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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Why Oil Bulls Are Running Rampant

Wall Street

Brent crude has successfully consolidated its position above $60 per barrel this week, and WTI is approaching $55 per barrel, which would be the highest oil price in more than two years.

The gains come after OPEC officials have all but signaled that they will extend their production cuts in a few weeks at their meeting in Vienna. But crucially, an extension would occur at a time when the oil market has significantly tightened, bolstering the bullish momentum exhibited for crude prices.

Evidence that the oil market is tightening can be found in the oil futures market. The futures curve for Brent has already been in a state of backwardation for some time—a situation in which near-term contracts trade at a premium to futures dated six months or a year out. The result is a downward sloping futures curve (i.e. longer-dated contracts are cheaper than near-term contracts).

The reason the curve is important is because a state of backwardation traditionally accompanies periods of time when the oil market is tight, whereas contango—the opposite of backwardation—crops up during surplus times. A contango allows for stashing oil in storage because it can be sold at a higher price at a later date. We have seen plenty of that over the past three years as the market buckled under the weight of too much supply.

Brent has been in backwardation for much of this year, but the backwardation has become more pronounced recently, with the December 2017 Brent contract recently trading $2 per barrel higher than the December 2018 contract, the strongest differential in more than three years. The December 2018 contract, in turn, is trading at a $1.50 per-barrel premium to the December 2019 contract—which is, again, the largest spread since early 2014, Bloomberg reports.

Related: Oil Prices Fly Higher On EIA Report

But, as many might recall, oil prices were trading in triple-digit territory in 2014, so the current state of the Brent futures market is an incredibly bullish sign. “It’s not much more complicated than this: stockpiles are falling, the market is bullish,” Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd., told Bloomberg. “The whole change in structure was triggered by the perception that global inventories are falling.”

Adding fuel to the bullish fire is a recent piece of data from the EIA that backs up the case that U.S. shale is not preforming as well as everyone thinks. The EIA recently released August oil production data, which showed that total U.S. oil output actually fell from a month earlier, dipping from 9.234 million barrels per day (mb/d) in July to just 9.203 mb/d in August.

As I have written in the past, the EIA’s weekly figures, which are more up-to-date but diverge quite a bit from the more accurate monthly figures, may be overstating output from the shale patch. For example, in June, the weekly estimates pegged U.S. output at about 9.3 mb/d. A few months later, when the monthly data came out, the EIA said June production was actually just 9.096 mb/d.

The same thing seems to occur every month—the weekly figures are undercut by lower monthly totals. But because the monthly figures come out on a several month lag, the market seems to overlook the correction. The same thing happened in August, the latest month for which data is available. At the time, the weekly estimates looked like this:

August 4: 9.423 mb/d

August 11: 9.502 mb/d

August 18: 9.528 mb/d

August 25: 9.530 mb/d Related: Trump’s China Trip To Reap Billions In Energy Deals

So, in August, we are to assume that the U.S. produced something like 9.5 mb/d, right? Yet, just a few days ago, the EIA released its more accurate retrospective monthly estimate, and put total U.S. output at just 9.203 mb/d for August—a discrepancy of about 300,000 bpd.


In other words, it’s quite possible that U.S. shale is performing worse than everyone seems to think. With rising costs, a falling rig count, production problems, and lots of debt, the shale industry is on the verge of a slowdown. Or a “midlife crisis,” as Bloomberg puts it.

As the market wakes up to the fact that U.S. shale won’t be the huge drag on prices that most forecasters have assumed, there will be much more room on the upside for prices. And with bullishness already picking up, that could translate into real price gains.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • the masked avenger on November 01 2017 said:
    More bad news for the economy.
  • George Mathew on November 01 2017 said:
    My simple view is like this, I go to a shop to buy (for eg.) palm oil when the price was at the bottom. I ask for 1000 times the quantity the oil production unit has at the time and pays the money (or enter into long term contract) for the same on an agreement that the total quantity shall be given to me in intervals. If the interval may take for sure more than 2 to 3 years, then even if the price of oil goes up, as a buyer how can this affect me?

