Misleading Builds and Permian Thrills

By: Jon Kalchthaler / February 9, 2017

The importance of OPEC sticking to its cuts through the rest of the year seems to be more and more imperative as time goes on. CNBC reports today that crude is approaching a “danger zone.”  Through the beginning part of 2017 thus far, crude oil has dropped over 2 percent.  A large contributor to this decrease is demand.  Boris Schlossberg, BK Asset Management’s managing director of foreign exchange strategy states, “The irony of this whole thing is that OPEC cuts are holding, but the demand is not there. And the longer oil wallows at this $52 level, the more likely it's actually going to go to the downside. And if it trips to $50 a barrel, I think it could really tumble very quickly. So I think we're in a perilous territory."  It would appear that on the inverse of this there are bullish views on the market ahead.  Even with a large build in our crude inventory Wednesday, the price held up, which appears to be a sign that for the upcoming 3-6 months everyone is relatively comfortable with where the market is.

January 1st marked the beginning of OPEC production cuts and as of this week we have seen the second largest build in crude, 13.8 million barrels, on record.  This jump, according to Goldman Sachs, is attributed to a large surge in imports with a concentration in the Gulf Coast.  There is a disconnect here though that could soon be revealed.  Starting closer to March we could see this trend reversed.  Transit time from the Arabian Gulf to our shores is roughly 47 days.  With the OPEC cuts in place and analysts seeing waning vessel demand, we should begin to see the decline in imported products as soon as late February/early March.  Goldman Sachs states, “As a result, we do not view the recent excess U.S. builds as derailing our forecast for a gradual draw in inventories, with, in fact, the rest of the world already showing signs of tightness."

In other news we saw another very large acquisition of land in the Permian Basin. Parsley Energy, a driller based in Austin, TX, announced it acquired 71,000 acres of land from Double Eagle Energy Permian.  With that addition of land it now holds 227,000 acres in the Permian.  The transaction falls short of the most recent deal—Exxon Mobil’s purchase of over $6 billion worth of Permian Basin land—but it still racked up a hefty total of $2.8 billion for the oil and gas rich parcel.  Back in the 80’s, many of the larger players in the game found that shale drilling was not worth the investment and focused on deep sea drilling instead.  As horizontal drilling technology continues to improve, areas like the Permian are attracting the sea dwellers back to the mother land.  Between West Texas and parts of New Mexico acreage, which makes up the Permian, the land could yield roughly 20 billion barrels of oil, an estimated 16 trillion cubic feet of natural gas and 1.6 billion barrels of natural gas liquids.  Penn Energy reports, “The discovery is nearly three times larger than the shale oil found in 2013 in the Bakken and Three Forks formations in the Dakotas and Montana.”

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Categories: Daily Market Update


Jon Kalchthaler

Written by

Jon Kalchthaler


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