Bearish Oil Outlook Persists

  1. U.S. production forecast to reach 10.01 million barrels daily in 2018
  2. Gulf of Mexico production reaches record
  3. Propane price breaks uptrend support
  4. Natural gas injections exceed 100 Bcf for first time since 2015


Al pic 2009_cropped

Alan Levine, Chairman of Powerhouse

The Matrix

Focus on geopolitical factors has often caused foreign oil hands to overlook the impact of the U.S. industry on crude oil expectations. The view from non-American sources, particularly OPEC, tends to minimize the importance of burgeoning production of shale oil in the emerging bearish oil price outlook.

One OPEC representative argued (inaccurately) at a recent meeting, “All shale companies in the U.S. are small companies. … The reality is that at $50 – $60 a barrel, [the U.S. oil industry] can’t break beyond 10 million barrels per day.” A U.S. banker noted, “OPEC looks at shale and it scoffs. … There’s a rational skepticism globally, but it misses the mark.”

The error in discounting the importance of shale oil production to global balances can be seen in the Energy Information Administration’s (EIA’s) newly revised forecast of crude oil output. The agency has raised its projection of U.S. production to 10.01 million barrels daily in 2018. This would represent a new record. In 1970, the country achieved its current high water mark at 9.6 million barrels per day. Domestic gains like these could sink the OPEC-non-OPEC deal.

Some observers point to relatively rapid decline curves for shale as cause for uncertainty over the long-term volume of supply from U.S. wells. Nonetheless, improvements in the costs of production could ease such concerns. Shale efficiencies are bringing break-even prices below $40.

Deepwater production is reportedly heading toward costs in the $40 range by early 2018. In 2014, such wells required $75 to break even. The improved outlook reflects lower rig rental rates and project redesign to achieve efficiency rather than maximized output.



Production in the Gulf of Mexico has been marginalized in the excitement attendant on the Permian Basin. Output in the Gulf was estimated at 1.76 million barrels daily in March. This was a record and about a third higher than in March 2014. One group estimates deepwater production growing by more than an added one million barrels daily by 2022.



Powerhouse is reconsidering its heretofore bullish posture on propane. The uptrend line established in February 2016 has been broken. If prices do not recover above that trend line, a more substantial correction may be at hand.


Supply/Demand Balances

Supply/demand data in the United States for the week ending June 2, 2017, were released by the EIA.

Total commercial stocks of petroleum increased 15.5 million barrels during the week ending June 2, 2017.

Builds were reported in stocks of gasoline, K-jet fuel, distillates, residual fuel, propane and other oils. A draw was reported in stocks of fuel ethanol.

Commercial crude oil supplies in the United States increased to 513.2 million barrels, a build of 3.3 million barrels.

Crude oil supplies increased in two of the five PAD Districts. PAD District 1 (East Coast) crude oil stocks rose 1.2 million barrels and PADD 3 (Gulf Coast) stocks expanded 3.4 million barrels. PADD District 2 (Gulf Coast) crude oil stocks declined 0.5 million barrels, PADD 4 (Rockies) stocks decreased 0.2 million barrels and PADD 5 (West Coast) stocks fell 0.6 million barrels.

Cushing, Oklahoma, inventories decreased 1.4 million barrels from the previous report week to 63.4 million barrels.

Domestic crude oil production decreased 24,000 barrels daily to 9.318 million barrels per day.

Crude oil imports averaged 8.341 million barrels per day, a daily increase of 356,000 barrels. Exports fell 746,000 barrels daily to 0.557 million barrels per day.

Refineries used 94.1% of capacity, a decrease of 0.9 percentage points from the previous report week.

Crude oil inputs to refineries decreased 283,000 barrels daily. There were 17.227 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, fell 162,000 barrels daily to 17.517 million barrels daily.

Total petroleum product inventories saw an increase of 12.2 million barrels from the previous report week.

Gasoline stocks increased 3.3 million barrels; total stocks are 240.3 million barrels.

Demand for gasoline fell 505,000 barrels per day to 9.317 million barrels daily.

Total product demand decreased 1.418 million barrels daily to 19.340 million barrels per day.

Distillate fuel oil supply grew 4.4 million barrels to 151.1 million barrels. National distillate demand was reported at 3.505 million barrels per day during the report week. This was a weekly decrease of 520,000 barrels daily.

Propane stocks rose 3.3 million barrels; total stocks are 50.4 million barrels. Current demand is estimated at 831,000 barrels per day, a decrease of 96,000 barrels daily from the previous report week.


Natural Gas

According to the EIA:

Weekly net injections top 100 Bcf mark for the first time since 2015. Net injections into storage totaled 106 Bcf, compared with the five-year (2012 – 2016) average net injection of 94 Bcf and last year’s net injections of 68 Bcf during the same week. This marks the first time since September 18, 2015, that the weekly net injections exceeded 100 Bcf. After topping the 100 Bcf threshold five times in 2015 and a record 10 times in 2014, net injections never exceeded 82 Bcf in any week during 2016. Record levels of working gas in storage entering the 2016 refill season likely contributed to the unusually slow refill activity. This is the first time in five weeks that net injections exceeded the five-year average.

Expectations that new gas-fired plants and exports would tighten the natural gas market have not been met. Higher prices in recent months have encouraged new natural gas production and have caused some fuel switching to coal. Moreover, 100 new rigs drilling for gas are reported by Baker Hughes.



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