Why the oil bears got it wrong

Crude oil prices traded at the highest level since OPEC declared a production war on Shale and laughed off an estimate of record U.S. oil production from the Energy Information Administration (EIA). The reason why the oil bears got it wrong was that they underestimated demand and overestimated production.

The bears failed to see that OPEC was serious about reducing supply and failed to respect the agreement they made with Non-OPEC nations. The bears failed to consider the impact from a historic pullback in energy investing of more than a trillion dollars and forgot the adage that low prices sometimes cure low prices. Oil prices were undervalued because of false fears about the economy and the belief that U.S. shale production would somehow be able to match OPEC production cuts barrel for barrel. They gave too much credit to Libya and Nigeria’s ability to be a stable producer and they thought that the lifting of Iranian sanctions would see a spike in Iranian oil production to a level much higher than they are producing right now.

This along with strong global demand is one of the reasons that we have seen oil supply fall in the U.S. at a historic rate. Oil supply, to pick a week in March, stood at 528.4 million barrels. As of last week, that figure fell to 424.5 million barrels. That is an incredible drop and if the American Petroleum Institute (API) report is any indication, that crude supply number should fall sharply again. The API reported a massive 11.19 million barrels drop in crude supply. If we are producing so much oil, then why are these numbers falling so hard? The API reported another big 2.516 million barrels drop in Cushing, Okla.

The Bears did get a consolation prize as distillates rose by a huge 4.65 million barrels and gasoline supply by 4.338 million barrels.

Yet, oil did not care, instead focusing on the historic crude oil supply drain. The oil market even rallied after the Energy Information Administration (EIA) said that its estimates that OPEC countries cut crude oil production output in 2017, but those cuts were offset by increased production in non-OPEC countries, especially the United States and Canada. “EIA forecasts U.S. crude oil production to grow by 980,000 barrels per day in 2018, and we expect most of that growth to come from tight rock formations in Texas and North Dakota... Led by U.S. production, particularly in the Permian Basin, and new oil sands projects in Canada, non-OPEC production is forecast to continue growing through the end of 2019. We expect to see growth near 2.0 million barrels per day in 2018 and 1.3 million barrels per day in 2019.” 

Yet, as I have written before, many doubt the EIA’s projections on oil. So to be safe, they cut their numbers by 10%. That is what the market did.  They rallied after the projection of record production in the United States. Maybe they feel it won’t be enough to meet surging global and U.S. oil demand.

Still, the “EIA expects Brent crude oil prices to remain near $60 per barrel over the next two years... EIA estimates that U.S. crude oil production averaged 9.9 million barrels per day in December, which would be the fourth-highest level of the monthly production on record, behind only the final three months of 1970. EIA raised its estimate for December production from its previous estimate, as reported survey data on October production came in significantly higher than expected. The incoming data contributed to a reassessment of our previous views on well productivity, particularly in the Eagle Ford, Bakken, and Permian regions.” 

For gasoline, the EIA forecasts U.S. motor gasoline consumption in 2018 to total about 9.3 million barrels per day, which would top the record for highest annual consumption set in 2016.” “EIA is expecting a strong increase in the use of ethane in 2018 and 2019, as several new petrochemical facilities on the U.S. Gulf Coast that use ethane as a feedstock open.”  

Natural Gas: “EIA forecasts LNG exports to increase to 3 billion cubic feet per day in 2018. The sharp increase from 2017’s level of 1.9 billion cubic feet per day is the result of infrastructure projects in several states, including Maryland, Georgia, and Texas, coming online in 2018... The forecast for natural gas exports to Mexico anticipates that growth will continue in the wake of their reforms to the energy market and our increased capacity for new export infrastructure in the United States.” 

Drill Baby Drill! Except in Florida! The Trump administration has exempted the state of Florida from all plans for offshore drilling for oil and gas. It came after Republican Governor Rick Scott raised massive objections. But I think he is ok with drilling off the coast of California. Of course, with the way oil supply is tightening, we may need to invest quickly in offshore production to head off the shortage that is coming five years down the road. Supercycle the sequel.  

Iran’s supreme leader and grand poohbah Ayatollah Ali Khamenei said that the United States was to blame for the uprisings in his country even as he admits the protestors had some grievances worth listening too. He then called President Trumps unstable with "Extreme and Psychotic Episodes."

I guess he might have delusions thinking that protests over no jobs and unemployment are caused by nefarious creatures from other countries.