From the May 2016 lows, the number of US oil rig counts have only declined 3 times and this week was no exception. Up for its 15th week in a row (+9 to 697), its highest level since April 2015, the rig count continues to pull US crude production higher, stymying OPEC efforts at balance, leaving the bullish case for oil fading fast.
"OPEC’s credibility is on the line: stocks need to show a significant draw during the second and third quarters or many hedge funds are likely to give up on the bullish narrative prevailing since late 2016."
Prices had been trading comfortably above $50/b since late March, with bulls re-trenching on the idea that Saudi-led OPEC supply cut will soon tighten balances. And while today’s price declines could prove temporary, a measure of caution is advised to all bulls, for two key reasons — reasons that we’ve been watching closely since November.
Goldman presents a chart which shows just as graphically how exactly OPEC lost the war against US shale: in one word: the cost curve has massively flattened and extended as a result of "shale productivity" driving oil breakeven in the US from $80 to $50-$55, in the process sweeping Saudi Arabia away from the post of global oil price setter
"We failed… miserably… in paying attention to the shifting nature of the term structure for more than a week ago we noted a change that was taking place and which was incipiently bearish of crude oil, but we failed to pay proper and full heed to the signals that this shift was sending to us. This is unforgiveable. It shall not happen again." - Dennis Gartman
After API's surprise draw across all major categories, DOE reported the 7th weekly crude build in a row (even as crude imports plunged). Gasoline, Distillates, and Cushing all saw draws even as crude production rose to new cycle highs - back above 9mm bbl/d. Gasoline demand saw its biggest annual drop in 16 years.
Despite record gluts in crude and gasoline amid resurgent US crude production, hedge funds boosted their net long position in WTI last week to a new record high. For the first time ever, hedge funds hold more than a billion barrels of bets that crude oil prices will rally.
The price gain from a shift to destination-based border adjusted corporate tax would prompt US drillers to “sharply increase activity" as a result of lower US corporate tax rates, which would aggressively incentivize shale drilling, resulting in a global oil price shock, sending domestic prices spiking, as global prices slide, according to a new Goldman report.