Oil Prices React to OPEC and U.S. Tax Concerns

  1. OPEC compliance upward of 75%
  2. Non-OPEC factors gaining importance
  3. Cost of production from shale falling
  4. Natural gas pricing range bound


Al pic 2009_cropped

Alan Levine, Chairman of Powerhouse


The Matrix

The matrix in which petroleum pricing now sits is overwhelmingly being shaped by the OPEC-non-OPEC agreement. Various analyses conclude that compliance is very high. Estimates run from 75% – 92% of the 1.8-million-barrel cut. Even such substantial cooperation may not fully resolve the problem of global petroleum oversupply in the six months of the agreement—and that was one of the principal objectives of the cut-back initiative.

The question of extending the deal itself has become something of an issue. Saudi Arabia, taking the biggest share of the reductions, is resisting continuing the agreement. Iran says that the deal should be extended—and reductions even increased—in the second half of 2017. Iran was granted an exemption from the cuts.

Ironically, it may be factors well beyond the exporters’ control that determine the future direction of prices; among these is demand. Another factor is production gains among countries that are not part of the agreement. Expanded output by Libya and Nigeria could also be in the offing.

The revival of production from shale oil in the United States is important in evaluating the global reach of the agreement. A new factor for consideration is that the cost of shale production has reportedly been reduced.

Analysis by one large energy consultancy suggests that “the average [breakeven price] for the shale basins [in the United States] is $32 a barrel.” The consultant also notes that shale breakeven recently had been estimated at $80+. Now, high breakeven is believed to be in the low $70s.

The entry of the United States into the crude oil export trade is weighing on global balances as well. Press reports show U.S. exports in February could reach 900,000 barrels daily. Most of the oil is destined for Asian markets. The reduction of OPEC oil to the region has created an opening for non-OPEC producers. This could foil plans to reduce global oil surpluses.


Supply/Demand Balances

Supply/demand data in the United States for the week ending February 3, 2017, were released by the Energy Information Administration (EIA).

Total commercial stocks of petroleum increased 1.4 million barrels during the week ending February 3, 2017.

Draws were reported in stocks of gasoline, K-jet fuel, residual fuel oil, propane and other oils. There was a build in stocks of fuel ethanol while distillate stocks were unchanged from the previous report week.

Commercial crude oil supplies in the United States grew to 508.6 million barrels, an increase of 13.8 million barrels.

Crude oil supplies increased in four of the five PAD Districts. PADD 1 (East Coast) crude oils grew 0.7 million barrels, PADD 2 (Midwest) stocks expanded 1.8 million barrels, PADD 3 (Gulf Coast) crude oil stocks increased 10.9 million barrels and PADD 5 (West Coast) stocks grew 0.5 million barrels. PADD 4 (Rockies) crude oil stocks decreased 0.2 million barrels.

Cushing, Oklahoma, inventories increased 1.2 million barrels from the previous report week to 65.3 million barrels.

Domestic crude oil production increased 63,000 barrels daily to 8.978 million barrels per day.

Crude oil imports averaged 9.372 million barrels per day, a daily increase of 1.082 million barrels. Exports expanded 18,000 barrels daily to 567,000 barrels per day.

Refineries used 87.7% of capacity, a decrease of 0.5 percentage points from the previous report week.

Crude oil inputs to refineries decreased 54,000 barrels daily. There were 15.893 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 95,000 barrels daily to 16.207 million barrels daily.

Total petroleum product inventories saw a decrease of 12.4 million barrels from the previous report week.

Gasoline stocks fell 0.9 million barrels; total stocks are 256.2 million barrels.

Demand for gasoline increased 630,000 barrels per day to 8.941 million barrels daily.

Total product demand increased 1.506 million barrels daily to 20.814 million barrels per day.

Distillate fuel oil supply was unchanged at 170.7 million barrels. National distillate demand was reported at 3.910 million barrels per day during the report week. This was a weekly increase of 101,000 barrels daily.

Propane stocks fell 6.9 million barrels to 55.8 million barrels. Current demand is estimated at 1.761 million barrels per day, an increase of 308,000 barrels daily from the previous report week.


Natural Gas

According to the EIA:

Colder temperatures during the week contribute to larger than average net withdrawals. Net withdrawals from storage totaled 152 Bcf, compared with the five-year (2012 – 2016) average net withdrawal of 138 Bcf and last year’s net withdrawals of 93 Bcf during the same week. Colder temperatures throughout the week for most of the Lower 48 states contributed to increased heating demand for natural gas and withdrawals from storage. Working gas stocks totaled 2,559 Bcf, which is 325 Bcf less than last year at this time and 45 Bcf more than the five-year average.

Natural gas withdrawals more or less matched expectations. With temperatures lagging normal, price gains from heightened heating degree days (HDDs) have not been available. February prices have traded in a range from $3.00 – $3.20. Next support is found around $2.75.


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