The Energy Report 1/15/20
Looking For Support
The oil market is trying to find support along with the lower Bollinger bands and is not getting help from supply data from the American Petroleum Institute(API). But it may find support from the fact that the market may have to reprice in at least a bit of geopolitical risk premium. OPEC today increased its 2020 world oil demand growth forecast by 140,000 barrels to 1.22 million barrels a day, but also raised global economic growth forecast to 3.1% .
Oil’s rally yesterday was thwarted by a rehashing of the fact that the Trump Administration will not lift tariffs on China until after the election. Of course, anyone who has been watching the Fox Business Network already knows that, and the reporting of old news seemed to be a catalyst for a late dip in oil and stocks. There were also rumors that the OPEC meeting in March might be canceled ensuring that OPEC plus production cuts would stay in place until at least June.
Yet Russian energy minister Alexander Novak and sources from the UAE said that the March meeting is still on. Mr. Novak said that Russia is ready to comply with the OPEC + agreement to reduce oil production in January. So cuts are in place and will remain in place until at least March.
The API reported that crude supply increased by 1.103 million barrels yet a massive 3.198 million barrel in gasoline and an even larger +6.779 million barrel build in distillate put a bearish tilt on the market. Yet based on the muted post report action, it gives us more confidence that we should be near the end of the correction in the petroleum bull market.
Shale producer pain may lead to merger mania. Reuters reports that U.S. oil output growth is expected to slow over the next five years, likely prompting oil majors to “gobble up” smaller shale oil producers, Mark Papa, shale pioneer and non-executive chairman of Schlumberger, told Reuters. “Papa, boss of the world’s largest oilfield services company, expects U.S. output to grow by just 400,000 bpd in 2020 and by 100,000-500,000 bpd per year through 2025, depending on future oil prices. “What we are seeing is that there has been a kind of inflection in the growth path for U.S. oil production, mainly due to inflection in shale oil growth,” Papa said in an interview in Saudi Arabia. He cited the shorter life and high decline rates of shale reservoirs such as the Bakken in North Dakota and the Eagle Ford in Texas. “I’m not saying that the U.S. shale oil will go away but I’m saying it will become a less powerful force as we go through the 2020s than it was in the previous decade.”
Everybody has a dream. President Nicolás Maduro said Venezuela’s crude output would more than double to 2.0 million barrels a day in 2020. “We’re at nearly 1mn b/d now and the goal in 2020 is to reach 2mn b/d,” he declared in the speech before the National Constituent Assembly.
Natural gas is coming under more pressure as old man winter took the last train to the coast. How warm is it? Well, Bret Walts at Bam WX says that, “We’ve seen major changes especially on the European model for medium-range weather model known as the Ensemble Prediction System (EPS) EPS, has lost more than 30 heating degree days (HDDs) since yesterday. The Global Ensemble Forecast System (GEFS) is a weather forecast model made up of 21 separate forecasts, has also seen warmer trends but not to the extreme of the major EPS trends. Model chaos has been high as of late. The last several weeks, the GEFS has averaged more than 30 HDDs too cold for week 2.
Walts says that, “into late January and February we are losing our major source of cold air as the Polar Vortex returns to the other side of the planet. (they can have it) Strong global winds favor warmer risks in the Eastern US, so we are inclined to go with lower than normal heating demand in week 2 of February. As of now, we do not see a *sustained* cold pattern in the Eastern US. Any cold remains look to remain rather transient following this brief cooler period in days 5. So get out you ice skates this week before the ice melts. P.S. – your natural gas calls are also melting.
The FT reports that natural gas production in the U.S. is poised to decline for the first time in half a decade, the government said on Tuesday, as persistently low prices lead to a slowdown in drilling. The U.S. is the world’s largest gas supplier and is flexing its muscle in international markets through exports of liquefied gas. But investors concerned about meager returns have begun to hold back on funding for oil and gas exploration and production companies. The companies have responded by cutting back on capital spending and, in turn, tempering their forecasts for future production.
While U.S. “dry gas” production, which excludes hydrocarbon liquids, will rise by 3 percent to a new record of 94.7bn cubic feet per day this year, the Energy Information Administration said in its short-term energy outlook on Tuesday, and it will fall back in 2021. The agency expects production will be 94.1bn cu ft/d next year, representing the first annual decline since 2016, “as relatively low natural gas prices contribute to a reduction in natural gas-directed drilling”. A must read.
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Senior Market Analyst & Author of The Energy Report
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