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Page added on May 2, 2017

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The Return Of Bearishness In Oil Markets

Consumption

The oil bears are gaining leverage over the bulls as confidence in the stability of crude prices continues to wane.

Oil prices traded above $50 per barrel for most of the first quarter, falling back into the $40s in March, although it quickly rebounded back above $50 in April.

The high level of OPEC compliance has surprised skeptical market analysts who predicted plenty of cheating, so the cuts of 1.2 million barrels per day from OPEC, plus smaller cuts from a slightly less compliant non-OPEC group, have put the market on a course towards balancing, albeit at a painfully slow pace. Global inventories have begun declining even if U.S. stocks are still at exceptionally high levels. An extension of the OPEC deal would put the icing on the cake, taking the market back to normal levels in the second half of the year, as the IEA recently predicted.

But the bears are not done yet, becoming more emboldened in recent weeks as WTI and Brent sank back to one-month lows.

The rig count continues to climb, adding another 9 rigs in the last week of April, putting the oil rig count just shy of 700, or up 120 percent from its low point a year ago. Aside from just a handful of exceptions, the rig count has grown almost entirely uninterrupted, week after week, for the past 12 months, even during bouts of lower prices. Lower breakeven prices have allowed shale drillers to confidently hike their spending plans even if oil prices fail to rally any further.

Predictably, that has led to a sharp resurgence in U.S. oil production. The most recent estimate from the EIA puts total U.S. production at 9.265 million barrels per day, up 700,000 bpd from September 2016. Some of those additions came from long-planned offshore projects that came online in recent months, so it has not come entirely from U.S. shale. But that suggests even stronger production gains could be forthcoming, since the shale industry is only now getting going. Estimates vary, but by and large, there is a consensus that U.S. shale will add hundreds of thousands of additional barrels per day to the market this year.

Then there are unexpected gains from elsewhere around the world. Libya, in particular, is one country to watch. The North African OPEC member’s production has whipsawed up and down by attacks on key export terminals, which have forced the closure of some very large oil fields. Libyan production stood at 700,000 bpd earlier this year, but dropped to just 490,000 bpd over the past month, helping to tighten the global market and push up prices. But output is back up to 700,000 bpd, according to the latest reports, taking away one of the few bullish trends in the market. More ominously, Libya is aiming to ratchet up production to as much as 1.2 mb/d by the end of the year. That goal could prove to be fanciful, but it highlights the fact that Libya could be as much of an upside risk as a downside one.

The return of bearishness is borne out by the latest trading trends in the futures market. Hedge funds and other money managers continue to pare back their bets on crude futures, reducing net-long positions for the third week in a row. According to CFTC data, cited by Bloomberg, major investors cut their bullish bets by 21 percent at the end of April. The selloff indicates a belief among oil traders that oil prices had “gone up too much compared to the fundamentals. The shale oil production trend is definitely bullish, which is bearish for prices,” Michael Lynch, president of Strategic Energy & Economic Research, said in a Bloomberg interview.

Speculative movements in the futures market don’t dictate everything, but they are good indicators of market sentiment. The recent net-long reduction suggests that investor confidence is on the wane. “You started the year with longs. They’re giving up on the trade to a certain point,” Tariq Zahir, commodity fund manager at Tyche Capital Advisors LLC, told Bloomberg.

The fact that the oil glut persists despite what should be bullish trends – high OPEC compliance, growing demand, and the initial signs of falling inventories – suggests that lower prices could be forthcoming. “Refiners have come racing back out of maintenance in the biggest way since November 2015. We’ve processed a record amount of crude oil last week, and you would think that will be bullish for crude oil,” John Kilduff of Again Capital said on CNBC on April 28. “But unfortunately the increased production of oil from the shale players keeps coming. And now we are going to see the product markets get swamped with product like we saw last year. And so we are going to have another quarter or two of downward pressure on gasoline and diesel prices, which isn’t gonna to help anybody.”

After the OPEC deal, “the market gave them the benefit of the doubt. So what we are seeing right now is that benefit of the doubt shouldn’t have been given,” John Kilduff said on CNCB. “It’s not working, global supplies aren’t coming down, it’s proving ineffective and it’s going to unravel.”

By Nick Cunningham of Oilprice.com



21 Comments on "The Return Of Bearishness In Oil Markets"

  1. bobinget on Wed, 3rd May 2017 9:08 am 

    With so much at stake, bots, bull and bear are out in force the week. At 10:30 Eastern EIA is expected to show a draw from storage… We’ll know in 20 minutes.

