Back to 2015

Jim Brown
 
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Crude prices rallied to close over $60 and the highest level since 2015.

There was a combination of forces lifting prices. The 90,000 bpd Libyan pipeline was not expected to be repaired until next week. However, Libya said it had been repaired on Sunday and production was due to restart. The 450,000 bpd Forties oil and gas pipeline has been repaired but testing is expected to continue with a full restart not expected until mid January. The pipeline has been closed since Dec 11th. The protest riots in Iran have helped to inflame worries about Iranian production although that is only a very remote possibility.

Iran's president Hassan Rouhani tried to calm the biggest anti-regime protests in more than a decade saying, "people have a right to criticize and protest the government." However, he said Iran would not tolerate violence that threatens security and opportunity. "Criticism is different than destroying property." As of Sunday 200 protestors had been arrested and 12 had died.

There is worry that the protests could continue to grow and result in work stoppages in the oil and gas sector.

Continued slowing of production in Venezuela is also supporting oil prices. The oil rich country is being hampered by the iron grip of its socialist government and on the verge of total failure. The country is now out of gasoline. Taxis no longer operate and delivery trucks are locked in their company warehouses because of a lack of diesel. The secretary of Venezuelan Petroleum Workers said 80% of refineries have stopped production because of poor management and lack of capital to buy oil. Total Venezuelan gasoline production is now 40,000 bpd and national demand is more than 200,000 bpd.

Oil production has fallen to levels not seen since the 1980s. In October, only 1.9 million bpd was produced, down -130,000 bpd from September. The country gets 96% of its government income from oil production and that is rapidly coming to a halt. Venezuela has the largest confirmed oil reserves on the planet but Chavez and now Maduro have killed the country's ability to produce. The rapidly falling production is helping reduce the surplus global inventories.

Maduro announced Venezuela's new cryptocurrency called the Petro, which would be backed by 5 billion barrels of oil. He said every single Petro will be backed by oil, gold and diamonds. This is another feeble attempt to raise cash to fund the government. One analyst jokingly called it the KLEPTO-currency since any money invested in it would immediately be confiscated by the government.

Also supporting oil prices is the rapid decline in global inventories. Analysts claim the surplus is now just 100 million barrels, down from more than 300 million barrel surplus from this time in 2017. Some estimate the surplus could be eliminated by July but that is the minority opinion.

Natural gas prices rebounded last week after a plunge to 10-month lows. The unseasonably warm weather had prevented material declines in storage up until two weeks ago. For the week of December 1st there was even a minor injection into storage. That direction has changed abruptly. For the week of December 15th there was a 182 Bcf decline in storage and the decline this coming week could be massive. The extremely cold weather blanketing the US is going to cause a massive decline. Gas prices have rebounded from $2.58 on the 15th to $3.08 on Monday evening. If they move over $3.20 we could see some additional short covering. The cold weather is expected to linger and that will continue to produce strong declines.

Gas demand had been declining by 3% for 2017 with production rising at 7%. Analysts were expecting current production of 84.6 Bcf per day but actual production declined in December to 77.1 Bcfpd. They are now projecting a 40 Bcf deficit per day and the first deficit since March. If the cold weather remains severe for several more weeks the daily deficit would increase and gas in storage would decline faster. At the same time gas exports by pipeline and LNG are up 20% year over year. LNG demand from China has exploded as they try to force the switch from coal to gas and eliminate the toxic smog plaguing their major cities. Gas prices inside China have been as high as $25.00 per Mcf compared to the $3 in the USA. That is causing a rapid escalation in exports from the US and other countries. LNG imports in China are up 47% YoY.

US oil production declined 35,000 bpd last week to 9.754 million bpd. This was the first time in 8 weeks that production did not set a record. The reason for the decline was probably related to to holiday scheduling/reporting and I am sure we will see a new record over the next couple weeks.


Active rig growth has also gone dormant. Over the prior three weeks, only 2 rigs were added and last week, there was a decline of 2 rigs producing no gain over the four-week period.

Seaport Energy reported last week there was a record 7,300 DUC wells in inventory. That means drilled but uncompleted. Producers do not have to activate additional rigs to complete those wells. Frac crews are going to be very busy in 2018.


Barclay's warned on Friday that oil prices were due for a correction. They pointed out that long bets on crude futures were near record highs. Everybody has gone all in on oil bets. They believe once the outages are corrected global inventories will begin to rise again. Typically, prices do decline in January as US inventories begin to rise again now that the December 31st property tax deadline has passed. Barclay's believes China's economy will begin to slow in 2018 despite strong stimulus and that will reduce global oil demand. China has already slowed imports into their strategic oil reserves due to high prices.


Another wild card could be the deadlines in January that could force President Trump to kill the Iran nuclear deal. Congress has to act to either affirm it or kill it and getting congress to do anything in a timely manner is next to impossible. If Trump kills the deal he is likely to impose sanctions on Iran once again and that is going to decrease their exports although the initial amounts could be minimal. Restoring sanctions could lead to conflict and geopolitical concerns always cause oil prices to rise.

2018 is going to be an interesting year. Personally, I believe oil prices will finish the year higher despite the rising production in the US. I am not going to target a price because it all depends on whether OPEC halts the production cuts at the end of June or the end of December. That remains the wild card.

Jim Brown

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