The Energy Report 05/30/19
Let the Draws Begin
If President Trump gets Impeached, the first thing you are going to do is stop driving your car. Well at least that is how the oil market reacted after Bob Mueller closed the special council, quit, and showed frustration that he could not charge President Trump with a crime. Oil prices sold off hard after Mr. Muller said “If we had confidence that the President did not commit a crime, we would have said so” raising the specter of impeachment. And while the first thought might be that impeachment is bearish because it raises the risks that we will see a reversal of the Trump economic policies, based on past impeachments it might actually be bullish. After President Bill Clinton was impeached, the stock market roared, and he was reelected. Yet the political circus may have helped oil finish its correction and solidify its bottom and resume its uptrend.
Oil rejected the key post Memorial Day correction point of 5660 and saw more support overnight as we are at the beginning of what should be major crude oil draws in the coming weeks. This was an area that we said yesterday was a key support and we wrote that at that point we would be much closer to the low than the high. The American Petroleum Institute (API) reported that U.S. crude supplies fell by 5.265 million barrels last week, which should be the first of many crude draws. The report showed that refinery runs are finally starting to rise, leading to a big 2.711-million-barrel increase in gasoline supply, but a disturbing 2.144-million-barrel drop in distillate supply as we might be seeing issues with the lack of heavy oil. That should be a wake-up call for crude traders as the global spreads for heavier crude grades are still on the rise. The perception of a crude oversupply should change as we continue to see demand from refiners rise. While the crude draw from today’s Energy Information Administration (EIA) supply report may not be as large, the trend of lower crude supply is well underway.
Despite the U.S. China trade war fears, a new commitment by Russia to extend production cuts should also add to the oil floor. OilPrice.com reported Russia may join a proposed extension of the oil production cuts agreed with OPEC at the end of last year, First Deputy Oil Minister Anton Siluanov told Reuters today. The most important issue to consider is what the oil price gains would be from an extension as opposed to the potential loss of market share to U.S. producers. “There are many arguments both in favor of the extension and against it,” Siluanov said, adding “Of course, we need price stability and predictability, this is good. But we see that all these deals with OPEC result in our American partners boosting shale oil output and grabbing new markets.” Russia of course is still dealing with its tainted crude oil. Reuters reported that “Russia has managed to take out around 2 million tons of the tainted oil from the pipeline system and agreed with Belarus last week to take back another 1 million tons. Two industry sources told Reuters on Monday that Russia’s oil exports via Transneft pipelines, including Druzhba, dropped 6% during May 1-26 from the average level seen in April. The country’s oil production over the same period totaled 11.126 million barrels per day (bpd), down from 11.147 million bpd on May 1-21, the sources said.”
Reuters also reports that “Iranian May crude exports fell to less than half of April levels at around 400,000 barrels per day (bpd), tanker data showed, and two industry sources said, after the United States tightened sanctions on Tehran’s main source of income. Official data released on Thursday in Japan showed imports of Iranian surged more than 800 percent in April, from a year earlier, as refiners stocked up on crude from the country before the U.S. ended waivers on sanctions this month”
In the meantime, falling rig counts and Cap x pullbacks are signaling a future pullback in U.S. output, Nick Cunningham at oilprice.com reports “roughly 9 out of every 10 U.S. shale companies are burning cash, according to Rystad Energy. The Oslo-based consultancy studied 40 U.S. shale companies and found that only 4 of them had positive cash flow in the first quarter of 2019. In fact, the number of companies with positive cash flow was lower than it was previously, and total cash flow from the group fell from $14 billion in the fourth quarter to just $9.9 billion in the first. “The gap between capex and [cash flow from operating activities] has reached a staggering $4.7 billion. This implies tremendous overspend, the likes of which have not been seen since the third quarter of 2017,” Alisa Lukash, Senior Analyst on Rystad Energy’s North American Shale team, said in a press release. U.S. shale drillers have historically loaded up on debt in order to continue to finance their cash burn. But investors have soured on the sector, finally waking up to the fact that shale drillers by and large are money losers. According to Rystad, no shale company has made a public offering since the collapse of oil prices last year, the longest stretch of time with no public capital issuance since 2014. “Recently released data, which confirmed dismal first quarter earnings, only served to cement negative market sentiment,” Lukash said. Investors are fed up and are “leaving no room for undisciplined spending in 2019.” The financial position should improve in the second quarter Rystad said. Capex is supposed to be roughly flat, while higher production should improve cash flow.
We get two reports for the price of one because of the holiday. Look for the EIA status report to show a crude draw. If gas and distillate supply fall, oil could really rally. Refiner runs will be watched as they have disappointed to the downside. The natural gas report should show a 102 bcf increase.
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network