Despite speculation that a rise in shale output would test the resolve of the OPEC/Non-OPEC accord, the two players that matter, Saudi Arabia and Russia, appear ready to double down on their production cut strategy. Saudi Energy Minister Khalid Al-Falih and Russian Oil Minister Alexander Novak, in an interview with Bloomberg News, both said that they in agreement that production cuts should continue throughout the rest of this year and that they may be laying the groundwork for an extension into 2019.
The resolve by the two kingpins of this historic agreement is another blow to the bearish arguments that we have been hearing. The oil bears have tried to laugh off this OPEC and Non-Opec accord for the last few years, but they are not laughing anymore.
Traders laughed off the International Energy Agency’s "no change in demand forecast" because it is clear to all non-biased readers that demand is going to grow in the next year. Their prediction of so-called "explosive” shale oil production growth is also being brought into question. For a major reporting agency using hyperbole like the word "explosive" seems like a desperate attempt to get attention and try to get attention to support the position of the consuming countries that they represent. We know that demand is strong and we are seeing it week after week.
Shale oil producers may not see the “explosive” growth predicted as they start to get smart. The Wall Street Journal reports that “frackers could make more money than ever in 2018, if they don’t blow it!” Oil companies, listening to investors, promise modest drilling as oil prices rise, but skeptics remain. The Wall Street Journal also reports that shale drillers are heeding growing calls from investors who have chastened the companies for pumping ever more oil and gas even as they incur losses doing so. But some investors and analysts remain skeptical that U.S. wildcatters will fulfill promises to live within their means, saying that higher prices have almost always led them to boost drilling.
“These companies can say that, but will they follow through?” said Norm MacDonald, vice president and portfolio manager at Invesco Ltd. “Given what oil prices have done in the past few months, the proof will be in the pudding.”
The speculators obviously are getting it as they pushed their net long position to a new record high despite the weakness that we experienced in price last week. Hedge funds and large speculators raised their net long crude position to 707,787 contracts. This was a weekly gain of 50,197 contracts from the previous week which had a total of 657,590 net contracts. While some say this is a sure sign that a major correction is bound to happen at any moment, the truth is that they have been saying that for weeks.
Consider that hedge fund and large speculator positions have now gained for seven out of the last 10 weeks and bullish bets have jumped by +83,574 contracts in just the past two weeks. Along the way, we have set records and yet the specs are not being shaken out. Is it because they are seeing the facts?
Facts like that of OPEC and Non-OPEC sticking to cuts. Or that supply in the United States is draining at a record pace. That global oil demand is going to set a record in the new year. Or that shale oil producers are just going to flood the market with explosive growth.
Trilby Lundberg, the “princess of petroleum” and the “mistress of the pumps” reports that the average retail gasoline price was up 4.4 cents in the past two weeks. That puts it at $2.5823 for regular grade. That is up more than 7 cents since mid-December. What is more, Trilby is warning that higher oil prices have not yet been fully passed through to the consumer! In fact, she says, gasoline retailers have now lost another penny of business margin and their average 13.5 cents gal. is unsustainably low. U.S. refiners gained a tiny tad of gasoline margin, but it remains narrow, far below that of 2017. The nation's overall refining capacity use rate has just slipped by 3.7 percentage points, reflecting tough straits for refiners; however, the use rate is still strong at 93%, some 3.4 points above its year-ago point.
As gasoline demand suffers this time of year due to fewer daylight hours and bad weather, it is tough for downstreamers to hike prices. If oil prices don't suddenly retreat, though, we may soon see another 4 to 8 cents at the pump. So fill up today, before it is too late!