The Energy Report 11/9/18
The collapse in oil prices has turned into a total bear bath. The market ignores the bullish fundamentals and only focuses on bearish things that are yet to come. The selling mania is going into its tenth day and is getting to be among the biggest consecutive down day slides since the 1980’s as the market that was totally worried about shortages a month ago are now pricing in a glut of supply. Even talk that OPEC is going to announce a production cut at its meeting on Sunday was not enough to bring buyers in and it’s clear that this selloff will have an impact on future oil output. Of course, the market does not care because it thinks that demand is going to sharply slow down. Either that or the market is trying to wash out everyone before they bring it back by the end of the year.
They hate oil in the front end of the oil curve but loving it more in the backend. While many see the new bear market as an ominous sign for the global economy, others see it as opportunity. Big buyers of oil are not predicting lower prices for longer, but using this as a chance to lock in these price levels for years to come. Bloomberg News reported that “not every oil price is falling”. While the nearest Brent futures contract is down more than 4 percent this month, crude for delivery in late 2021 and 2022 has risen during the same period. The move has been spurred by consumers of oil — notably shippers and airlines — locking in their forward supplies as spot prices teeter on the brink of a bear market.
What this tells us is that despite the price crash in the front end and the predictions of slowing oil demand, even though we have not really seen that yet. While the market in the front end sees an adjustment mainly due to President Trump’s waivers to big buyers of Iranian oil and record U.S. oil output, in the big picture we still have a tight oil market, unless indeed we see that demand drop come quickly.
OPEC is talking a production cut and while the market does not care about that now, they will soon. Winter time fuel supplies are tight, and OPEC will cut when refiners really must ramp up. The bright side is that at least we may have some spare production capacity, something that we do not have now. On top of that, despite the U.S. waivers, it is still expected that eventually we will see Iranian exports reduced by about 300,000 to one million barrels of oil a day.
The market is also getting excited about the recent surge in U.S. production but already the sharp price drop in prices will cause many shale producers to start pulling back. While we have seen more shale production, we still have shale pipeline bottlenecks, and while we have seen some new pipeline capacity come on-line there won’t be any real relief until late 2019. U.S. Shale, the growth engine of oil production worldwide over the past decade, is facing pipeline bottlenecks that are already significantly slowing oil production growth in the U.S. These bottlenecks won’t be resolved until Q4 of ’19.
The price drop may also hurt more long-term investment in energy. Talk of a bear market may cause another pullback in CapX as oil companies are going to be weary of investing if they are hearing talk of a new oil glut.
So, OPEC is going to try to make a stand. The Cartel is angry that President Donald Tamp misled them and with Iran telling the Saudis I told you so, the cartel is going to have to stop the bear bath for it stands to lose more billions than they already have during this selloff. Yet, what would happen if there was no cartel at all?
The Wall Street Journal reports that “ Saudi Arabia’s top government-funded think tank is studying the possible effects on oil markets of a breakup of OPEC, a remarkable research effort for a country that has dominated the oil cartel for nearly 60 years. The effort coincides with new pressures on the Saudi government, including from the U.S., where President Trump has accused the cartel of pushing up oil prices, and from investors who distanced themselves from the kingdom after the brutal killing of a U.S.-based Saudi journalist.
While the think tank’s president, Adam Sieminski, said the study hadn’t been triggered by Mr. Trump’s statements, a senior adviser familiar with the project said it provided an opportunity to take into account the criticism from Washington. Depending on the findings, the study could offer a defense of the cartel and the Saudi role in it.
The research project doesn’t reflect an active debate inside the government over whether to leave the Organization of the Petroleum Exporting Countries in the near term, according to people familiar with the matter. Stay tuned.
Yes, that was snow! Many parts of the country are seeing that white stuff raising fears of a long cold winter. Natural gas prices stayed strong. Even as the EIA reported a bigger than expected 65 bcf increase into storage the fact that soppy is still 15.3 percent below a year ago and 16.2% below the five-year average is keeping the prices strong .
The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network