Above $50 To Stay?

Crude oil came in like a lamb, can it go out like a lion? Oil prices closed back above $50 a barrel, potentially negating the downside breakdown we saw in early March. The breakdown happened because of a shocking increase in oil supply and is coming back because action by the OPEC cartel may soon extend production cuts and put quotas on everyone. Could this make that so-called record inventory a distant memory?

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I say yes. Because if we look at supply in terms of daily demand coverage and the fact that the U.S. can export oil which it could not before, this gives the impression that supply is higher than it is. After refiners ramped up to a record pace as they emerge from seasonal maintenance and exports of oil and oil products start to ramp up, we should see supply start to fall at a pretty good clip from here on out. The U.S. should be on pace to export at least 800,000 barrels per day. This means the U.S. exceeds will be exporting more oil that OPEC members Libya, Qatar, Ecuador, and Gabon. The U.S. should be viewed as refiner to the world, not just the United States as we exported a record 3 million barrels a day of refined product, ten times more than we did just a decade ago.

OPEC may be raising the stakes, hinting that all members of the cartel not only agree to an extension of production cuts but also having all members agree to a quota. The Kuwaiti oil minister said not only is there consensus between OPEC and non-OPEC producers for an extension of their nearly 1.8 million bpd in oil output cuts through the rest of the year, but it is possible that OPEC members, without a quota, would agree to one. DTN and Bloomberg reported that "OPEC members Iran and Libya now exempt from the current quota would join the new agreement that could mean deeper output cuts by OPEC than the current 1.2 million bpd. OPEC members will meet on May 25 to make their decision on whether to extend the cuts.

Still, we must respect the charts and one close above $50.00 a barrel might not solve all our problems. The market is still fixated on the U.S. oil rig count that we know will continue to rise. As I have explained before, the increase of shale can’t replace oil from the OPEC cuts and traditional projects but with the illusion of a historic supply glut, the trade may not wake up until it is too late. Another break below $50.00 may shake things up and cause some more expensive oil projects to get shelved.  

Oil and Gas reported that “Five oil and gas companies have gone bankrupt in the first two months of this year, according to the most recent edition of Haynes and Boone’s Oil Patch Bankruptcy Monitor. Currently, 119 E&P companies have entered bankruptcy since the beginning of 2015. The pace of bankruptcies seems to have slowed in recent months, as higher commodity prices give some relief. April and May 2016 have been the worst months for E&P companies when a total of 28 companies entered bankruptcy. An average of 4.75 companies entered bankruptcy each month in 2015 and 2016, meaning that the five in January and February of 2017 is below average for such a period.”

Natural gas has been on the attack. The EIA reported a withdraw of 43 bcf. Andrew Weissman of ECB Analytics said that the April natural gas contract soared 43¢/MMBtu during its tenure as the front-month contract, a performance that may be difficult to replicate this month. The market is balanced by a bearish near-term outlook with seasonally declining demand and bearish April forecasts. The more bullish medium to longer-term outlook is driven by strong core fundamentals and possible further upside from hot summer forecasts and potential delays to completion of the Rover pipeline. We remain bullish on our natural gas outlook for summer 2017 contracts, with another 40¢ (12.1%) of potential upside in our most likely scenario.