The Energy Report 12/31/18

It’s Going to Be a New Year     

Should all the old tweets be forgot, and never brought to mind? Should all old tweets be forgot, that’s caused oils big decline. It was the year of the tweet as President Trump seemed to tweet oil to a 4 year high before tweeted back to give up all of its gains for the year for its first yearly drop since 2015. For oil, it was a year on contradictions and a memorable year that many oil producers would like to forget. Yet there were good times and bad and it was a year where we entered a new era of low gasoline prices along with rising diesel. A year where one tweet could rally or break prices in an instant. A year that started with a lot of optimism and yet ending with a lot of pessimism, but we are one tweet away from turning it all around as oil has a strong start after President Trump tweeted “Just had a long and very good call with President Xi of China,” Trump posted on Twitter. “Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!”

A year of wild volatility packed with historic moves along with a big surge in oil market volatility. We saw a year where oil hit 7690 for a high, only to retreat putting tighter the most amount of consecutive down closes in oil market history. Oil now is struggling to find a bottom as OPEC and Russia cut back production and energy companies struggle to make a buck. It was a year where U.S. oil production hit an all-time high and a year where we saw record demand for all oil products. It was a year where we saw interest rates start to rise. It was the best year we have seen economically since the great recession only to have the stock market put in the worst December since the great depression. We got a trade deal with Canada and Mexico but are fearful that we won’t get a deal with China causing fear and turmoil. Shale cuts and cap x cuts are in out futures, yet despite all of the questions about growth and the impact on rate cuts the oil market is poised to make a major price comeback in 2019.

Oil prices will come back in the New Year as OPEC and Non-OPEC cuts will get the market back into a situation where we will see supplies drain. We think the talk of a recession is way overstated and we think the break in price will cause a global spike in oil demand in the new year. At the same time, the pullback in investment will take its toll on output and put oil back on track for $80 a barrel in the new year.

The cutbacks will come! The Wall Street Journal reported that shale oil drillers have cut budgets as oil prices drop. “Declining crude prices prodded drillers to reduce capital spending, but U.S. production is set to keep rising. The Wall Street Journal says “Some Frackers are scaling back next year’s drilling plans amid weak crude prices, a quick reversal for an industry that months earlier expected 2019 to be a banner year. Still, the cuts so far have been modest and shale drillers remain on track to push U.S. crude production to new highs next year, further pressuring a global market straining because of oversupply. Producers Diamondback Energy Inc., FANG -1.07% Parsley Energy Inc. PE -2.18% and Centennial Resource Development Inc. CDEV -1.63% either plan to operate fewer drilling rigs in 2019 or recently lowered production plans in the country’s most active drilling region, the Permian Basin in Texas and New Mexico, the companies have said in public statements and filings.  A must read in the Journal says that  “analysts expect similar announcements from more shale drillers in the weeks to come, as companies reveal or revise their capital budgets for the year. Many shale companies are under pressure from investors to show financial discipline and live within their means. “Operators are in a world where they don’t have a lot of budget flexibility,” said Matthew Portillo, a managing director at energy investment bank Tudor Pickering Holt & Co. It now forecasts shale-producer spending to be down about 3% next year from what the companies had planned. With those budgets, producers can still add one million barrels or more, Mr. Portillo said.

Shale oil has us in a new era of low gas prices but not so for diesel. We look for diesel to rise along with crude and gasoline will be the weak sister in the new year.

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Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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