Big oil is back

WTI Oil prices are pulling back as oil starts to trickle down the Keystone Pipeline. TransCanada Corp. restarted the Keystone crude oil pipeline that leaked in South Dakota and caused a drop in Cushing Oklahoma crude supply, is now running at reduced rates on Tuesday according to the company. The leak which caused WTI to move higher recently against the Brent crude that has held a commanding premium could ease some oil product tightness concerns against very strong domestic and global demand. According to our estimate global demand is rising by 1.8 million barrels a day this year and could increase by 2 million barrels a day next year. 

Oil is also waiting on OPEC. While an extension of a production cut is widely priced in, the OPEC cartel could try to jolt the market by leaving the door open for an extension beyond 2018. OPEC now sees oil market rebalances after June of 2018 according to Reuters but, they might be late with that prediction.  Global demand has surprised OPEC and is over a million barrels a day in demand growth above earlier predictions and based on global economic data the global oil demand number is tighter. According to our estimates we are already in a global supply deficit and that is explaining why global oil inventories are falling and floating storage has all plummeted. Reuters News reported recently that the amount of oil stored on tankers around Singapore has dropped sharply in the last months, the latest indication that OPEC-led supply cuts are successfully tightening crude markets even as U.S. exports have soared. Shipping data in Thomson Reuters Eikon shows around 15 super-tankers are currently filled with oil in waters off Singapore and western Malaysia, storing around 30 million barrels of crude. That is half the number of ships in June and down from 40 tankers holding surplus fuel in mid-2017.

That drop-in storage, as well as the drop in crude inventory around the globe, should tell OPEC that their job is done. Yet the market will not want to hear that, but an extension of cuts will push the globe into a bigger supply deficit and while shale oil producers in the U.S. try to respond, the recent uptick in drilling activity won’t arrive in time to offset the big supply drain.

John Kemp, of Reuters, points out that U.S. shale producers have started adding more drilling rigs in response to rising oil prices and improving confidence about the outlook for 2018. He says that experience shows changes in the number of rigs drilling for oil in the United States tends to follow changes in WTI prices with a lag of about 16 to 20 weeks. Kemp says that thee active rig counts peaked in mid-August and then declined through September and October, in response to the earlier peak and fall in prices between February and mid-June. But as WTI prices have soared back the rig count has climbed from a low of 729 on Nov. 3 to 747 on Nov. 22.

Kemp says that shale firms are adding rigs in response to a big increase in spot prices, which is improving their short-term cash flow, and a brightening outlook, which should make production more profitable over the next year. Front-month WTI futures prices have climbed by more than $16 per barrel or almost 40% since their trough in late June. Front-month prices are now above their previous peak in February and at the highest level in almost 31 months.

He says that the WTI calendar strip for 2018, the benchmark against which shale producers execute hedges for next year, has climbed by more than $11 per barrel to the highest level since the start of 2017.  The strip is now trading above $56 per barrel, high enough for most shale firms to ensure basic profitability in 2018. He says that the renewed rise in the U.S. rig count underscores the delicate balance Saudi Arabia, Russia and other OPEC and non-OPEC oil exporters must strike this week at their meeting in Vienna.

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