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Bearish EIA Data Can’t Keep Oil From Rallying

A somewhat bearish EIA inventory…

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U.S. Crude Oil Output Drops In September

U.S. crude oil production dropped…

Don’t Panic, Nothing Has Really Changed In The Oil Markets

Don’t Panic, Nothing Has Really Changed In The Oil Markets

Monday’s 8% WTI crude decline is setting up a big opportunity for buyers. And there could be more to come. But this is driven by momentum, not by the fundamental conditions in the physical market.

To the point:

Demand is heading towards record levels both internationally and in the U.S.

The Greek issue is not new and it has not changed. It is just popular now as deadlines are pushed. It will fade and its drag on oil prices will ease.

The Chinese stock market is either correcting or crashing depending on who you listen to but to put it into perspective, the Shanghai Composite Index is off 25% over the last month after a 115% run to the upside over the last eight. Our NASDAQ is flirting now with zero growth for the year. We’re still upright. Not that all things are apples and apples but the Shanghai Index is still doing quite well on a relative basis. Oil consumption is unlikely to change based on short term momentum one way or the other here.

The dollar will go where it’s going to go and its influence will be strong, but stronger yet will be a balanced crude market which we are approaching.

Should the West come to an understanding with the Iranian government, the 20 to 40 million barrels of Iranian oil in storage will be sopped up quickly in a global market of 93 +/- mm barrels of oil per day (BOPD). No one has a real gauge on this oil and no one seems to know how much actually remains in storage. The extra million BOPD we’re reading about is not immediate. This will take time and investment. Adding it to the current world supply straight away is not an accurate assessment, though it does fit into the mindset of the market. Perception is steering the bus, not reality. Related: Venezuela At A Crossroads

North Dakota, the number 2 oil producer in the U.S., saw a 30,000 BOPD decline in April over March numbers. This is a real number reported by the state, not an estimate. And bear in mind that April up north is a lot friendlier to pumpers than March. Never underestimate the effects of weather on oil production. If there are any weak points in your facilities, you’ll find them in the cold months.

The EIA production estimates will be revised downward. They have to be. Two months of inventory draws with one weekly increase is a trend in its infancy. Production and inventory cannot be divergent for long.

“More efficient rigs,” a concept advanced in the financial news, is a misnomer. Lately operators have been running more sand due to discounting being offered by midcontinent mines. They have also made some adjustments in fluid chemistry that is helping to lower frack costs. But there is nothing more efficient or much different than a well that is fracked today than from one that was fracked at $100 oil a year ago. Four years ago there was, but not one year ago. Related: U.S. Shale In For New Wave Of Pressure As Hedges Expire

A 12 rig increase after 6 months of declines is chicken scratch. A few operators who had leases to hold, or testing to be done, likely waited until county and township roads stiffened up then brought rigs in. It’s nothing. If it increases by 200 in a short period of time, you can call me wrong and you’ll be right. But after a 60% drop in the count, even 200 new rigs won’t come close to balancing the scales.

What has changed with oil in July is the level of patience in the financial markets. This market is a lot like raising kids. Some come home with a paycheck faster than others. But they all will eventually if the fundamentals are there.

By Dan Doyle for Oilprice.com

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  • Amerigo Vespuci on July 07 2015 said:
    Many wells that once produced 500-1000 barrels per day still have very large storage tanks in place. Some shale wells have declined so much that their tanks can hold months of production. It makes sense that some producers wouldn't call in the trucks until prices rise. When the loads are delivered to the refinery, pipeline, railcar terminal, etc. then the companies must report it, and pay severance tax and royalties. While in the wellhead tanks the oil is invisible to everyone but the company pumping it. If a very large number or producers began holding oil in the $40's and then sold in the $50-60's, it makes sense that production numbers could temporarily appear larger in state data. That's perhaps part of the reality.

    But the Wall Street fiction is that those crazy wildcatters just won't learn their lesson and have chosen to "flip the switch" on the newfangled oil wells.

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