We now have more evidence that the oil supercycle is underway, crude prices are on the rise as global demand and underinvestment in new oil projects are starting to take their toll on global oil supply. There is talk of new sanctions on Iran and Platts is reporting that Venezuela’s production hit its lowest since its oil industry was affected by a major strike that lasted from December 2002 to February 2003. Not counting strike-affected months, Venezuela production was last this low in August 1989, more than 28 years ago.
Shale oil production is sputtering as Baker Hughes reported that oil rigs fell by five, perhaps due to the extremely cold weather. With sharp decline rates by U.S. shale oil wells, they had better keep those rigs rising and increase well completions to have a chance to even come close to the levels of oil production that the Energy Information Administration is predicting will happen.
EIA shale oil data has been brought into question by an MIT study as well as producers because they are astounded by what the EIA is projecting. Those concerns are also being raised by shale pioneer Harold Hamm of Continental Resources as well as BP CEO Bob Dudley. Most of the producers that I have spoken to in the shale patch agree that the EIA is missing the complexities of shale oil and the variance of different wells and formations. They also say they are giving too much emphasis on technology gains that are not happening like the EIA thinks they are.
This new super cycle in oil started to develop when oil prices crashed in 2015 and 2106. After a false start, global economies worries’ like the Grexit, the lifting of U.S. sanctions on Iran and worries about the Chinese economy caused a selloff of historic proportions, yet it is in the ashes of these market collapses that the biggest bull markets are born.
For anyone that would listen we were warning that shale oil production was not a replacement for trigonal oil projects. We warned that a trillion dollars in capital spending cuts would take its toll. We warned about the false "lower for longer" narrative.
For anyone that would listen, we said stop focusing on supply and start focusing on demand. Demand growth for oil is at a decade high and in part was inspired by low prices. Oil supplies were so far above normal that folks said we would never see the glut go away, have fallen back to just above the average range in a world where demand and demand growth is well above average. While OPEC and NON-OPEC are still restarting production, they may be forced to agree to raise output because based off data, oil supply is falling so hard because demand is outstripping global supply.
A tragic oil accident. An Iranian oil tanker off China’s east coast collided with a grain ship causing a massive explosion. The body of one of the 32 missing crew members was found on board according to Reuters. Prayers going their way.
Trilby Lundberg, of the Lundberg Survey, is reporting that the average price of a gallon of regular-grade gasoline jumped 3 cents nationally over the past three weeks to $2.54. That is 16 cents above the year-ago price. San Francisco gets the award for the highest price at an average of $3.22 a gallon. The lowest price award goes to Tucson, Arizona, at $2.10 a gallon. You can’t blame refiners as they must max out distillate to meet cold weather demand. Considering the cold, gasoline demand continuing to be strong is a testament to strong U.S. economy.
The Wall Street Journal is reporting that “The 2015 Iran nuclear agreement faces a potentially fateful week, with a series of deadlines awaiting President Donald Trump as Tehran reacts to recent anti-government protests. Trump is expected to again notify Congress he doesn’t believe the Iran deal is in the best interest of the United States, restating a well-known position. More important, Trump will have several opportunities starting Wednesday to refuse to extend United States sanctions relief to Iran under the deal, which would put Washington in breach of its terms.” Stay tuned! More sanctions on Iran will be bullish for oil.