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Weekly Oil Markets Recap – Prices Fall Despite Bullish Storage Report

Welcome to the weekly oil markets recap edition of Oil Markets Daily!

WTI (USO) finished the week lower by 1.65%.

Oil prices started the week strong with Wednesday’s EIA storage report pushing WTI to $47.32/bbl and closing above the 50-day moving average. However, the rally didn’t hold as some traders took profits on the rally and the uncertainty from the OPEC and non-OPEC meeting on July 24 hung over the market. In addition, Petro-Logistics wrote in a report on Friday that said OPEC’s oil production for July will likely exceed 33 million b/d.

As oil prices continue to flutter around $45/bbl, we are starting to see US rig growth stall. On Friday, Baker Hughes reported -1 in oil rigs as major shale basins in the US are beginning to see a slowdown in rig additions. This should not come as a surprise as oil prices are no longer in the territory where they supports shale growth.

In fact, over the last two months, the market is slowly catching on to the narrative that without external capital, US shale growth would actually be flat year over year. It’s the outspending that is contributing to the aggressive production growth assumptions. As the Federal Reserve is on pace to further reduce stimulus, we believe higher interest rates as a result of unwinding the balance sheet will directly impact shale producer’s ability to access cheap financing. This, in our view, will put additional headwinds on US shale producers alongside servicing cost inflation, lack of field workers, and increasingly higher field decline rates.

Next week will be important to watch…

There are important events unfolding next week. First, the OPEC and non-OPEC meeting is on July 24, and the market will be watching closely regarding whether Nigeria and Libya will be given production caps like other producers. Second, will Saudi unveil any surprise “whatever it takes” plans? Third, will the cartel maintain the discipline going forward of bringing down storage back to the five-year average?

The market narrative over the last 7 months have shifted from, “OPEC will cut production” to “Don’t believe OPEC whatsoever”. It will be important to maintain the trust of the market if Saudi wants any pull over how much Aramco (Private:ARMCO) gets valued next year during the IPO process. Doing “whatever it takes” in this meeting might be premature as we described here, but saving ammunition for later this year could be hinted at during this meeting.

Bullish storage report fails to keep prices higher…

This week also saw EIA report better than expected storage results. However, it’s important for readers to note that next week’s results could disappoint.

The chart above shows the historic running average discrepancy between EIA and API. As you can see, the historic average of the running error difference between the two has been 6.82 million bbls. The last report had the running error at 150k bbls likely indicating that EIA’s report next week will be more bearish than API’s estimates on Tuesday.

However, this isn’t to take away from the fact that US crude storage will continue to decline over the next month as we expect storage to draw down materially by September. See chart below:

Price Implications…

As we continue to forecast US crude storage to decline over the coming weeks, we expect oil prices to be supported by the recent bullishness in the physical market. The risk of oil prices declining below $40 is low and we expect oil prices to fluctuate between $45 to $50 over the coming weeks as the market fights the current narrative of “shale growth pushing market to oversupply” with clear evidence of global storage declining.

Again, we urge readers to take a more cynical view of the US shale industry and the consensus’s growth estimates. We do not believe or forecast that US shale will push the market into oversupply in 2018, and we continue to believe that declining global oil stockpile by the end of the year will send WTI back to $60. A combination of downward forecast revisions to US shale growth, higher global oil demand, and evidence of global oil storage declining will be needed for prices to rally to that level. We remain one of the few research firms out there that sternly believes in higher prices by year-end as our fundamental analysis indicates.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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