Crude: Nothing really matters
After those EIA numbers came out yesterday, all I could think was that we need to get to this June FOMC meeting and a rate hike. Once we get there, we’re probably going to see U.S. production start to pump the brakes. The rising rig count and the increasing production week to week will come to a crawl. Producers have some room on margin, but with oil prices not wanting to go much higher than the current $50 area, there’s not a lot of room left. Now if you raise interest rates and maybe start to squeeze a bit on tightening credit to wildcatters and boom goes the dynamite. Of course, we don’t have to leave it only to those things, there’s also the rising cost of equipment, services and labor. When we catch up with the Unemployment figures on Friday, keep an eye on the hourly earnings. If those are moving up, yay America, but it will be disheartening to oil producers that are going to have to start increasing budgets. And we all know how that played out at the end of 2014.
This is all coming to a head when you look at this high supplies of crude oil, the 7/11 mentality of U.S. crude oil producers and a record high pace of refinery runs. Starting from the last to the first here, we’re now at back to back refining runs over 17mm b/d. It’s not only 2 weeks in a row over 17mm, it’s the two highest weekly refining run numbers on record (17.3, 17.2). The thing is, America doesn’t do such a great job running light shale produced crude oil. Oh, the teeming millions know I had high hopes for switching the slate this past Spring turnaround season, but nothing much happened. Now we get back to those U.S. crude producers that think they are making Cabbage Patch Kids in the 1980’s. There’s an idea that there’s no stopping this craze and soon everyone else around the world is going to catch the fever too. Uh, no.
This is where we’re coming close to see a big shift in oil prices. Given the way that America is producing more and more shale crude. The way that more Canadian is coming into the U.S. at a torrid pace of 3.2mm b/d in 2017. And the way we’re still finding plenty of buyers for Saudi, Venezuelan and Iraqi crude. We’re on the path to flipping price premium from light, sweet grades to heavy, sour. Go figure it can happen right when we hit Summer driving season and one would think that light sweet and it’s higher yield for gas would be a gimmie. We’re setting up a scenario that may just turn around the game and send the rest of the world into mass hysteria. That’s right, cats and dogs living together. For all we know, Justin Bieber may come out looking like an adult and Britney Spears will become our generation’s, Cher. It’s a lot ot handle, but if you’re watching the stats and more importantly, the sideways action of this oil market, you can see there’s a primer here for something shocking. The way rational markets work is that sooner or later, something irrational jolts it out of normalcy and then it can readjust to balance. I’m all on board with this theory and the way I am seeing it, there’s a swan out there and it’s covered in black oil.