Tightening Path
After the showdown in Venezuela and a drop in the U.S. rig count, more folks are starting to agree with the Energy Report’s scenario that the global oil market is on a path to being undersupplied in just a few months. Not only are people questioning the optimism about shale production coming from the Energy Information Administration, they are also considering that a trade deal between the U.S. and China could jolt global energy demand higher. U.S. gas prices and diesel prices are set to rise as the lack of heavy oil starts to impact refineries and U.S. production may start to fall. Yet despite the very bullish fundamentals, you cannot underestimate the power of the tweet.
Oil prices that were higher sold off after President Trump tweeted that oil prices were too high. Of course, what are we going to do about it? If he thinks OPEC is going to help him out, forget about it and if the Venezuelan situation gets out of control the only way to change that would be to release oil from the Strategic Petroleum Reserve.
The Venezuelan people were heroic as they stood up to dictator Nicolás Maduro, after clashes over humanitarian aid that left at least 3 dead and at least 300 injured. The Venezuelan dictator decided to kill his own people instead of allowing in food and medicine, and then gleefully taunted the U.S. over the dead bodies of those unarmed civilians killed by this brutal regime. That shows you where his heart is. In the meantime, the Venezuelan people suffer under this criminal regime as they have taken away their rights to replace their leader, as Maduro stole the election and has jailed many in the opposition. Juan Guaidó, Venezuela's interim president, called on the United States and the rest of the international community to consider "all measures" to overthrow Maduro who has proven his illegitimacy from his actions. For the oil trade, the odds of continuing conflict in Venezuela is going to keep heavy oil off the market for an extended period. What is more, the military control of PDVSA is making it likely that the infrastructure for their oil will continue to crumble.
China – U.S. trade optimism is also underpinning prices. President Donald Trump extended the trade deadline. The President tweeted “The U.S. has made substantial progress in our trade talks with China on important structural issues including intellectual property protection, technology transfer, agriculture, services, currency, and many other issues. As a result of these very productive talks, I will be delaying the U.S. increase in tariffs now scheduled for March 1.” The Chinese also said progress had been made but warned the talks could face "new uncertainties because trade disputes agreements could be long-term, complicated and arduous."
The Energy Information Administration is very optimistic about U.S. Shale oil production but is Wall Street in the same camp? Not only did we see the Baker Hughes oil rig count fall by 4 rigs last week there are reports that many shale companies are still bleeding cash.
The Wall Street Journal reports that “Frackers Face Harsh Reality as Wall Street Backs Away. Key lifeline for smaller operators fades, as losses pile up and prospects dim for big investment returns” The Journal writes “The once-powerful partnership between fracking companies and Wall Street is fraying as the industry struggles to attract investors after nearly a decade of losing money. Frequent infusions of Wall Street capital have sustained the U.S. shale boom. But that largess is running out. New bond and equity deals have dwindled to the lowest level since 2007. Companies raised about $22 billion from equity and debt financing in 2018, less than half the total in 2016 and almost one-third of what they raised in 2012, according to Dealogic.
The loss of that lifeline is forcing shale companies—which have helped to turn the U.S. into an energy superpower—to reduce spending and face the prospect of slower growth. More than a dozen companies have announced spending reductions so far this year, even as crude-oil prices have rallied more than 20% from December lows. More are expected to tighten budgets as they release earnings in the coming weeks.
The drop in financial backing is especially being felt by smaller, more indebted drillers. But even larger, better-capitalized Frackers are facing renewed investor skepticism about whether they can keep spending in check and still hit growth and cash-flow targets.
This reality flies in the face of the EIA numbers that many in the industry believe are overestimating current and future shale production. Analyst Joel Koppel asks the question “How does U.S. production rise as Texas completions and Permian productivity fall? He points out that January Texas oil completions are down 25% from October, and down 3 months in a row from the peak in October. Baker Hughes shows that U.S. oil rigs are down 30% from their peak in November and December.
Cold weather is giving us a nice bottom on natural gas. We should rally into this week’s report.
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