Crude oil prices are trying to figure out the potential risk to the market because of the fallout from President Trump’s travel ban and another rise in the U.S. oil rig count. This comes as the trade puts on it biggest net long oil position in history as OPEC production cuts are exceeding market expectations.
OPEC naysayers are starting to eat their words as compliance to the historic production cuts are blowing people’s minds. Saudi Arabia said that as of now compliance to the OPEC cuts are at a historically high 80%. Geneva-based Petro-Logistics gives them a 75% score but that is still a record high the tanker tracking firm said that OPEC will reduce supply by 900,000 barrels a day. Eleven non-members, led by Russia, are to curb their output in support.
Some are fearful that there may be some retaliation from the U.S. travel ban from Syria, Iran, Iraq, Yemen, Libya, Sudan, and Somalia. What that retaliation might be is unclear. Iran has already vowed retaliation by banning U.S. citizens to go into the country but other than that there is not much more they could do that would impact oil. Supposedly some terrorist group says that this is proof that the U.S. is at war with Islam but considering the source, it is not likely to increase the terror risk that already exists from these evil wacko extremists group.
The Baker Hughes rig count for oil in the U.S. rose by 15 in the past week to 566, the highest reading since November of 2015. While money seems to be pouring back into shale, larger, more expensive projects are not seeing the same type of investment. The U.S. offshore-rig count fell by 3 from last week to 21, which is 7 fewer than a year ago. The Wall Street Journal explains the recent shale boom but larger oil project doom.
The Journal writes that, “Shale oil drillers are boldly raising annual budgets for a quick recovery, but international rivals chart a more cautious course. Big oil companies and smaller U.S. upstarts are plotting sharply divergent paths as they plan spending for 2017 after a modest recovery in crude prices. While shale-oil drillers are boldly raising annual budgets to revive drilling in Texas, New Mexico and North Dakota, international oil giants such as Exxon Mobil Corp (NYSE:XOM)., Chevron Corp. (NYSE:CVX), Royal Dutch Shell (LON:RDSa) PLC and BP (LON:BP) are planning to hold back spending, charting a cautious path to recovery. One reason for tighter purse strings at the bigger companies is a concern that the recent rebound in oil prices has run out of steam or could even reverse if members of the Organization of the Petroleum Exporting Countries fail to follow through on promised output cuts.”
The WSJ continues, "Another threat: Even if OPEC does make good on its pledge, the smaller firms focusing on U.S. wells could respond by replacing the barrels the cartel takes off the market, keeping a ceiling on oil prices over the longer term. The resilience of some shale-oil producers during the energy downturn—and their ability to once again tap capital markets as oil prices stabilize—has added complexity to the decision making at their bigger brethren, which traditionally have been focused on multibillion-dollar mega projects that start and stop slowly. The big firms are catering to the demands of their largely conservative investor base. That forces the companies to focus on profits and debt reduction to maintain share-price stability and steady dividend payments.” A must read in the Journal.
You see, the point of the article is that shale projects are easier to bring on line and easier to shut down. Yet for long term sustained production, what mis really needed is larger more sustainable projects that have a much slower decline rate than shale. The Journal says that, “Investors in shale companies, meanwhile, are focused mainly on production growth. That gives these companies more flexibility to return to U.S. oil fields but it leaves the weakest vulnerable when oil prices drop, as the more than 100 bankruptcies during the past two years showed.”
The Journal points out that in all, spending at major oil companies is expected to decline by as much as 8% this year, per consulting firm Wood Mackenzie. So, it is not all good news when it comes to replacing OPEC cuts and meeting what may be the strongest oil demand growth in the world in over a decade.
Dow Jones said that the former Russian energy minister on Friday dismissed concerns that U.S. shale oil companies may try to use production cuts by Russia and nations in the Middle East to swoop in and steal market share, saying the Americans know there are some no-go zones. Igor Yusufov, Russia's energy minister from 2001 to 2004, said U.S. shale producers wouldn't attempt to enter core OPEC and Russia markets where prices are too low for them to compete. "The fact is that shale oil and gas are doing well markets that start from a certain price," he said in an email exchange with The Wall Street Journal.
For oil, we are on the side on money managers that are seeing that for oil there is a lot more upside potential than downside potential. We like the long side as we feel the floor for oil is pretty much here. The longer we stagnate the higher ultimately, we will go as investment in big oil projects are still on hold while demand expectations are rising.
Winter returns and while natural gas is weak due to warm weather, we may see a return to above average withdrawal next week. Use the weakness in the market to buy some long term options