The Energy Report 06/28/19
Are You Ready for the Fireworks?
The oil market has a lot on its plate, so get ready for the fireworks. Traders must focus not only on the G20 meeting, but also on tensions surrounding Iran and their threat to pull out of the Nuclear Proliferation Treaty (NPT). We also have the OPEC plus 1 meeting that is once again timed to screw up a U.S. holiday.
This comes as U.S. drivers are expected to shatter travel and gasoline records this 4th of July holiday. If that wasn’t enough there are more signs that U.S. shale oil producers are struggling, raising more speculation of another round of shale bankruptcies. So, if you thought you had to leave your house to watch fireworks, you don’t have to, just stay tuned to the oil market for the next weeks.
Iran is laying down the gauntlet to its European allies. Not only are they expected to exceed their uranium enrichment quota in the failed 2015 nuclear deal, now they plan to raise the stakes, basically saying they are going to try to acquire a nuclear weapon. The Wall Street Journal writes “Iran raised the stakes in its standoff with the U.S. and Europe on Thursday, warning that if the 2015 nuclear agreement unravels, it would follow the path of North Korea and quit a treaty aimed at stopping the spread of nuclear weapons.” The Journal says that “Leaving the NPT would suggest Iran is prepared to turn its back on years of insisting its nuclear program is only for peaceful purposes. It could end international monitoring of Iran’s nuclear program and almost certainly galvanize a sharp international response.”
Oil will also get a strong boost if it looks like China and the U.S. can get on a path to a trade deal. Already we are seeing a demand response to Chinese infrastructure spending, signaling an increase in Chinese oil demand. The perception that a deal might get done will raise oil demand expectations exponentially. President Trump said a trade deal with Chinese President Xi was possible this weekend, but he is prepared to impose U.S. tariffs on most remaining Chinese imports should the two countries disagree.
So does the OPEC meeting matter? You bet it does. It is clear that OPEC and Russia will extend the deal until the end of the year, unless prices really spike hard. In fact, because many in the cartel are fearing slowing oil demand there is even a possibility that they will cut output even more. This comes as some shale dreams are being shattered. Many U.S. shale companies are struggling, raising questions about the longer-term projections of shale oil output.
Nick Cunningham of OilPrice.com writes a must-read column that “The recent downturn in oil prices forced a slowdown in the U.S. shale industry, and top executives appear to be gloomier than ever.” He points to a survey by the Dallas Federal Reserve, “The business activity index in Texas fell to -0.6 in the second quarter, down from a positive reading of 10.8 in the first quarter. A negative reading means that business activity actually contracted from the prior quarter, offering evidence that the slide in oil prices led to a pullback in spending and drilling.” He Points out that “While oil and gas production continued to rise in the second quarter, it did so at a slower pace than in months past.” The Dallas Fed said that its spending index actually fell into negative territory, again, an indication of contraction.” He said that “the slowdown in drilling is felt most acutely by oilfield services companies, who make their money from drilling volume and activity, rather than from oil sales. Not only did activity dip, but the prices that oilfield services charge for their services fell sharply, and margins were “notably lower” in the second quarter, the Dallas Fed said.”
Employment and wages also contracted. The Dallas Fed offers indices on “company outlook,” indices that further highlight the rising pessimism among most firms. The “aggregate uncertainty index” showed a surge of uncertainty from the sector, and it posted the highest reading since 2017. In short, conditions appeared to have deteriorated in the second quarter, even as the industry posted a “gusher of red ink” in the first.”
In the must read he wrote “For instance, one executive said that the oil price downturn in the second quarter has had a dramatic effect on industry conditions.” The biggest impact has been the rapid and accelerating lack of investor interest in both conventional and unconventional oil and gas. The securities of oil and gas companies now sell at a fraction of what they once commanded. Huge losses in these shares hamper new exploration. It looks like another round of bankruptcies and mergers,” the executive said. There were countless others that offered similar sentiments. “It is very true that cash is drying up, and it is going be hard to get financing to drill our wells.”
For oil, the odds for higher prices outweigh their case for lower prices. While a breakdown of the U.S.-China trade talks would cause a big price correction, an extension of OPEC cuts with the possibility of a bigger cut, and global central bank stimulus will keep oil products on a long-term upward track.
Nat gas is getting its summer comeback! Sweating in the heat and humidity never felt so good. Of course, a bullish EIA report also helped. The EIA reported working gas in storage was 2,301 Bcf as of Friday, June 21, 2019, according to EIA estimates. This represents a net increase of 98 Bcf from the previous week. Stocks were 236 Bcf higher than last year at this time, and 171 Bcf below the five-year average of 2,472 Bcf. At 2,301 Bcf, total working gas is within the five-year historical range. So, with a little heat the market mood has changed from very bearish to now modestly bullish.
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network