    If you aren’t familiar with these EIA reports… They do offer reporting on refinery use, consumption, imports, exports, and regional storage. The instant the report goes public there is immediate reaction.

    http://ir.eia.gov/wpsr/wpsrsummary.pdf (storage)

    http://www.livecharts.co.uk/MarketCharts/crude.php
    reaction shot

    Currently this oil market is being controlled, in a very real sense, by China.
    Here’s why. China imports more oil than anyone else.
    China and Venezuela, the world’s largest stash of actual heavy crude oil.
    Venezuela currently exports almost a million barrels a week to the US. This is in direct contravention to Chinese loan agreements which call for that million barrels and more to to be shipped, not to the US but China to service over 50 Billion in loans.
    As long as China permits Venezuela to overstock
    US inventories, oil prices go lower. Clearly in China’s
    interest.

  2. bobinget on Wed, 3rd May 2017 9:13 am 

    Oh, in spite of what you are being told, US inventories are indeed overstocked. (normal for spring)

    The remainder of the importing planet is NOT.
    Consumption is holding steady in the US but on the increase everywhere else.

  3. bobinget on Wed, 3rd May 2017 9:40 am 

    Energy Board sentiments;

    EIA impressions, basically flat.

    Not too bearish or bullish. Imports still seem high to me then again exports seem LOW to me.

    Total demand looking better.

    I am sure the market will take it as bearish, because everything is bearish sentiment right now.

    This completes the streak of April draws which is counter seasonal.

  4. Cloggie on Wed, 3rd May 2017 9:43 am 

    https://twitter.com/cleantechnica/status/859762688569868289/photo/1

    Wind and solar largest part new power capacity 2017-Q1.

    If this goes on like this for the coming 30 years, nobody will ever talk or worry about peak oil again.

    Or oil for that matter.

  5. Cloggie on Wed, 3rd May 2017 9:46 am 

    That was new capacity… how about existing wind capacity?

    https://twitter.com/cleantechnica/status/859763947666329604/photo/1

    8% cumulatively in 2016.

    That’s not bad at all (although 2012 was better).

  6. bobinget on Wed, 3rd May 2017 10:08 am 

    Wind and solar: (by definition, sunshine makes wind, even hydro)
    Look! solar desalinates at far lower cost.
    Solar makes hydrogen for autos.
    Electricity made with solar cheaper then coal or oil.

    getting back on topic. Reading more carefully, EIA reported another 1.5 Million barrels were removed from the SPR. (on-going US effort to destabilize Venezuela for Chinese benefit)

    Why else would we be selling oil being held for emergencies at a time of full storage and opening of the fighting season in the Mid-East. (MORE troops
    being sent in to defend oil we are selling from SPR)
    Not to mention below cost of production oil prices here in Greatest America.

    Without that 1.5 million barrel injection, oil prices would be a dollar higher today. Great for China, for the US oil industry, not so much.

  7. Apneaman on Wed, 3rd May 2017 10:39 am 

    Sure clog, no need for oil in your fantasy future. Techno utopians and their predictions.

    Article From 1917: Don’t Worry About Coal, They Will Definitely Be Using Something Else By 2017

    “In the autumn of 1917, a severe coal shortage hit the United States. Riots even broke out over the lack of energy as the nation went into the winter months. Some people were calling for conservation, but one snarky newspaper article insisted that conserving was for suckers. Why? People of the future — specifically, the people of 100 years hence — wouldn’t be using coal anyway.”

    https://www.gizmodo.com.au/2017/01/article-from-1917-dont-worry-about-coal-they-will-definitely-be-using-something-else-by-2017/

  8. Apneaman on Wed, 3rd May 2017 11:12 am 

    The Sacred “C Words”

    “Clean energy extracts resources from the earth. What’s clean about that? Clean energy production causes emissions of greenhouse gases, produces toxic waste, and uses up water and electricity. There’s no way you can get around burning fossil fuels and depleting the living planet while producing and transporting these “clean energy” alternatives.”

    “People are afraid to address the fact that you cannot have infinite growth on a finite planet. If they find out you are against a Capitalistic society you will be called a commie, socialist, libterd, extremist, eco-terrorist, radical or any other trendy slogan developed by those that occupy the table with Capitalism serving as the head.

    See I am not any of these things. What I am is a believer in the concepts of science and math. Science is telling me by an overwhelming amount of evidence that humans are the culprit in the heating of earth’s biosphere. Math is telling me that if everyone on earth had the American lifestyle you would need 2.5 earths.”

    http://www.counterpunch.org/2017/05/03/the-sacred-c-words/

    There will be no long decline. The humans will go over the cliff.

  9. bobinget on Wed, 3rd May 2017 11:51 am 

    Energy, as far as the consumer is concerned is all about price. Want an airline ticket? Go to Kayak.
    I’ll bet all you care about is a reasonable time of day departure and arrival and PRICE.

    So it is when a person flicks on a wall switch. Most don’t even think about how the energy got made that turned on that vibrator.

    The federal tax credits that made mass Solar possible,
    will soon go away. That’s fine.

    Ten Years ago I installed a 10 K PV system that cost
    40 K. My state and the feds returned one third of that cash outlay. My wife, who cares about the planet brags about how we made money on oil and paid our electric bill 10 years in advance. Today, we could get 20 K for the same money.

