May 2019 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil reversed course in May when falling by $3.04 (-4.8%), to $60.83 per barrel. The increase occurred within the context of a stronger U.S. dollar, the lagged impacts of a 10,000 barrel-per-day (BPD) drop in the amount of oil supplied/demanded during March (to 20.2 million BPD), and an expansion in accumulated oil stocks (May average: 483 million barrels). 

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From the 3 June 2019 issue of Peak Oil Review:

Oil prices fell on Friday posting their biggest monthly drop in six months, after President Donald Trump threatened tariffs on imports from Mexico.  Unless the Mexican government stops people from illegally crossing into the U.S., he would impose a 5 percent tariff on imports starting on June 10th that would increase monthly, up to 25 percent on Oct. 1.   Following the threat Brent crude futures fell $2.38, or 3.6 percent, to settle at $64.49 a barrel and New York futures fell $3.09 to $53.50 a barrel, a 5.5 percent loss.  Brent touched a session low of $64.37 a barrel, lowest since March 8.  WTI hit $53.41 a barrel, weakest since Feb. 14.  During May Brent futures posted an 11 percent slide and WTI 1 percent, their largest monthly losses since November.

U.S. refiners import some 680,000 b/d of Mexican crude so that a 5 percent tariff would add an additional $2 million to the cost of their daily purchases and a 25 percent tariff an extra $10 million.  Given the scale of the pushback from the Congress and the many organizations that have interests in the U.S.-Mexico trade, it seems unlikely that the tariffs will be imposed. 

Other important factors bearing on the price decline last week were the on-going U.S.-China trade war and the U.S. stocks report showing that the U.S. crude inventories decreased by less than 300,000 barrels.  The American Petroleum Institute had estimated a 5.2-million-barrel drawdown earlier in the week sending the markets higher.

On the last day of every month, the U.S.'s Energy Information Administration releases its Petroleum Supply Monthly, which contains the U.S. oil production number up to 60 days before publication. While the newest of these numbers are two months old, they are more accurate than the forecasts the EIA releases in its Drilling Productivity Report on the 15th of each month.  Recently these forecasts have been too optimistic about how much shale oil would be produced in the coming month forcing revision when the actual production numbers become available ten weeks later.

When the May production numbers were released on Friday, Reuters headlined its conclusions as "U.S. crude output rises 2.1% in March to a near record high."  While this sounds great, digging into the details tells another story.  The EIA has been predicting that U.S. crude production, which now is critical to global economic growth, will grow by some 1.2 million b/d this year.  While U.S. production was up in March, it has been largely static for the last six months with production in November and December 2018 slightly higher than in March 2019.  Growth in output between February and March largely came from a rebound in North Dakota production which was hampered by frigid weather in February.  The other significant increase during March was an 11 percent increase in Gulf of Mexico production, which usually comes when a new production platform comes online and is unlikely to grow much in coming months.

The most interesting revelation in the report was that oil production in Texas declined by 0.1 percent between February and March to 4.873 million b/d.  This decline suggests that the press stories saying that small and medium-sized shale oil drillers are cutting back may be showing up in production numbers. The decline further suggests that the U.S. will have difficulty in achieving a 1.2 million b/d increase this year.  On the positive side, the new numbers show that oil production in New Mexico was up by 23,000 b/d last month and up by 39.5 percent since March 2018 to 870,000 b/d.  This westward extension into New Mexico's portion of the Permian Basin seems to be the fastest growth area in the shale oil industry.

The OPEC+ Production Cut: Preliminary figures show that OPEC's production dropped to a four-year low of 30.17 million b/d in May, as a 200,000 b/d increase in Saudi production was not enough to offset Iran's and Venezuela's lower output.  Crude oil has fallen from a six-month high above $75 a barrel in April to below $65 on Friday, due to concerns about the economic impact of the U.S.-China and U.S.-Mexico trade disputes.  This decline in prices is likely to affect the decision on whether to extend the production cut that is to be taken at the end of this month.

Despite the U.S. sanctions, Iran was able to ship out about 400,000 b/d last month, less than half as much as it exported in April.  Venezuela's production fell by 50,000 b/d in May due to the impact of U.S. sanctions and long-term deterioration of its production infrastructure.  Output also dropped in Nigeria because of a pipeline shutdown that disrupted exports.

The decline in oil prices increases the chances that that OPEC+ production cut will be extended for another six months at the June 25-26 meeting to consider the cuts.  The Saudis have been hinting for weeks that they want an extension and we have indications that Russia may be changing its position. Moscow's Finance Minister Siluanov said last week, "there are many arguments both in favor of the extension and against it, but we see that all these deals with OPEC result in our American partners boosting shale oil output and grabbing new markets."  Russia's energy ministry and the government will determine their stance on the pact's extension after weighing these pros and cons and the longevity of current market trends.

