Economic Worries Impact Crude Prices, But Permian Output Set to Double Anyway

Friday March 8, 2019

As many observers had anticipated, crude prices on Friday dropped about 1 percent due to an element related to the usual concerns of a slowing global economy and weaker demand for oil: the disclosure from Washington that only 20,000 new jobs were created in the U.S. in February amid a contraction in payrolls in construction and other sectors.

And while uncertainty continues to dominate crude trading, several sure things accompanied Friday's price drops: that crude production is set to skyrocket for the foreseeable future - and bullish wagers on crude will continue despite so many experts insisting that the road ahead is gloomy.

West Texas Intermediate on Friday fell 59 cents, or 1 percent, to settle at $56.07 per barrel - good enough to end 0.5 percent higher for the week; Brent fell 56 cents to settle at $65.74 per barrel, a 1 percent gain for the week.

Echoing the bearish mindset of analysts, Gene McGillian, VP of market research at Tradition Energy, said, "We've witnessed this week a rekindling of worries about demand growth" - even though oil demand has held up, especially in China, where imports of crude remain above 10 million barrels per day (bpd).

In general, U.S. producers take the worries about prospective weakening of oil demand less seriously than analysts, partly because there's still not any sign of weakening (especially in light of drastically reduced output from formerly huge players like Venezuela and the ongoing cuts enacted by the Organization of the Petroleum Exporting Countries).

Their skepticism helps drive persistent increases in output, and on that score, Friday saw news that drillers expect to increase their output from the Permian Basin to where it could double over the next four years, to 8 million bpd (more than all of the oil the U.S. produced just six years ago).

Francisco Blanch, head of commodities and derivatives at Bank of America Merrill Lynch, said, "There's a lot of shale capacity being prepared, there's a lot of pipeline capacity; we're going to triple pipelines going into the market from 3 to 9 million in three years, from last year to late 2021."

Eric Lee, energy analyst for Citigroup, added that Permian output, currently at 4 million bpd, will increase to 5 million bpd next year, and "We're happy to look out to 2023, when it gets to 8 million.... they figured out how to access it at very low break-evens, like $30-$40."

Raoul LeBlanc, vice president, North American Unconventional at IHS Markit, contributed to the sentiment in some quarters that global demand is just fine by remarking, "Every incremental barrel that the United States produces will be exported; we're in a situation, of course, where the quality of what we produce is actually higher than what we need."

Finally, even with crude prices stuck in neutral, hedge funds keep betting on an oil rally: media on Friday reported that investors pushed bullish wagers on West Texas Intermediate prices to their highest in a month and cut short-selling bets to the lowest since October, on the supposition that  dwindling global supplies will more than compensate for a weaker economy.

According to U.S. Commodity Futures Trading Commission data, net-long WTI positions climbed by 15 percent to 151,560 options and futures contracts for the week ended March 5; also, long-only bets on an increase grew by 5 percent, the most since July, while wagers on a decline were cut by 13 percent.