Latest Market Commentary

January 23, 2017

OPEC members and non-OPEC members of the compliance group meet over the weekend in Vienna to determine how the compliance with the cuts is progressing. I have not seen any official details but the overview and the headlines so far are that compliance is very good. So much so that Saudi Arabia oil minister said that he believes 1.5 million bpd of production was cut during January. The target is to take 1.8 million bpd out of the market. Some market watchers see this as a possible point to rally prices during today’s market but so far the early trading has been lower.

But there is bearish news to go right along with the support of strong compliance. Baker Hughes Rig Count report on Friday reported that the US added 29 oil rig last week a strong sign that higher crude prices continues to see the number of shale rigs increase. That jump of 29 oil rigs is the largest weekly increase since April 2013. The Perming Basin added 13 rigs and that takes it to the highest level of operating rigs since March 2015. The US is currently operating 551 oil rigs, last year at this time there were 510. The US has 142 natural gas rigs, up 6 this past week, and 1 miscellaneous rig, which is unchanged on the week. Canada had 342 rigs in operations, 149 natural gas, 193 oil rigs, and no miscellaneous rigs. In Canada oil rigs were up 23, natural gas rigs up 5, and miscellaneous rigs were down 1.

The spending by US shale producers is called to be substantially higher according to a story in the Wall Street Journal. The assumption the story makes is that this is an indication that higher prices are expected to hang around awhile as these large investments by shale firms is an indication. The recent release of capital spending plans by several of the large shale driller is on average an increase of 60%.

Libya’s oil production has continue to increase and that is a bit of a bearish factor for oil. Libya is an OPEC members but they are exempt from the current agreement and their production is being reported at 722,000 bpd after bad weather scaled it back.

The CFTC data from last Friday is showing that large speculators have again increased their net length in crude oil. The market is searching for direction and many traders are calling for a period of congestion and range bound trading. The large speculative positon is an indication that at some point this market will get bumped out of it range when these funds decide to move.

With crude oil prices above $50 dollar per barrel, the number of rigs and shale fracking has been on the rise in the U.S. Some experts are calling for Brent crude oil to trade in a range of $50 to $60 dollars per barrel. The $50 dollar floor is due to the OPEC and non-OPEC production cut agreement and the $60 dollar per barrel cap is due to the increased shale fracking. Others have called for a $40 dollar per barrel to $60 dollar per barrel range for WTI crude oil. With all the uncertainty of cuts versus shale production it will be a rock road moving forward which will keep volatility high even if the market trades in a $20 to $30 dollar range.

Tim Danze, MFA Oil Company Hedging Manager