Man Cannot Live By Shale Alone

More concerns about the long-term over reliance on shale and talk of a Trump gas tax was the major excitement on an inactive trading May Day. In an interview on Monday, Chevron CEO John Watson warned that U.S. shale oil alone cannot meet the world's growing appetite for crude oil. President Trump in an interview said he would consider raising the federal tax on gasoline to fund infrastructure development on a day where gasoline demand concerns and weak growth dominated trading.

Let us talk shale first. The shale investment play, while in the short term, is rising U.S. output but the over reliance on shale by major oil companies is a threat to meeting future demand. Those concerns were echoed by Chevron CEO John Watson who told CNBC that, "Shale can help. Certainly, between now and the end of the decade it will be a big contributor to meeting that million-barrels-of-oil-demand growth that's out there, but ultimately oil fields decline, and we're going to need all sources of supply, including the shales, but also deepwater and other sources around the world.”

We have raised this concern as record spending cuts on conventional oil plays have created scenarios for future supply tightness. People look at drilled but uncompleted wells as added production that will start to replace wells that are already in decline after the shale rig rebound began. Oil supply globally is tightening. The FT reported that last month crude shipped over oceans or stored on supertankers is down 16% this year and that is rising. 

The OPEC Co-Founder and CEO Fabio Kuhn is warning that “shock and awe” is coming to the “dateless oil markets” with the next OPEC report. He says that, “The effect of the OPEC agreement on the global balances of crude oil is one of the most important questions in the oil market now." He said that we have seen a significant reduction in global oil supply since January, with oil on water going from 978 million barrels on January 1st to 812 million barrels on April 3rd. “With an average level of 930 million barrels over the last year, oil on water volumes are sizable and are known to be the first level of stock to respond to changes in oil supply. These changes are a signal that the rebalancing is happening faster than many in the market believe.”

It not just oil but natural gas. One must remember how quickly one can move from a surplus to a deficit. Just last week in Australia the Australian Prime Minister Malcolm Turnbull said he would impose natural gas export restrictions from July 1, 2017 to make sure the domestic gas market is adequately supplied before gas exports are permitted. Turnbull said that, “The shortage of domestic gas supplies has resulted in dramatically higher prices in Australia - higher than prices paid in the markets to which Australian gas is being exported. Australians are entitled to have access to the gas they need at prices they can afford.”

RBOB gas futures fell on demand concerns. Not the best time to be talking about a gas tax. President Donald Trump told Bloomberg News that he would consider raising the federal tax on gasoline to fund infrastructure development. "It's something that I would certainly consider," Trump said. "The truckers have said that they want me to do something as long as that money is earmarked to highways." While a tax might make sense to start rebuilding infrastructure it may not help the demand. Reports of the tax hike weighed on RBOB futures even though it is far from passing. 

AAA says that gas prices have dropped slowly on the week. Today’s national average price for a gallon of regular unleaded gasoline is $2.39, three-cent drop from one week ago; however, it is an increase of nine cents over last month and 18 cents more than this time last year. AAA says that one year ago the country was experiencing higher consumer demand and prices were increasing. Fast forward to today and consumers are still experiencing higher gas prices over last year due to the OPEC agreement but we are not seeing substantial increases at the pump due to increased gasoline inventories and low demand across the country.

Oil prices should start to come back as data this week should be supportive. The odds are high for a big crude draw and that may set the stage for a rally to the upper end of the trading range. Long dated options are in play once again as the market looks like it will start to tighten.