U.S. oil inventories increased more than expected for the 8th week in a row. Oil stockpiles were expected to grow by 3.95 million barrels but came in at 10.3 million barrels. The April spot price of oil dropped below the $50 mark when the numbers first came out but recovered very quickly and actually increase in value during the day.
Capital Economics says:
“The sharp increase in crude stocks has been far bigger than we would normally expect at this time of year. But it estimates that U.S. storage tanks are around 61% full which “leaves ample space for additional barrels.” Capital Economics expects that there are “still a couple of months to go yet before we see an ease off in the growth of, let alone a decline in, U.S. oil stocks.”
Shale Production Dominates Oil Supply
Production from shale-rock formations makes up about half of the total U.S. output and the other half comes from off-shore wells, like the ones in the Gulf of Mexico. Unlike the giant gushers behind previous oil growth, the shale boom was driven by thousands of new wells that could be drilled quickly and relatively cheaply, but fade fast after an initial burst of production.
Unlike other petroleum formations, the nature of shale’s short-lived wells, means producers can stop and start drilling on a dime. This allows them to quickly cut costs in a downturn but every time prices tick up, so will their production.
According to oil analyst Allen Gilmer, “costs continue to fall as companies such as Halliburton Co. that provide drilling and other oilfield services cut their prices by 20 percent to 30 percent to retain business. Even as drilling rigs declined by a third since October, there’s been less than a 15 percent reduction in the growth of new output, showing how improved efficiencies will continue to prop up production rates.”
The business media is still speculating that oil prices may have hit a bottom because the price of WTI has been in the $50 price range for the past six weeks. Countless traders and hedge fund managers are getting more confident in recommending putting some money into the oil patch.
Article from CNBC Evening Brief:
Oil trader Andy Hall has closed out his bearish bets on oil and is predicting a price recovery in crude sooner than many analysts expect. In his most recent letter to investors, dated Monday, the chief executive of the $3.2 billion commodity hedge fund Astenbeck Capital Management harks back to a classic rationale for his bullish point of view: that the cure for low prices is low prices.
Hall said: “We suspect their projection of current prices into the future will again be frustrated by the market. For that reason we have closed out all of our bearish bets (at a substantial profit) and started adding to our bullish ones. “In short,” he wrote, “we think it is time to look beyond the rapidly building crude inventories of the next month or two and focus on the much improved supply and demand fundamentals that will assert themselves later this year.”
Keep in mind, hedge fund manger Mr. Hall is gambling with rich peoples’ money and will get a 20% bonus on any profits. He doesn’t have to repay bonus money if he is wrong!
Unlike Mr. Hall, I am going to wait until the oil storage tanks are full before considering any investment in the oil sector. Plus, the large intergraded oil companies, Exxon, Chevron, BP and Royal Dutch Shell will all report their earnings near the end of April. I would prefer to see some earnings and guidance going forward before investing.
I wouldn’t be surprised that both BP & Shell will have to cut their annual dividend. I have a feeling that their future earnings will not be enough to cover the cost of their current dividend.
(Bloomberg) — Exxon Mobil Corp. sold $8 billion of debt in its biggest bond offering ever and the largest energy-related deal since the plunge in crude prices that began in July.