EIA Surprises, Oil Prices Surge – Oil and Gas Market Summary 10-19-16

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Hello and welcome to the Oil Prices Daily podcast.

Doug Stetzer here, bringing you your daily recap of all the latest news, events, and trends influencing oil prices.

Oil Prices Daily is hosted on the EKT Interactive Oil and Gas podcast network and sponsored by Oil 101, a free online introduction to the oil and gas industry.

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Okay. What happened in oil prices for today, Wednesday, October 19th?

Well, EIA, once again, really providing a surprise to the market with its statistics.

Analysts expecting a 2.4 million barrel build, and what do we get? A draw of over 5 million barrels. What did that do to oil prices? As you can expect, November crude up $1.31 or 2.6% to settle at $51.60.

Looking at the charts you’ll see trend-lines we’ve been drawing for the last week or so, as we consolidated around 50, forming that pennant, strong breakout to the upside.

As you can see in the inter-day chart, it really is a huge move, based right when the EIA statistics came out. Hit a high almost $52 a barrel, and then actually slowly drifted off for the rest of the afternoon.

However, still an extremely strong settlement and really strong move for the market.

With these fundamental numbers in alignment with very technically strong market and a lot of headlines and concerns to the upside, what you’re seeing is, as we’ve been mentioning in the podcast for the last few days or even weeks, is that the market is very long.

Speculators, hedge funds really getting on board. You’re seeing it in the CFTC reports, net length is at levels we haven’t seen in a number of years, and there’s just a lot of momentum.

One quote from analyst Phil Flynn who is often quoted in the news,

“There is a strong possibility that global demand is already outstripping daily oil output. Extraordinary cutbacks in global energy spending are starting to show up. We are seeing US oil supply tighten very quickly.”

Now, what this is alluding to is the fact that billions and billions were cut in capital expenditures over the last 2 years.

One camp is starting to build around the idea that we’re actually going to have a really tight supply constraint in the next few years since we were not investing in production for these 2 years. That is a storyline that OPEC is really jumping on the bandwagon.

Not everyone sees it that way. Rex Tillerson, CEO of ExxonMobil, quotes,

“It’s difficult for me to see a big price blow-up.”

There’s an article pitting these two camps against each other, you have Saudi Arabia’s energy minister and CEO of ExxonMobil painting different pictures of this concept of a real tight supply constraint that’s now imminent in the future.

It’s a Wall Street Journal article titled, “Saudi Arabia energy minister warns of oil shortage”.

Of course, the link to that is in the Oil Prices Daily newsletter if you are interested in checking that out.

A lot of length, and some consensus, or at least a camp of thought, forming around this idea that this lack of investment is going to really come back to bite us in the maybe not too distant future.

Looking at other information out of the EIA today, as we mentioned, a 5.2 million barrel decrease in crude oil inventory is posted by the EIA daily report today.

The gasoline and distillates actually both built, and looking at the petroleum balance sheet US production domestically bumped just slightly higher, although the lower 48 number is still below this 8 million barrels a day threshold, so not enough to damped the enthusiasm for this draw right now.

What you did see is that imports were down almost a million barrels a day.

While it certainly looks like everyone’s getting on board from the long side, as we’ve been mentioning, we have a section in the newsletter today with a couple of stories along the lines of the idea we’ve been speaking about, beware of the one-sided market.

In commodities, when you get everyone on one side, that’s when things have the ability to really correct sharply. We have been speaking about this.

All it would take is one solid headline, or this OPEC deal falling apart, to send things lower really quickly and violently.

There’s a couple of stories talking about this. First out of Financial Times, “Hedge fund bets on rising oil prices hit highest since July 2014,” so again, just this idea that speculators’ net length is really getting big.

People are going to start feeling that they’ve missed the boat if they were not on board already, and that’s when you get the weaker length coming in late, that has the ability to maybe be shaken out a little bit easier.

Another story along that same line is on oil price but written by Zero Hedge, saying, “Oil won’t crash before the OPEC meeting,” which is interesting headline, but if you really read the whole article, and it is quite a long-form article, at the very end he really touches on this concept of having a market that’s too one-sided right now.

A quote out of that says,

“Usually, anytime hedge fund positioning has reached an extreme in either side, this has been promptly followed by a “max pain” type move in the underline.”

Beware and be diligent. There’s a lot of momentum on the long side and there’s a lot of length piling in.

It really will require this OPEC deal to firmly back up their talk, to keep the momentum going here as we head into the mid-50s.

Speaking of that, I did look at where the crude oil curve is looking as we look out towards 2017 and 2018.

Average price for 2017 hitting $54 right now, average price for $2018 is $55 and a half. Will US production start picking up here? It’s hard to say.

You would expect that it will, as they are able to lock in these prices. You would expect these ducks that drilled but uncompleted wells to start to be completed and start to flow, especially if there’s signs that demand is keeping up with this production.

Demand is strong out of big consumers, US, China, India, then you would expect that these producers will have incentive to open the taps on these drilled but uncompleted wells.

Speaking of production, of course, everyone’s looking at what Saudi Arabia and the rest of OPEC is actually producing, as opposed to talking about, as we head towards this deal.

The idea, backed by evidence in the market, is that they are pumping full tilt before any production cuts go into play. This has been evidenced in tanker rates.

There’s a story out of Bloomberg today titled, “Tanker rates surge as mid-east cargoes rise before OPEC deal.”

It’s pretty impressive, the amount of cargoes and the price for these cargoes has taken a significant upturn as they are racing to book these cargoes before the deal is in place.

We haven’t really spoken about it much, but it’s a pretty common theme that the shipping market has been quite devastated by the downturn in commodities and other parts of the global economy over the last 2 years.

Huge shipping company went bankrupt this year, Maersk looking to separate their oil and gas from their shipping, there’s just a lot of pain going on in that side of the market; so to see these rates surge really goes to show how quickly that can turn around in the face of really sharp demand from one sector.

Another interesting story, not so much related to the prices but an effect of the prices: Saudi Arabia today floating bonds for the first time.

They have entered the international debt markets and they borrowed 17 billion. Now of course, good interest rates, good time to do so, but very telling that their cash economy is now needing to get on the debt bandwagon.

That’s going to do it for today. EIA, again, really providing the surprise. This has really been a trend, not a one-off event lately, so it’s really catching the analysts off-guard.

If these people are expecting builds week after week and getting huge draws, it really starts changing the fundamental picture of the supply dynamic here in the US.

We start pulling back from these all-time highs in crude oil supplies, it doesn’t take too much to start tipping the balance.

All right, that’s going to be it for today. Of course, get our concise recap of all the news and events influencing oil prices each day by going to oilpricesdaily.com to sign up for our newsletter there.

Of course, you can also subscribe to this podcast on iTunes and listen to it on the EKT Interactive Oil and Gas podcast network.

Thanks a lot, and we’ll see you tomorrow.

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