    Most of the big oil markets like India and China has already entered into agreements with major oil producers for long term oil contracts. So how are the short term oil prices being fluctuated much? I assume that this is more like a "Company share" trading which is influenced by news from EIA and other oil agencies who get paid for such news rather than pure MARKET ECONOCMICS.
  • Al on November 02 2017 said:
    Good article Nick...

    Bullishness is warranted for the reasons you articulated, and if you factor in the possibility/probability of a supply shock in the near future, prices could go parabolic, if only for a short period.
  • Lorraine D Bradley on November 02 2017 said:
    It's not hard to see where your investment money is. Why don't you tell the whole story instead of favouring one piece of data. Besides it's always a game of catching up isn't it. Low seasonal demand is just beginning and the hurricanes are what caused the lower levels of products in storage along with increasing exports. Time changes everything so we will see.
  • Disgruntled on November 02 2017 said:
    Thank you, Nick Cunningham, for shedding light on the truth. Keep it up! We are living in the Age of Propaganda. People who can, and do, put in the work to not only bring the truth to the light, but actually point out who is responsible for habitually putting out falsehoods, well, they're modern day heroes, Knights of the modern crusade.

    As for the EIA, catch a clue! Your methodology is in error! (at best) And if it is motivated to attempt to create a false illusion of the domestic and global oil marketplace then its "authority" will dwindle to nothingness the longer it perpetuates its lies.
  • Paul D. on November 02 2017 said:
    Could it be that US production is being held back because producers expect higher prices in the future?
  • Jeffrey J. Brown on November 02 2017 said:
    In late May, Neil Dwane, with Allianz Global Investors, released a report in which he outlines "Five reasons to expect higher oil prices." Note that the current Brent price is around $60, versus $46 in June.

    Five Reasons to Expect Higher Oil Prices:

    1) Global oil demand is reassuringly stable

    2) Multiple factors will constrain the oil supply

    3) New discoveries are dwindling

    4) The US shale industry has problems

    5) Domestic production is falling in a booming Asia

    Note that Mr. Dwane references Mexico as a point of concern. Mr. Dwane did not get into Mexico's problem with net oil exports, but there is a good chance that Mexico's net oil exports will drop by about half from 2016 to 2017, down to about 0.3 to 0.4 million bpd (total petroleum liquids) versus 1.9 million bpd in 2004.

    In any case, Mr. Dwane was interviewed on CNBC in July, and he made the following points:

    There's still a major reason why oil could jump back to $120, experts say



    Oil supply could easily be threatened by geopolitical risks, and such a disruption could cause oil prices to skyrocket, experts tell CNBC.

    Neil Dwane, global strategist and chief investment officer of European equity at Allianz Global Investors, warned that oil production supply is looking threatened around the world.

    "Venezuela's 2 million barrels of oil a day could literally go any day. Mexico looks poor. Azerbaijan's in trouble. China's own production is collapsing rapidly," he told CNBC's Squawk Box on Friday.

    "One only has to have one mistake and the only thing you'll be talking about all morning is oil at $120."

    Dwane said geopolitical risks could cause prices to skyrocket as several oil producing states are fragile, and oil prices are currently too low for anyone to want to drill fresh wells which may be needed in the future.
  • david on November 02 2017 said:
    Great article Nick.

    Finally, as people in the industry have been saying this for years and even Harold Hamm on the news a few weeks ago. This assumption of reaching 10MM bbls per day in US production by the end of the year was foolish at these prices and in the 40's and 30's. The media and EIA was placing way too much attention on Rig Count and US shale production. As the price of oil fell in 2014, magically oil and gas companies in the US became more efficient (thanks slashing cost of the drilling company), production sored out of the same wells and H well techniques and the decline curves just went away. So if the US rig county up ticks by 20 wells or goes down by the same, this should not move global oil prices in large swings as it has been in the past. It should not even be a headline.
  • Jeffrey J. Brown on November 03 2017 said:
    It's taken a while, but Brent is currently trading at around $62 this afternoon, which is 100% higher than the January, 2016 monthly low of $31 that we saw for this price cycle.

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