    When times were tough, 2008/09, solar provided heat in winter and every electrical need, all ‘free’.

    Oh, BTW. Check out the new Nissan Leaf for 2018.
    OVER 275 mile range. With a half dozen PV panels
    you prepaid your gasoline bill five years in advance and helped our environment. By 2022 a recharge, like ‘gas’ stations will be only a few miles apart.

  10. GregT on Wed, 3rd May 2017 12:04 pm 

    “Wind and solar largest part new power capacity 2017-Q1. If this goes on like this for the coming 30 years, nobody will ever talk or worry about peak oil again. Or oil for that matter.”

    Wind and solar are adding to our global energy mix, they aren’t replacing fossil fuels. Fossil fuels consumption still continues to grow, as does oil consumption ‘for that matter’.

  11. bobinget on Wed, 3rd May 2017 12:21 pm 

    It’s all about storage. Tesla’s “Wall” is being copied everywhere. Prices, like computer storage, will
    halve every year.

    Not just solar. Most people in this world don’t live in private homes but multi dwellings.

    Where smart meters are installed a person can ‘buy’ power in the middle of the night for use anytime.
    No Solar Needed.

    Overnight parking will sell electrical power generated
    with solar during daytime. Cars in southern regions get overheated in summer. Parking at super-markets, etc could sell recharging parking spots under solar panels
    in day and overnight recharge as well.
    Underground parking could and will sell power as well.

  12. Cloggie on Wed, 3rd May 2017 12:34 pm 

    Wind and solar are adding to our global energy mix, they aren’t replacing fossil fuels. Fossil fuels consumption still continues to grow, as does oil consumption ‘for that matter’.

    I have to agree with you that it is difficult to discern a global energy problem.

    We seek it here, we seek it there,
    Those Peakers seek it everywhere.
    Is it in heaven? — Is it in hell?
    That damned, elusive [insert rhyme word here]

  13. GregT on Wed, 3rd May 2017 2:48 pm 

    “I have to agree with you that it is difficult to discern a global energy problem.”

    We wouldn’t be looking to lesser sources of energy if there wasn’t a global energy predicament, and it is difficult to discern anything at all, if one refuses to look.

  14. Davy on Wed, 3rd May 2017 3:44 pm 

    Damn, Bob has a bout of makatism too. “Prices like, computer storage, will halve each year.” Bob, like clog, thinks the economy is great and wonderous days are ahead.

  15. Sissyfuss on Wed, 3rd May 2017 5:20 pm 

    That damned elusive Cloggie smell.

  16. Cloggie on Wed, 3rd May 2017 5:32 pm 

    I knew I could count on Siss!

    He may be a tad lethargic at times, but when a poem needs to be completed, Siss is there and delivers.

  17. Cloggie on Wed, 3rd May 2017 5:41 pm 

    We wouldn’t be looking to lesser sources of energy if there wasn’t a global energy predicament, and it is difficult to discern anything at all, if one refuses to look.

    I have been looking for decades. There are no “lesser sources”. It doesn’t make a difference if your source has a EROI of 100 or 20; you maybe an expert in understanding the exponential function, regarding your understanding of the logarithmic function, some work still needs to be done.

    The difference in EROI of 20 or 100 is like harvesting 100 potatoes. In case of soil with EROI 100, you only need to reserve 1 potato for the next harvest of 100, in case of a soil with EROI 20, you need to reserve 5 potatoes from your for next year’s harvest of 100.

    The difference in in consumption is 99 vs 95, big deal.

  18. GregT on Wed, 3rd May 2017 6:50 pm 

    It is the EROEI that matters. You are confusing money (a claim on future productivity) with energy. Humans, like potatoes, require energy to grow. Neither require debt.

  19. Boat on Wed, 3rd May 2017 7:10 pm 

    greggiet,

    Show me the EROEI numbers from the Permian 2013 compared to 2017. You know why you can’t? Nobody gives a shyt about EROEI enough to keep track of anything. Not only that nobody can agree to how far the chain of supply should go for inputs to develop an EROEI standard model. Guys like you just blow smoke. To this point EROEI is a worthless tool.

  20. GregT on Wed, 3rd May 2017 7:15 pm 

    “To this point EROEI is a worthless tool.”

    Coming from someone of your intellectual capacity, not the least bit surprising.

  21. onlooker on Wed, 3rd May 2017 7:22 pm 

    Yeah right Boat. Heads up the Balken is collapsing
    https://www.kcet.org/shows/earth-focus/is-the-dakota-access-pipeline-already-obsolete-the-collapse-of-the-bakken-oil
    “The decline in Bakken oil production that started in January 2015 is probably not reversible. New well performance has deteriorated, gas-oil ratios have increased and water cuts are rising. Much of the reservoir energy from gas expansion is depleted and decline rates should accelerate. More drilling may increase daily output for a while, but won’t resolve the underlying problem of poorer well performance and declining per-well reserves.”

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