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Continue the Cuts. The Energy Report 11/17/17

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Khalid A. Al-Falih, the Minister of Energy, Industry and Mineral Resources of Saudi Arabia and chairman of Saudi Aramco all but guaranteed an extension of oil production cuts to be officially announced at the end of the month despite the protestations by some Russian oil companies. Russian oil companies are desperate to raise production to try to get more cash from oil prices that are near 2 and a half-year highs. Yet, Russian President Vladimir Putin will have none of that as he is looking at the big picture and understands the political power that comes with higher oil prices.

Talking about power, a report from the daily mail that King Salman of Saudi Arabia, or MBS, is planning to step down next week and name his son Prince Mohammed bin Salman as his successor is raising the risk factor in oil. The oil take, on a MBS kingship, is that the risk of a military conflict with Iran is more likely. You already have the King arresting more than 40 princes and government ministers in a corruption probe and now is allowing them to buy their freedom by giving back a sizable percentage of the wealth that they have accumulated and to put it into the Kingdom’s coffers that have been depleted because of overspending and the fall in the price of oil.

The drop in the price in oil is bothering Harold Ham, the founder and chairman of Continental Resources known as the “shale king” because he sees a real danger in the over reporting of U.S. shale production. He says that bad forecasting is hurting the U.S. shale industry. In an interview with Bloomberg News he said that the boom in U.S. shale-oil production requires “more sophisticated” forecasting than ever. “It just disadvantages the U.S. market,” said Hamm, the founder and chairman of Continental Resources Inc. The EIA is “a very powerful market mover, and so it’s necessary they understand these things.” He blames overly optimistic government production predictions for depressing U.S. oil prices. Yet, it is not just Harold Hamm that is upset with the over estimation of shale production, many users of oil and products feel misled and because of these over optimistic productions and low-price forecasts felt they became underhedged.

Bloomberg News Laura Blewitt reports that “Farmers Racing to Finish U.S. Harvest Squeezed by Pricey Fuels”. She points out that amid higher exports, diesel and propane supplies are shorter. She writes that as Americans ship record amounts of heating fuels like diesel and propane abroad, the farmers at home are getting squeezed.

Supplies of the fuels used to run tractors and dry corn for storage are running short just as U.S. farmers are racing to finish a late harvest. The 2017/2018 U.S. corn crop is now 83 percent harvested, versus the five-year average 91 percent for this time of year, U.S. Agriculture Department data show. To make matters worse, a chunk of U.S. farmers didn’t hedge fuel prices this year, according to Phil Flynn, senior market analyst at Price Futures Group Inc, which trades energy and grain commodities futures.

“There was a perception that prices were going to be lower for longer,” he said by telephone from Chicago. “They’re kicking themselves for not locking in the prices when they were much cheaper.”

Farmers use propane heaters to dry corn and diesel for corn and grain sorghum, Sudermann said. Both fuels have seen prices surges this year as record-high exports whittled down national stockpiles over the last year. Propane consumption has nearly doubled in two weeks to 1.52 million barrels a day, according to the latest U.S. Energy Information Administration data. Propane prices are at a three-year high

This year’s corn crop is forecasted slightly smaller than last year’s record 15.1 billion bushels, but yields improved to a new high, Arlean Suderman, chief commodities economist for INTL FCStone said, citing USDA data. Harvesting is particularly slow in northwestern Minnesota and the Dakotas, where some corn farmers are now facing further complications from snow on the ground. “They can’t leave it out in the field any more to dry,” Suderman said by phone from Kansas City, Missouri. “That’s a risk for direct crop loss. If it’s still wet that means they have to dry it to keep it in storage.”

The tighter market is showing in the spot price of wholesale propane in Mont Belvieu, which has tripled from early 2016 to trade just below $1 a gallon. It’s been nearly three years since the U.S. has seen propane prices that high, adding pain to farmers’ home heating bills, too, as many live in colder rural regions of the country that depend on the fuel to keep their houses toasty. The EIA estimates Midwest households will pay an average 24 percent more for propane this winter than last. “They’re getting double-whacked,” Flynn said. “What makes it more difficult, if you’re not making money this year, it makes it harder to hedge for next year.”

This comes as larger oil projects are struggling as well. Dow Jones reports that offshore oil drilling and service companies, hurt by the energy industry’s shift to lower-cost shale and away from deepwater projects, are dominating the year’s energy bankruptcies in North America, according to law firm Haynes and Boone.

There were fewer oilfield service companies seeking protection this year than last but those that did have had larger debts. Through October, 44 oilfield services companies filed for bankruptcy in the United States and Canada owing creditors $24.8 billion, compared with 72 companies and $13.48 billion for all of 2016.

Oil is also getting support from the weakening dollar. Talk that the Mueller investigation over alleged ties of the Trump Team to Russia is heating up. But as the House tax reform and talk that the senate is near a bill is very bullish for oil demand and ultimately prices.

Reuters’ reports that Lebanon’s Foreign Minister Gebran Bassil said on Friday a crisis triggered by the resignation of its prime minister was part of an “attempt to create chaos in the region”, local television stations reported. and al-Hariri quit as prime minister in a broadcast from Saudi Arabia two weeks ago, saying he feared assassination and criticizing the Saudis’ regional arch-rival Iran along with its Lebanese ally Hezbollah. The actions of Hariri, a Sunni Muslim leader and long-time Saudi ally, plunged Lebanon into a political crisis, putting the country center stage in the rivalry. He has yet to return to Beirut and is expected to leave Saudi Arabia this weekend for France, where he will meet with President Emmanuel Macron. Bassil is touring European and other capitals seeking diplomatic help to end the crisis. “We will respond and we have the full capacities to do so, but we hope it doesn’t get to that,” Bassil was quoted as saying from Moscow by Lebanese broadcasters al-Jadeed, al-Manar and LBC.  French officials said they did not know how long Hariri would stay before returning to Beirut, but hoped his visit would help ease the crisis by demonstrating he was not being held in Saudi Arabia.
Phil Flynn
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About the author

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.

Media highlights include: The President of the United States, Bloomberg, ABC, CBS, NBC´s "Today Show" and "Nightly News with Tom Brokaw", CNBC, CNN/CNNfn, FOX´s "O´Reilly Factor", PBS´s "The Newshour with Jim Lehrer" and "Nightly Business Report", MSNBC´s "The News with Brian Williams", The Wall Street Journal, Business Week, Investor´s Business Daily, The New York Times, The Los Angeles Times, Chicago Tribune, Associated Press, The Toronto Globe & Mail, Houston Chronicle, Futures Magazine, Inside Futures, and National Public Radio.

Contact Phil Flynn: (800) 769-7021 or at

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