Administration (EIA) -- Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville, Niobrara, and Permian -- still showed a year-over-year increase in oil production. However, if we look at the year-over-year gains over the past few years, there has been a noticeable slowdown in oil production growth. This slowdown is particularly pronounced in the Permian Basin. The most recent estimates in the Permian are that year-over-year production is growing today at just over half the level of a year ago. Production growth there has been in rapid decline since peaking a year ago.

That comes as the Baker Hughes rig counts continue to fall. They reported that U.S. oil rig count fell -5 to 779 last week and has fallen by an average of -2.5 per week over the last four weeks. The count is now down -8.7% compared with last year. < MY TAKE is that at the current active rig count, the U.S. is not drilling enough new wells to offset the decline of the existing wells. We now have over 200,000 horizontal wells completed in tight formations; 99% are on decline. - Dan.

The Increasing geopolitical risk and shaky output from the Permian should help solidify a bottom in oil. Technically, oil may try to retest recent lows but if they do, that should hold and that will signal a major bottom for oil.

Oil inventories should show big draws this week but with the recovery from Tropical Storm Barry, the numbers may provide some crazy surprises. Still the trend of inventories should be substantially lower. Oil Product demand should continue to be solid.

REUTERS: Hedge funds buy oil as price risks shift to the upside
John Kemp is a Reuters market analyst. The views expressed are his own

By John Kemp
LONDON, July 22 (Reuters) - Hedge funds purchased oil last week at the fastest rate for almost a year, as escalating tensions in the Middle East and hopes for a cut in U.S. interest rates outweighed concerns about flagging global growth.

Hedge funds and other money managers bought the equivalent of 84 million barrels in the six most important petroleum futures and options contracts in the week to July 16, the largest weekly increase since August 2018.

Funds were buyers last week of Brent crude (+36 million barrels), NYMEX and ICE West Texas Intermediate crude (+29 million), U.S. gasoline (+6 million), U.S. heating oil (+2 million) and European gasoil (+11 million barrels).

Portfolio managers have bought 125 million barrels of crude and fuels in the last four weeks, after selling 389 million barrels over the previous eight weeks, exchange and regulatory records show.

Funds remain cautious on the price outlook, with net long positions totalling just 647 million barrels, down from recent highs of 911 million in late April and 1.099 billion in September 2018.

And the ratio of hedge fund long to short positions, perhaps the most useful measure of bullishness, was still only 4.5:1 last week, down from 8.1:1 in April and 12.4:1 in September.

But late June and early July have seen a significant and sustained reversal in the previous trend from selling to buying.

For now, most fund managers appear to have concluded the balance of risks has shifted firmly towards the upside.

From a positioning perspective, short positions remain high, creating the potential for more short-covering to support price gains, while long positions are low, leaving plenty of headroom for funds to add to their holdings.

From a fundamental perspective, the worsening standoff between Iran and the United States and its allies in the Middle East is increasing the threat of further disruption to oil supplies.

At the same time, senior policymakers at the Federal Reserve have been hinting they will cut interest rates at the end of the month in an effort to keep the U.S. economy expanding.

The anticipated cut in U.S. rates is part of a worldwide cycle of monetary easing by major central banks in response to signs of slowing growth.

Rate cuts should reduce the U.S. dollar’s value versus the currencies of major oil-importing nations such as India and China, which would support local consumption and push dollar prices higher.

More generally, lower interest rates should help boost global economic growth and oil consumption over the next 12-18 months, provided the global economy avoids recession.