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Dangerous Drawdown. The Energy Report 11/01/17

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U.S. oil production disappoints in August as U.S. oil, gasoline and distillates plummet.  Global demand is exceeding supply and the forward crude curve is signaling higher prices ahead. Shale oil production is proving to be no match for OPEC and Non-OPEC production cuts. Underestimates of oil demand growth and inaccurate assessments of projected shale production led to lower prices and under investment leading to problems for supply going into winter.  The West Texas Intermediate calendar spread for the first six months moved from contango to backwardation yesterday for the first time in almost three years according to John Kemp at Reuters. The six-month spread last closed in backwardation in Nov 2014 and the continued firming of the spread is a further sign the oil market is tightening.

5 million barrels drop here, and another 7 million barrels drop soon you are talking not about a glut but a shortage. The American Petroleum Institute reported a disturbing 5.087 million barrels stop in crude oil supply last week. This comes after the Energy Information Administration reported that U.S. crude oil output fell in August in their monthly report to 9.203 million barrels while many traders were looking for an increase in production. Some of that may have been Hurricane related but really it was still a big miss and is raising real concern that we can ramp up production to starve off these plummeting crude oil draws. U.S. crude oil production is 410,000 bpd below the April 2015 peak of 9.62 million bpd where earlier projections said we would be well over 10 million barrels day. That is not happening.

Oil products are also plummeting. In distillate, where supply is already below the 5- year average, saw a stunning 5.087million barrel drop. That is not good news as we head into winter.  Gasoline supply fell even more plunging 7.697 million barrels as demand surges towards a record reflecting surging consumer confidence that according to the Conference Board hit the highest level since 2000. Consumers of gas consume more when they are feeling confident and right now they are feeling giddy. They will drive to work and drive for fun and if they are right about what they reported to the board they will be on a gasoline consumption tear. Bloomberg reported that the share of respondents who say jobs are plentiful rose to 36.3 percent, the most since June 2001, while people reporting good business conditions increased to 34.5 percent, matching the highest since 2001. That was also two years after the $10 oil bottom. That signaled of course a major bottom in oil that lasted until the fiscal crisis in 2008 and only dipped after the Terror Attacks in September. Then of course oil went on its biggest bull run in modern history.

Of course, terror and a stock market correction are the biggest threat to this market. We are reminded that the world is still a dangerous place after the disgustingly evil attack in New York. Our prayers are with the victims and their families and while the markets take these attacks in stride concerns that there is the possibility of a September 11th type of attack in planning should still give us some pause.

The other concern is stocks that are now starting to show some more parabolic like up moves which is a strong sign that the market is getting closer to that overdue market correction.

Andrew Weissman of ECB natural gas declined notably over the past week, with bearish weather, record-high production, and lack of spot market buyers all playing a role. The gas market has grown surprisingly complacent regarding potential upside price risks this winter. Steep drawdowns in storage beginning in mid-November, bullish comparisons to both year-ago and five-year average figures, and expected shots of cold weather between now and the end of 2017 are likely to prompt traders to asses price upside risk by the end of the year. Adjusting EIA’s monthly production report for Harvey impacts, it appears that natural gas production growth decelerated notably in August. Further, August figures show pipeline flow data likely overstating production growth by 0.7-0.9 Bcf/d. FERC is not expected to approve DOE’s controversial resilience pricing rule in its current form, but clues to possible action should become apparent by December.
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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