Mario Draghi had his moment when he said he would do whatever it takes to save the Euro. Today Saudi Arabia's energy minister Khalid al-Falih said that OPEC and non-OPEC will do whatever is necessary to balance the oil market. The words so far have had less impact on the market than Drahi’s declaration did because of concerns over rising U.S. oil output and a failed North Korean missile launch but, nonetheless, should be taken seriously. OPEC’s determination to get the market in balance cannot be underestimated or just laughed off.
Even as the U.S. rig count increased for the 13th week in a row, U.S. oil output still lags when we were at the peak of the U.S. shale revolution. Global stockpiles declined in the first quarter. The IEA shows global inventories falling at a rate of 200,000 barrels a day during the first quarter of this year. It is expected that OPEC and non-OPEC will do a six-month production cut extension and that means even with expected increases in U.S. oil output, global oil supply could be drawn down at a rate of about 1.2 million barrels a day in the third quarter.
It seems like more folks are starting to realize that perhaps the crazy bearish oil calls are wrong. As we said a year ago, oil has put in a generational bottom and historic cuts in capital spending would eventually take its toll on future supply. We also predicted that not only would OPEC cut production, but their compliance would be high. By any stretch of the imagination OPEC has not only complied but exceeded expectations with full compliance, something that has never happened before in the history of the cartel. The dynamics for an era of higher prices are underway even as we still have some short-term hurdles to get through.
Geopolitical risk premium seems to have fallen as North Korea had a failed missile launch. Vice President Mike Pence warned that the era of strategic patience’s was over and that the U.S. should not be tested. President Trump tweeted that the U.S. did not brand China a currency manipulator because that would help with North Korea. So, North Korea is without an ally as Kim Jong Un seems to descend further into madness.
While U.S. drillers added 7 oil rigs they reduced the natural gas rigs by 3. Natural gas production has not been stellar and the reduction of rigs is not really that comforting. Natural gas has held up well as demand could exceed expectations. Look to buy breaks.
Gas prices on the rise! The bulls are getting more popular. Former bears are now getting bullish and are starting to throw in the towel. The facts are getting in the way of the bearish calls as the bears are living in the past and not trading the futures!
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