Crude: Home for the holiday

There is no place like home for the holiday! And based on the build in gasoline supply it looks like on Thanksgiving a lot of people did not leave home.  I am just partly kidding but it was clear that demand for gasoline fell short of near record production of gasoline and record production of distillate even as oil supply plunged as refiners ran crazy. This comes against a backdrop of more concerns in the shale oil patch about production and profitability as mentioned in an article in the Wall Street Journal. Energy Report readers are not surprised about shale concerns but now those concerns are going more mainstream.

Let’s talk gasoline. The Energy Information Agency (EIA) confirmed American Petroleum Institute gas increase by reporting that rose by 6.78 million barrels. That came as U.S. gasoline production hit 9.758 million barrels a day versus demand of only 8.895 million barrels a day. What is everyone fighting with their family? I think we will soon see an upward adjustment in gasoline demand and a downward adjustment in gasoline supply.

Refiners went crazy raising runs to 93.8% and posted record distillate production of 5.402 million barrels a day versus demand of 3.37 million barrels a day, that is a good thing because supply of distillate are below average, and the warm weather break we have seen may be changing and that will bump up that distillate demand.

Yet, the historic drain of U.S. crude supplies resumes. U.S. crude supply fell by 5.61 million barrels led by a 2.753 million barrel drop in Cushing Oklahoma. The drop in Cushing was partly related to the Keystone pipeline. Still, refiners ran 17.2 million barrels of crude a day last week.

The Wall Street Journal reports that “Wall Street Tells Fracker’s to Stop Counting Barrels, Start Making Profits.The shale-oil revolution produces lots of oil but not enough upside for investors”.

U.S. oil production has surged so quickly that it appears on course to surpass 10M barrels a day in 2018, breaking a record set in 1970. But as companies have pumped more, investors have started to pull back. About $800M flowed out of energy-focused equity funds for the year through November, compared with inflows of over $6B in 2016, according to fund-data tracker EPFR Global. Oil prices have been rising since June, but shale stock prices haven't followed. Investors are concerned about executive pay. In the last decade, CEOs at 15 of the biggest oil-and-gas companies were paid $2.8B, despite providing total shareholder returns of 2.7% a year, and saw pay exceeding 100% of their targets in 95% of pay years in that period, according to Evercore ISI.

Some other tidbits from the WSJ must read “As a group, U.S. shale companies have been forecasting they are on the brink of generating free cash flow—taking in more revenue from operations than they spend on new investments—for the first time since 2014 when oil traded at over $100 a barrel. Since then, they have largely repeatedly moved those goal posts back.

Wood Mackenzie estimates that if oil prices hover around $50, shale companies won’t generate positive cash flow as a group until 2020. Even then, only the most efficient operators will do well, says Craig McMahon, a senior vice president of research for the consultancy.

Returns from individual wells can be good, but shale wells tend to pop online with a gush and then peter out quickly. That has meant operators sink profits back into more new wells that can take another two years to become profitable, with shareholders told to hang on for a payday.

Like I said before, you can’t lose money on every barrel and expect to make up for it in volume. This comes on the Heels of the MIT study that says that shale oil production numbers are being vastly overstated by the EIA. The EIA said the study raises valid points. This is a point that few have raised and the answers to these questions will greatly influence oil and prices over the next decade.

Dec. 7, 1941 - a date which will live in infamy - the United States of America was suddenly and deliberately attacked by naval and air forces of the Empire of Japan. We will always remember and pray for peace.