Can Oil Continue To Rally Like This?

On this final Friday in August, the crude complex is looking lower into the weekend after yesterday's nutty 10% rally. The rollercoaster ride across financial markets continues apace, with Chinese equities rallying nearly 5% amid further market intervention from Chinese authorities to prop it up.

Overnight we have had a number of economic data releases, with benign inflation data from Germany, and UK GDP data which was inline with expectations (at +0.7% QoQ). There were some glimpses of good news out of Japan, with the unemployment rate ticking lower to 3.3%, while retail sales increased by 1.6% YoY, considerably better than expected.

That said, Japanese inflation data mirrored that of Germany, and was flat MoM, with YoY inflation dropping to +0.2%. In terms of inflation, the US is in a similar position to both Germany and Japan, in that should oil prices stay around current levels, it will too see inflation data coming in as flat as a beaver's tail by year-end: Related: Did The Fed Intentionally Spark A Commodity Sell-off?

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Adding a wee sprinkle of bullishness to yesterday's rampant crude rally was word that Shell had declared a force majeure on Bonny Light oil exports due to a leak on the Trans Niger Pipeline at Oloma in Rivers State, and also due to sabotage on the Nembe Creek Trunkline. As #ClipperData illustrates below, Nigerian waterborne crude exports have been holding relatively steady in recent months, and have averaged 1.8 million barrels per day through the first eight months of the year. Related: Could The 'Fusion Engine' Become a Reality Before 2020?

Once again we've got Venezuela trying to cajole an emergency OPEC meeting. We heard similar rhetoric from President Maduro back on August 11th, as the Latin American nation seeks to bring both Russia and OPEC together to address falling oil prices. In response, a Gulf OPEC official has been quoted as saying "If Venezuela or others like Algeria can get Russia to commit to an action then we could have a reason to meet, but at the moment there is nothing that warrants an action". Hence, an emergency OPEC meeting at this juncture seems unlikely.

As we fast approach the peak of hurricane season on September 12, and as Tropical Storm Erika barrels by Puerto Rico and the Dominican Republic and towards the Florida peninsula, the EIA provides us with a timely reminder of how the impact of hurricane season on the oil and gas industry has been marginalized by the onshore shale boom in the last half a decade.

While ~1.5mn bpd of oil continues to be produced from the Gulf of Mexico (GoM) - a level similar to a decade ago - this share of total US production has dropped from 27% to 15% last year, as onshore shale plays have ramped up. Related: Fate Of U.S. Fracking Could Rest With Colorado Supreme Court

A slightly different scenario has played out for natural gas; not only has production in the GoM been marginalized in percentage terms, but absolute production has dropped considerably, from ~10 Bcf/d a decade ago to ~3 Bcf/d now, as lower cost production from onshore shale plays has driven prices down, leaving it the GoM both increasingly uneconomical and irrelevant.

By Matt Smith

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