Sweet $60 crude

February 28, 2017 08:38 AM
Daily Energy Market Analysis

Saudi Arabia has found its sweet spot for oil and that number is $60 a barrel per Reuters. That is a number the Saudis believe will allow them to prosper and not be high enough to make U.S. shale output a major threat. Saudi Ariba knows that while higher prices for oil will allow some of the more economical shale plays like in the Permian basin to come back on line, it is still too low for some of the other shale plays that may need oil in the 70’s to make sense.

That is not stopping hot money from trying to secure shale fields. As investors start to realize that the big oil cap x retreat could reduce future oil production by five million barrels a day, the shale investment play is looking to try to fill a part of that void. That may be risky if OPEC decides to start another production war, but that is a debate for another day. Right now, OPEC compliance is at an all-time high and even as the OPEC secretary general Mohammed Barkindo has shown a little disappointment with non-OPEC cooperation, the desire of Saudi Ariba to get prices higher should mean that OPEC cuts will be extended.

Barkindo told Reuters that the "worst was over" for the oil market. "For non-OPEC countries, this is the first time, so we can expect teething challenges," Barkindo told a conference in Abuja, Nigeria. "But the commitment from all ministers, all participating countries, is very strong. “We remain optimistic that the worst is over for this cycle," he said, referring to market conditions. "Now the challenge is how to solidify the platform of 24 (countries)," he said, referring to 13 OPEC and 11 non-OPEC members. Signals are highly positive." He also said the oil market needed every barrel which cut-exempted Iran, Libya and Nigeria could produce."

U.S. oil exports that are at a modern-day record will continue to change the way U.S. oil inventories are viewed. We expect that we will see U.S. oil inventories start to fall as refiners start to come out of maintenance. Remember when the trade talks about inventories at a 30-year high and we could not export oil for the last 30 years.

U.S. demand expectations are also right with President Trump, who is talking about a historic, "10% increase in defense spending ahead of the President’s speech before congress." That size of an increase in defense spending, if approved, would increase demand for energy as the United States Department of Defense is one of the largest single consumers of energy in the world. Per Wikipedia, "The DOD was responsible for 93% of all U.S. government fuel consumption in 2007 (Air Force: 52%; Navy: 33%; Army: 7%. Another DoD: 1%).  In fiscal year 2006, the DOD used almost 30,000 gigawatt hours (GWH) of electricity, at a cost of almost $2.2 billion.”

Reuters reports that President Trump has said previously he would expand the Army to 540,000 active-duty troops from its current 480,000, increase the Marine Corps to 36 battalions from 23 – or as many as 10,000 more Marines – boost the Navy to 350 ships and submarines from 276, and raise the number of Air Force tactical aircraft to 1,200 from 1,100. That type of increase would raise energy demand.

The President has also shown concern about dollar strength, which could affect gold and silver prices along with crude. Dollar strength has kept oil and gold prices in check even as they continue to work higher. I think the way these commodities have stood up in the face of a stronger dollar speaks to its overall bullish fundamentals.

RBOB futures are turning more positive as the markets focus will turn toward the summer blend. Winter blend in storage will need to be worked off and exported while they rebuild summer stocks. Traditionally this process will add .15 to .25 cents at the pump.

Natural gas continues to get hammered as winter is on holiday! It will be 60 degress in Chicago on Feb. 28 and that is reason enough.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.