Sweet 16 Update - April 14
Posted: Fri Apr 14, 2017 1:45 pm
Since the markets were closed Friday, I am a day early with this report.
Despite rising oil prices and an improving outlook for U.S. natural gas and NGLs, the Sweet 16 was down 1.65% for the week ended April 13. It is now down 11.48% YTD.
The S&P 500 Index also pulled back 1.18%, but it is still up 4.03% YTD.
Investors do not like uncertainty and geopolitical risk has increased. "Saber Rattling", especially when it includes the U.S. and Russia, should be a bit of a concern. Syria and North Korea have insane leadership, but they are no threat to the United States. Russia surely does not need or want a direct conflict with the U.S. If Trump can get China to step up and do something about North Korea it sure would benefit everyone.
Crude Oil: EIA reported the first significant decline in U.S. crude oil inventories on Wednesday, April 12. IEA in their latest Oil Market Report said oil supply/demand is now in balance and we should see a steady decline in global oil inventories in the 2nd quarter. Refiners need to "put the pedal to the metal" if they are going to meet increasing demand for transportation fuels in the months ahead. U.S. refiners have increased crude oil inputs by 1.2 million barrels per day in the last six weeks and they will continue ramping up demand for black oil.
Natural Gas: Bentek data shows that U.S. natural gas production was down 2.4 Bcf per day year-over-year in March. I have been telling you for months in my weekly podcasts that the U.S. natural gas market is going to me MUCH TIGHTER this summer than last year. It is nice to see the "experts" confirming this fact. Cheniere is bringing on another LNG train at their Sabine Pass facility in July that should really tighten up the gas market. Wells Fargo put out a detailed report on the U.S. gas market on April 12th. WF now forecasts that ngas storage will be 82 BCF below the 5-year average by the time next winter starts. Gas storage will move rapidly toward the 5-year average during Q3 and that's when traders will bid up the futures contracts for gas. Higher gas prices and increasing industrial demand will combine to jack up NGL prices this summer.
It is extremely important that you know the production mix of your upstream oil & gas company holdings. For the Sweet 16, production mix is shown at the bottom of each forecast model.
The Sweet 16 is trading at a deep discount to First Call's price targets and 51.2% below my valuation for the group.
> First Quarter results are going to be MUCH BETTER than Q1 2016 (remember how low oil & gas prices were a year ago).
> Production guidance for the year will be confirmed, giving us more confidence in the forecast models.
> Hedge books will be updated
I think a lot of money (and I mean A WHOLE LOT OF MONEY) is sitting on the sidelines waiting for OPEC to confirm that they are going to extend their production cuts to year-end. The deadline for the decision is May 25, but Saudi Arabia has already indicated that they want the extension. All of the OPEC countries know that they need higher oil prices to survive, so I think the likelihood of an extension is high.
Another valid concern is that increasing service costs will significantly reduce well level economics. Drilling and completion costs are increasing, but like OPEC, the service companies know that they must be careful not to mess up this rebound in activity. Keep and eye on FRAC SAND prices and supply. Regional shortages of sand could delay some completions.
"They call them cycles for a reason" and oil price cycles tend to over-shoot on both the downside and the upside.
Read the summary of the IEA report ( https://www.iea.org/oilmarketreport/omrpublic/ ) and I think you will agree that we are entering a period where demand for hydrocarbon based liquid fuels is going to exceed supply.
Remember this: Saudi Arabia wants to take part of Aramco public a year from now. Where do you think Saudi wants oil prices to be when they float that IPO?????????????
Despite rising oil prices and an improving outlook for U.S. natural gas and NGLs, the Sweet 16 was down 1.65% for the week ended April 13. It is now down 11.48% YTD.
The S&P 500 Index also pulled back 1.18%, but it is still up 4.03% YTD.
Investors do not like uncertainty and geopolitical risk has increased. "Saber Rattling", especially when it includes the U.S. and Russia, should be a bit of a concern. Syria and North Korea have insane leadership, but they are no threat to the United States. Russia surely does not need or want a direct conflict with the U.S. If Trump can get China to step up and do something about North Korea it sure would benefit everyone.
Crude Oil: EIA reported the first significant decline in U.S. crude oil inventories on Wednesday, April 12. IEA in their latest Oil Market Report said oil supply/demand is now in balance and we should see a steady decline in global oil inventories in the 2nd quarter. Refiners need to "put the pedal to the metal" if they are going to meet increasing demand for transportation fuels in the months ahead. U.S. refiners have increased crude oil inputs by 1.2 million barrels per day in the last six weeks and they will continue ramping up demand for black oil.
Natural Gas: Bentek data shows that U.S. natural gas production was down 2.4 Bcf per day year-over-year in March. I have been telling you for months in my weekly podcasts that the U.S. natural gas market is going to me MUCH TIGHTER this summer than last year. It is nice to see the "experts" confirming this fact. Cheniere is bringing on another LNG train at their Sabine Pass facility in July that should really tighten up the gas market. Wells Fargo put out a detailed report on the U.S. gas market on April 12th. WF now forecasts that ngas storage will be 82 BCF below the 5-year average by the time next winter starts. Gas storage will move rapidly toward the 5-year average during Q3 and that's when traders will bid up the futures contracts for gas. Higher gas prices and increasing industrial demand will combine to jack up NGL prices this summer.
It is extremely important that you know the production mix of your upstream oil & gas company holdings. For the Sweet 16, production mix is shown at the bottom of each forecast model.
The Sweet 16 is trading at a deep discount to First Call's price targets and 51.2% below my valuation for the group.
> First Quarter results are going to be MUCH BETTER than Q1 2016 (remember how low oil & gas prices were a year ago).
> Production guidance for the year will be confirmed, giving us more confidence in the forecast models.
> Hedge books will be updated
I think a lot of money (and I mean A WHOLE LOT OF MONEY) is sitting on the sidelines waiting for OPEC to confirm that they are going to extend their production cuts to year-end. The deadline for the decision is May 25, but Saudi Arabia has already indicated that they want the extension. All of the OPEC countries know that they need higher oil prices to survive, so I think the likelihood of an extension is high.
Another valid concern is that increasing service costs will significantly reduce well level economics. Drilling and completion costs are increasing, but like OPEC, the service companies know that they must be careful not to mess up this rebound in activity. Keep and eye on FRAC SAND prices and supply. Regional shortages of sand could delay some completions.
"They call them cycles for a reason" and oil price cycles tend to over-shoot on both the downside and the upside.
Read the summary of the IEA report ( https://www.iea.org/oilmarketreport/omrpublic/ ) and I think you will agree that we are entering a period where demand for hydrocarbon based liquid fuels is going to exceed supply.
Remember this: Saudi Arabia wants to take part of Aramco public a year from now. Where do you think Saudi wants oil prices to be when they float that IPO?????????????