U.S. Shale Oil Production: Despite the hype of lower breakeven prices, and the hype around longer laterals, energy digitalization, and other technological breakthroughs, most shale companies are still not profitable.  Nine in ten U.S. shale oil companies are burning cash, according to Rystad Energy.  The consulting firm has studied the financial performance of 40 dedicated U.S. shale oil companies, focusing on cash flow from operating activities.  Free cash is the money available to expand the business, reduce debt, or return to shareholders.  Only four companies in the group reported a positive cash flow balance in the first quarter of 2019, bringing down the share of companies with a positive cash flow balance from the recent average of around 20% to just 10%.

Evidence continues to mount that U.S. shale oil production is slowing.  Last week, Schlumberger, the largest oilfield service company in the world, saw its debt rating downgraded by S&P due to the slowdown in drilling by U.S. shale companies.  Meanwhile, rival Halliburton saw its outlook downgraded from "stable" to "negative."   An analyst at S&P wrote in a report, "The oilfield services industry has fundamentally changed due to permanent efficiency and productivity gains realized by E&P companies as well as investor sentiment calling for E&P companies to live within cash flow and limit production growth."

Independent shale drillers in the U.S. are facing pressure to either expand or be acquired, Robert Kaplan, president of the Federal Reserve Bank of Dallas, said recently.  "Smaller, independent drillers are losing access to capital and hearing complaints from shareholders."  In the Dallas Fed's most recent Energy Survey - a quarterly poll of about 200 oil and gas companies - one anonymous oil industry executive wrote that "the shrinkage in market capitalization of some companies is breathtaking."

North Dakota drillers are falling short of the state's goals to limit the burning of excess natural gas.  This situation comes five years after the state adopted rules to reduce the environmentally harmful practice. The industry has spent billions of dollars on building new infrastructure but is at least two years from catching up.  Regulators are saying that the state's increasing gas production will continue to outstrip new pipeline capacity to pipe it away.

Occidental Petroleum acquired some of the richest shale oilfields in Texas when it beat out Chevron Corp in a bidding war to acquire Anadarko Petroleum.  It also quadrupled its debt - to $40 billion - at a time when investors are calling for spending cuts and higher dividends.  The acquisition's success will depend on how quickly Occidental can sell off some of Anadarko's assets and focus on optimizing and integrating the assets it keeps - especially the U.S. shale fields.  Corporation activist investor Carl Icahn has filed a lawsuit against the company over what it called its "misguided" acquisition of Anadarko and may seek a special meeting to remove and replace board members. 

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Selected highlights from the 31 May 2019 issue of OilPrice.com’s Oil & Energy Insider include:

Oil prices are on track for their largest monthly decline in six months. The Trump administration exacerbated the selloff with another threat of trade escalation.

Trump threatens Mexico with 5 percent tariffs. President Trump threatened to slap a 5 percent tariff on all goods imported from Mexico beginning on June 10. In a tweet, he said that the tariff would gradually increase over time unless illegal immigration stopped. The announcement is also a serious blow to attempts to pass the NAFTA 2.0 agreement, which needs be ratified in the national legislatures of Mexico, the U.S. and Canada. "The decision, understandably, is sending shivers down investors' spines," PVM said in a note. "U.S. refiners import roughly 680,000 barrels per day of Mexican crude. The 5% tariff adds an extra $2 million to the cost of their daily purchases."

Fed under pressure to cut rates. The escalating trade war, which may now include Mexico, has led bond investors to bet that the U.S. Federal Reserve will cut interest rates. If the trade war is not resolved soon, "the patience needed to keep from easing will be severely tested sometime in the months ahead," Steven Blitz, chief U.S. economist at TS Lombard, told the Wall Street Journal. For now, the central bank is not making any moves.

Trump to lift summer E15 ban. The Trump administration has approved the sale of higher concentrations of ethanol in summer months, a move that will be welcomed by ethanol producers and American farmers, already battered by the trade war. Until now, the 15 percent ethanol mix was only allowed to be sold eight months out of the year over concerns about smog in summer months. The oil and refining industries oppose the move and will likely launch legal challenges.

OPEC output falls by 60,000 bpd in May. A Reuters survey puts OPEC's production at 30.17 million barrels per day in May, down 60,000 bpd from April and the lowest figure in nearly four years. Saudi Arabia increased output by 200,000 bpd, but Iran lost 400,000 bpd.

U.S. delays petrochemical sanctions on Iran. In what is being interpreted as an attempt to dial back tensions, the Trump administration has delayed sanctions on Iran's petrochemical sector.

Oil majors won't bail out struggling Permian drillers. The oil majors have said that they will not overpay for indebted and struggling drillers in the Permian. There is "not always alignment among buyers and sellers," ExxonMobil (NYSE: XOM) CEO Darren Woods said Wednesday, a diplomatic way of saying that smaller companies are demanding too much. He suggested that these companies will be squeezed over time and will lower their expectations.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.