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Slowdown in Shale. The Energy Report 10/23/17

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Another big drop in U.S. rig counts and warnings from major oil service firms is making it clear that the Shale oil slowdown that I predicted is here. Baker Hughes reported a plunge of 7 oil rigs and eight natural gas rigs. Some of the drop is storm related but a lot of the drop is not. We know that in the prolific Permian basin rigs fell by 6 as Schlumberger CEO Paal Kibsgaard warned that U.S. energy and production companies seems to be moderating and that while he expects continued growth in the U.S., he believes the pace would slow.  He also said that “There are clear signs the global oil market is balanced, which would support higher oil prices and investments if sustained, the head of Schlumberger said according to UPI. He said “The reduction in global oil inventories in the third quarter is clearly showing that the oil market is now in balance, which is reflected in the upward movement in oil prices over the past month”.

Reuters reports that, Baker Hughes’ CEO Lorenzo Simonelli was more pessimistic, saying the oilfield services industry continues to be volatile and describing the business environment as “challenging” with customers pushing out some equipment purchases. “We have seen some improvement in activity but we have not seen meaningful increases in customer capital commitments,” he said.

The FT also is reporting that shale oil firms are finally focusing on profitability and not just volume of production. That means that shale producers will reduce production until they can start making money. Yet even with the cutbacks there is rising production costs per well and a shortages of oil workers that are tired of getting hired only to be fired a few months later. The frac crews will now command higher wages and that will increase to cost per well.

It also means that it will be more difficult for frac producers to ramp up production, this should mean that U.S. shale production will continue to be revised downward by major reporting agencies.  We are still hearing reports that the production per well is falling.

This comes as global demand is red-hot. Reuters reports China’s oil demand remains voracious, hitting a January to September average of 8.5 million barrels per day (bpd). India’s fuel thirst is also increasing. India imported a record 4.83 million barrels per day (bpd) of oil in September as several refiners resumed operations after extensive maintenance to meet rising local fuel demand. India’s September imports stood 4.2 percent above this time last year and about 19 percent more than in August, ship-tracking data from industry sources and Thomson Reuters Analytics showed.

With the U.S. tightening, flows from Iraq reduced due to fighting between government forces and Kurdish groups, and production still being withheld as part of a pact between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers to tighten the market, much will depend on demand going forward. Reuters reported that as of Sunday, oil exports from Iraq’s Kurdistan via the Turkish Mediterranean port of Ceyhan were still flowing at sharply reduced rates between 200,000 and 250,000 barrels per day, two shipping sources said. Flows had increased slightly to 255,000 bpd by Monday, one source said. Typically, the pipeline transports around 600,000 bpd. Iraqi Oil Minister Jabar al-Luaibi said on Saturday oil exports were increasing from the southern Basra region by 200,000 bpd to make up for a shortfall from the northern Kirkuk fields.

In a landmark visit to Iraq, Saudi Arabia’s Energy Minister Khalid al-Falih praised the two countries’ collaboration within the Organization of the Petroleum Exporting Countries to cut production in an effort to prop up prices. Iraq said the two countries would continue to cooperate in implementing decisions by oil-exporting countries according to Reuters.

The market balance is here. While oil may be reluctant to breakout just yet, it will only be a matter of time. The so-called seasonal slowdown in demand will soon be ending and we expect to see significant tightening of suppl. As we predicted the lifting of the U.S. oil export ban was very timely and the US is now a major factor in the global oil export market. This will allow for more global economic growth as oil will get to where it need to be to foster growth.
Phil Flynn
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Mr. Flynn is one of the world's leading energy market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.

Phil Flynn's accurate and timely forecasts have come to be in great demand by industry and media worldwide. His impressive career goes back almost three decades, gaining attention with his market calls as writer of “The Energy Report”.

He is a daily contributor to Fox Business Network where he provides daily market updates and analysis. Phil’s daily commentary is also featured in Futures Magazine, International Business Times, Inside Futures, 312 Energy, Enercast, among many others.

Phil is a lifelong resident of Illinois. He attended Daley College in Chicago before beginning his career on the trading floor of the Chicago Mercantile Exchange which eventually led him and his team to The PRICE Futures Group.

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