There is a temptation to attribute the recent rise in oil prices to just the uncertainty of the political purge that we have seen in Saudi Arabia, but you might be missing the larger point. There is a reason why we have seen oil prices hit a 2 and a half year high and a reason why they are up from a of 26.05 in in 2016 to a high yesterday 57.69. It is because the crash in oil prices caused one of the biggest oil investment pull backs in history and at a time when low oil prices spurred demand and which now is at one of the fastest growth rates and fastest global growth rate since 2012 leading to the fastest drain in global oil and petroleum supply drains in history. The Energy Information Administration reduced their outlook for U.S. shale and OPEC put to rest the myth of “peak demand” as the oil supply drain is speaking volumes.
The American Petroleum Institute added to that record supply drain by reporting that U.S. crude supply fell for the eighth week in a row by 1.56 million barrels. They also said the supply deficit in reporting that distillates supply fell by 3.13 million barrels. They say gasoline supply did rise by 720,000 barrels but that followed a API 7 million barrel drop a week ago.
Shale Oil producers continue to disappoint and while we did see the prolific Permian Basin add production in the other basin production is flat to declining. Why well capitalized forms can lock in hedge, yet smaller firms would be hedging in losses at this point, but mat do so just to get banks to lend them capital. This caused the Energy Information Adminstrations (EIA) to once again lower its outlook for U.S. shale production in yesterday’s Short Term Energy Outlook.
For the second month in a row the EIA lowered its estimate for production to a growth of just 81,000 barrels a day in November, putting total shale output at just hit 6.12 million barrels a day next month. Many in the industry think the EIA is still overestimating output and based on the big drops, week after week in U.S. inventory, it seems that they probably are. In Fact, in some basins shale production is going in a decline. Estimates are that shale oil producers will have to double their capital spending to regrow output by a million barrels a day, that would be almost impossible unless oil stabilizes in the $60 a barrel handle. Even at that they can’t match OPEC production costs and growing global oil demand growth.
