- Oil Production in the US powered higher to 10.3 million barrels per day (mbpd) (see right) and the oil-drilling rig count increased from 765 on February 2nd to 800 on March 2nd. Crude production from major shale formations is expected to rise in March by 111,000 bpd from the previous month to 6.76 mbpd. US’ EIA forecasted similar to higher new well productivity per rig versus the previous month for the major shale plays: 1,421 bpd versus 1,404 bpd (Bakken), 632 bpd versus 632 bpd (Permian) and 1,345 versus 1,287 bpd (Eagle Ford). In summary, the US is on track to set a new record later this year in every metric. The IEA in its February report predicted that the US’ oil production will surpass Saudi Arabia’s by averaging 10.4 mbpd (+260,000 from previous forecasts) this year and overtake in 2019 the largest oil producer, Russia, at 10.95 mbpd (Russia’s February’s output). Furthermore, the agency predicts that the rise in global oil production, led by the US, is likely to outpace growth in demand this year, despite an uptick in their forecasted demand growth. OPEC, of course, sees world oil demand growing faster than expected in 2018 because of a healthy world economy, but still predicts that the global market will return to balance only towards the end of 2018, no earlier than previously estimated.
- While OPEC and Russia are holding to current cuts, no decision has been made about extending them into 2019. There has been some discussion of changing the measurement to a days-cover method (days of supply to cover existing or forecasted demand), which may allow production to slowly increase without the headline risk of policy change. Perhaps they are trying to be cleverer than the Federal Reserve and other central banks who are changing monetary policy. Meanwhile, OPEC oil output fell in February to a 10-month low as the United Arab Emirates joined other Gulf members in further reducing production, pushing compliance to its highest level yet. OPEC pumped 32.3 mbpd in February, down 70,000 bpd from January. The February total is the lowest since April 2017. Troubled Libya and Nigeria did have strong production in February but consistency is questionable.
- US net crude oil imports fell from 7.75 mbpd in 2013 to 6.91 mbpd in 2017. As a matter of fact, if you include Canadian and Mexican crude oil exports into the US as “domestic” production then that target has already been reached. The main threat to North American oil independence will be the July elections in Mexico – if the leftist candidate Obrador wins, then a likely return to fuller state control of the oil industry could reverse foreign investment in Mexico and renew the slide in their oil production (as had occurred in Venezuela). Electric vehicles are no a serious alternative for more than a decade(s) from now. China imports in January hit a record 9.6 mbpd. The launch of their new oil futures contract on March 26th in Shanghai should be off to a good start as many state and local refineries can now hedge in the local currency and use local quality specifications. The delivery locations have not been made public at the time of this writing, however and foreigners may not be allowed to participate (and still would face capital controls prohibiting/limiting the extradition of profits).
- Despite having the largest oil reserves in the world, Venezuela imported more oil from Russia to either mix with its domestic crude to be able to process it or to maintain production without costly interruption (refineries take time to stop and restart – they are more complicated than a light switch!). The refineries were already running at a minimum 40% capacity. Venezuela also does not have the money to pay for the Russian crude oil. Maduro’s launch of a crypto-currency (the Petro) will not save him – one cannot trade it for oil (despite the government’s purposeful obfuscation) – one can only pay government taxes with it, just like with the “regular” currency – but Bolivars cannot be used to buy Petros so regular people are shut out from using it. Therefore, buying Petros is just another form of donation to the Venezuelan government. No real change expected in their upcoming May elections where citizens can vote for anyone as long as it is Maduro (or implicitly his Vice President Tareck El-Aissami, a Lebanese with ties to Syria’s Baath party and Hezbollah who has been accused by the US of corruption, money laundering and drug trafficking). Interesting Venezuela – Syria – Russia triangle here.
Tug-Of-War in Grains
As plentiful supplies weighing on prices were challenged by weather issues affecting wheat and soy, particularly. Crop conditions in drought-saddled Argentina tumbled as forecasts remain stingy with rainfall into early March. The Buenos Aires Grain Exchange revised the country’s soy forecast down to 44 million metric tonnes from 47 previously (the corn forecast was unchanged at 37 million metric tonnes). On the other hand, Brazilian farmers are expected to harvest a record 117.5 million tonnes of soybeans in the 2017/18 crop cycle, up from expectations last month of 114.1 million tonnes which would be above last year’s record-large harvest. The soy harvest is well underway (27% done as of February 28th) in Paraná, Brazil’s second largest grain-producing state. US farmers will plant the same amount of soybeans and corn this spring, potentially marking the first time since 1983 that corn has not been the nation’s top crop. Soybeans have gained favor on rising global demand, especially from China. However, the US corn and soybean harvests for 2018 were forecast to come in below the levels reached in 2017 (though supplies should remain abundant). The US has been the world’s biggest corn producer and exporter, and the number two soybean exporter after Brazil.
David Burkart, CFA
Coloma Capital Futures®, LLC
Special contributor to aiSource