As INTL FCStone’s James Burr said ever so perfectly yesterday, “There is a distinct lack of news to drive the energy market…” He couldn’t have been more spot on. The market is very much in a “lull.” Of course, there have been some supply disruptions recently: pipeline leaks, refinery turnaround (both unplanned and planned), and even natural disasters in the Southeast, but none these have been out of the norm or significant major market movers. It seems that all eyes and ears are on OPEC and any relevant conversations in preparation of the meeting next month.
The market has been relatively flat the last few weeks as WTI crude has wavered no more and no less than two dollars above or below $50/bbl. According to OPIS, the “tame” futures market has allowed the physical market to move on its own fundamentals rather than follow suit behind what its respective paper prices are doing. This may well continue to be the case during the majority of November as OPEC gossip continues regarding the end-of-month meeting in Vienna. Some of the most recent chatter has been:
- Russia’s oil giant, Rosneft, insisting that it is not going to cut back but rather increase output.
- Iraq, OPEC’s second largest producer, has asserted it should be exempt from any OPEC production cut because its oil production revenue is currently needed to fight the Islamic State.
The oil industry has obviously been in a two year slump in which we saw prices fall from over $100/bbl to under $30/bbl and most recently hover around the $50 mark. While great for consumers at the pump, the most downstream part of the supply chain, a real burden has been put on the global oil companies, many of which are the largest companies in the world. Many major oil companies have posted net losses, delayed many projects, decreased investments and dividend yields, and most unfortunately laid off thousands of workers. Q2 earnings were much worse than expected. Chevron, BP, Shell, and Exxon, to name a few, all reported losses, and Q3 reports are looking bleak as well. According to Bloomberg.com, three out of the four oil majors that have reported Q3 earnings showed a net loss, and many investors expect just as much from the big four, whose Q3 earnings reports come out in the next few days.
To make matters worse, an increase in the efficiencies and processes of major oil companies, in order to limit their losses, followed in the wake of lower oil prices. In turn, shale production here in the U.S. has been able to continue pumping, which has added to the over-arching global supply-glut. However, in the near future, possibly just 2-3 years out, there may be some upside potential in store for oil majors. From mid-2014 till now there has been a decrease in exploration spending which has caused a drastic drop in crude oil discoveries. This could potentially lead to a supply shortage which would then give a much needed boost to crude prices.
Do we have to wait until then? Or will an actual agreement come from the meeting on November 30th? Time will tell.
WTI crude is currently down 24 cents to $40.48, RBOB is up 24 points, and ULSD is down 86 points. We may be teased with nice weather this weekend, but don’t be fooled, winter is upon us. It’s time to start stocking up on heating oil and thinking about winter operability. Your sales representative will happily guide you through what it takes to keep your fuel protected this coming winter.