The oil patch is taking a breather today as February WTI crude trades lower by $0.86 to $63.09/barrel. Much of the bearish sentiment today is being attributed to the IEA monthly report which is estimating a larger increase in U.S. production in 2018 than originally thought. This, coupled with the fact that oil is still trading near highs not seen since December 2014 has traders taking profits before the weekend.
The IEA (International Energy Agency) today raised its U.S. production growth target for 2018 by an additional 240,000 barrels per day. This means that it now expects the U.S. to add 1,350,000 barrels per day of incremental capacity over its 2017 production levels. The U.S. would then have north of 11 million barrels per day of production, knocking off Saudi Arabia and Russia as the world’s largest oil producer.
This incredible rise in the production forecast is largely attributed to the highest oil prices we’ve seen since late 2014. It’s also due to the fact that Brent continues to trade at a premium to WTI; March Brent trades about $6/barrel higher than WTI. This allows the U.S. producers to pick and choose if they want to sell American refiners or refiners abroad at higher prices.
What will be interesting to learn a few months down the road is to what magnitude U.S. producers are hedging their production. The sharp rise in prices over the second half of last year until now, allows producers to hedge production out 18 months at much higher prices than just a few years ago. This means that even if we do have a correction downwards by $5-15/barrel, we could still see an increase in domestic production. You go America!
February RBOB trades lower by $0.0232 to $1.8603/gallon and ULSD is off by $0.0107 to $2.051/gallon.