Energy Prospectus

U.S. refiners processed a record volume of crude oil last week, according to the EIA. With maintenance season over and refiners ramping up to meet summer demand, they are pulling crude oil out of storage. U.S. inventories dropped by 3.6 million barrels, the largest drawdown in quite a while.

Goldman: high probability of OPEC extension. Goldman Sachs’ head of commodities, Jeff Currie, said that OPEC is likely to extend its deal for another six months. That could result in WTI trading between $55 and $60 for the rest of this year, which is a "substantial upside, given we are trading at roughly $49.50" Currie said on Bloomberg TV.

IEA: global oil discoveries hit record low. The IEA said on Thursday that the oil industry discovered a record low amount of oil in 2016, logging just 2.4 billion barrels in new discoveries. Also, the volume of oil given final investment decisions in 2016 amounted to 4.7 billion barrels, the lowest level in 70 years. The result could be a supply shortage towards the end of the decade, the IEA warned. In fact, the IEA has repeatedly warned about the pending shortfall, which would lead to higher prices and much more volatility by 2020.

Libyan production restarts. Although there is conflicting news about what is going on in Libya, Reuters reports that several key oil fields in Libya are restarting operations, including the Sharara field that has a capacity of 300,000 bpd. That news could have been a big reason for the 1.6 percent sell off of WTI and Brent on Thursday. To be sure, there were separate reports that the Sharara field remained shut and Libyan production was still at a 7-month low at 490,000 bpd. Needless to say, Libyan production will likely seesaw for the foreseeable future, and conflicting reports will be likely.
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Fears keeping lid on oil price;
1. OPEC will not extend the production agreement. MY TAKE: 90% chance it gets extended. Cartel members will be crushed if oil price drop again.
2. U.S. production growth will offset OPEC production cuts. MY TAKE: 0% chance of this happening. Yes, U.S. production is growing, but outside of U.S. all other countries add up to flat.
3. Libyan production coming back. MY TAKE: Libya is run by gangs. The odds of "peace" lasting in Libya is ~1%.
PS: Keep in mind that demand for oil goes up by over a million barrels per day each year. See chart at: https://www.iea.org/oilmarketreport/omrpublic/

BTW demand for oil exceeds supply today and gap will widen in the 3rd quarter. See chart at the bottom of the link above.

I get daily reports from OilPrice.com (because I write for them myself). Below are comments from one of their top technical analysts.

What the Charts are telling us.

A couple of weeks ago I opined in these very pages that WTI was essentially trading in a range created by sensitivity to its own price. The theory was that somewhere around the $51 level seemed to be pivotal, with production increasing above that point and decreasing below it. The natural tendency of markets to overshoot means that the range created extends several dollars either side of that point and the tendency of traders to place orders just inside a range means that it will narrow over time. That would give us a bottom somewhere around the $48-49 level. It is still really too early for a big old “I told you so”, but the price action in crude futures over the last couple of days definitely supports that theory.

After a rapid climb, increased U.S. production and talk of problems with some OPEC members’ resolve to stick the current schedule of cuts, let alone actually expand them, caused a rapid selloff. As usual that brought out the exaggerators. One particular “analyst” from a major Wall Street firm was all over the media predicting that WTI was going to $20 a barrel on the move down. One assumes that he was in need of attention, because he was totally ignoring the pricing dynamic around $51 and the trading reaction to it.

What has actually happened over the last couple of days is that futures got below $49 and then this week’s inventory numbers showed a much larger than expected draw on crude stocks, and we reversed after forming a bottom around $48.20. If this afternoon’s rig count number is even marginally less than expected the pattern will be confirmed and WTI will receive another boost.

It is quite likely that even the longer term fundamental factors will be supportive of oil over the next few weeks, enabling a run back up to the top of the range in the low $50s. History tells us that the worries about OPEC’s resolve are entirely justified as in the past coming to an agreement and sticking to it have been two very different things. There is no reason to believe that this time will actually prove to be any different, but if nothing else the rhetoric looks likely to shift.

The OPEC members will meet in Vienna in a month’s time and, again as I have pointed out here in the past, there is a tendency towards unanimity of purpose as the meetings approach, even if there has been public sniping and disagreement in the interim. The thing to remember here is that nobody has anything to lose by talking oil up as the meeting approaches, so why would they not?

As I said earlier it is too early to be even planning, let alone performing, a victory dance, but the evidence so far suggests that WTI is still ranging. At any stage a major change in fundamental conditions could easily break us out of that range in either direction so risk control is still needed. If, for example, it becomes obvious that non-compliance is rampant within OPEC and the non-OPEC countries that agreed to the cuts a few months ago, then we could easily drop through $45. For now, though the range is intact and I am long WTI at $48.50, with a stop just below $48 and an initial target of around $51, and happy with the position.
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MY TAKE: As I have been saying since January in my weekly podcasts, there is a hard ceiling for WTI just under $55 that will not be broken until we see several weeks of declines in U.S. storage. Now it will also take an extension of the OPEC production agreement with clearly stated resolve from the top cartel members that they are committed to balance the oil markets. Regardless, of what OPEC does or does not do, supply & demand will work back to balance. Oil demand growth is RELENTLESS.

On April 26, Iranian backed Yemeni Houthi insurgents steered an unmanned ship loaded with explosives on a course aimed at a Saudi Aramco oil terminal on the Red Sea shore of Jizan province. The Saudi coast guard intercepted the vessel before it struck. The Houthis would not have launched an attack on a strategic Saudi oil target unless they were directed to do so by the Iranian Revolutionary Guard’s command center in their capital of Sanaa. – DEBKA Weekly

What happens to oil prices if an Iranian back force is successful in blowing up a Saudi oil terminal?