The world did not blow up over the weekend so the global markets are feeling a bit of optimism. A Trump Administration official over the weekend tried to assure us that we are not on the verge of a nuclear war so the markets felt a bit better. Fear that the short VIX trade could blow up in the markets face has eased, but the risk of it has not gone away. Reports about security threats at Libya’s biggest oil field has caused the country to reduce crude production by more than 30%. Yet oil seems to be a bit worried about numbers on China’s oil demand and is not joining in the “i’m still standing” market.
Chinese July refining rate fell in July according to the national Bureau of Statistics which reported that runs fell to the lowest level since September of 2016. The drop is raising concerns about the demand for oil products such as gas and diesel where there already is plentiful supply in the region. There may be more if they decide to cut North Korea supply.
The US oil rig count is still rising but more slowly and not enough to make up for the lack of completions and the existing well production decline rate. Baker Hughes reported that oil rigs increased by 3 to 768 rigs, but natural gas rigs fell by 5 to 949. The slowing rig count will mean that US production will start to level off and drop.
Shale producers will continue to struggle as oil stays sub $50 a barrel. Many may be able to produce at sub $50.00 levels but can’t make money because of debt and well head economics such as rising costs. One shale producer has vowed to not make the same mistakes that other shale producers are making.
Reuters reported last week that Continental Resources Inc, one of the largest U.S. shale oil producers, will fund future wells from cash flow and not take on any new debt, Chief Executive Harold Hamm said on Wednesday. The vow from one of the shale industry leaders and strongest advocates comes as prices mostly below $50 a barrel this year pressure oil companies to live within their means after overspending for years.
Heavy debt loads nearly decimated U.S. shale producers when oil prices started to tumble in 2014. The number of bankruptcies in the U.S. shale patch from 2014 through 2016 eclipsed the depths of the telecom bust of 2002 and 2003, a previous high-water mark. Continental, which operates in North Dakota and Oklahoma, famously stopped hedging in late 2014, expecting oil prices to rebound. They didn’t, and the company’s debt load jumped 15 percent to $6.54 billion, but that appears to be at an end. “Absolutely no new debt. That’s part of our plan, the strategic plan going forward to knock our debt down,” Hamm said on a conference call with investors. The company will forgo some growth opportunities as it curtails spending and spends only as much as it takes in, Hamm said. The announcement came the day after Continental cut its 2017 capital spending plans and raised its production estimate, essentially promising it could do more with less. “We actually have postponed some development in some very lucrative fields,” said Hamm. “In the meantime, we believe that the long-term oil supply cannot be sustained at $50 WTI. There simply won’t be adequate capital investment long term at this price to adequately supply market demand growth,” Hamm said.
Capital investment will cut into production. Energy investment is at the lowest level in decades and if you do not think that is going to catch up with us, then you might be in for a big bullish surprise. As oil starts to consolidate we believe we are still on target for oil to end up near $80 a barrel when the winter rally begins.
Natural gas is on the rise. A return to summer is going to boost demand possibly driving supply in storage below the five-year average in the coming weeks for the first time in at least 3 years. This could set the stage for a big-time rally. Buy calls!
— Phil Flynn
Warmer temperatures and rains forecasted have the Grains taking another leg down. The August Grains expire today and we also have weekly Export Inspections at 10:00 A.M. and Crop Progress at 3:00 P.M. In the overnight electronic session the September Corn is currently trading at 356 ¾ which is 4 cents lower. The trading range has been 359 ¼ to 356. We are still a sellers’ market until further notice.
On the Ethanol front the September contract is currently trading at 1.566 which is .009 of a cent lower. The trading range has been 1.575 to 1.566 with 11 contracts traded and Open Interest at 705 contracts.
On the Crude Oil front the market is trading a little easier this morning with no real headline to ignite a fire. In the overnight electronic session the September contract is currently trading at 4848 which is 34 cents lower. The trading range has been 4890 to 4843.
On the Natural Gas front weather is keeping this market lower this morning with no real extremes in heat after last week’s rally with Thursday’s bullish Gas Storage data. In the overnight electronic session the September contract is currently trading at 2.968 which is 1 ½ of a cent lower. The trading range has been 3.018 to 2.966.
— Daniel Flynn
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