Crude Down Due to Shale Surge, But Tillerson Exit Viewed as Good News For The Bulls

Tuesday March 13, 2018

Once again, U.S. crude prices dropped 1.1 percent on Tuesday due to the Energy Information Administration saying that output from American shale basins would hit a new record high in April of 6.95 million barrels per day (bpd), an increase of 131,000 bpd.

That, combined with a pullback in the U.S. stock market caused West Texas Intermediate to settle down 65 cents to $60.71 per barrel and Brent to drop 39 cents to $64.56 - and it also caused John Kilduff, founding partner of Again Capital, to remark, "We've been following the S&P 500 around a lot lately."

Worse, CNBC noted that in a sign the early-year rally in crude is over, "money managers cut their combined net long positions in the six most important futures and options contracts linked to petroleum prices by 50 million barrels in the week to March 6."

However, the bulls may yet prevail thanks to U.S. president Donald Trump's replacement on Tuesday of Rex Tillerson as secretary of state with hawkish CIA director Mike Pompeo

CNBC host Jackie DeAngelis noted that the removal of Tillerson may "actually be seen as bullish for prices because of the potential different approach on the Iran deal and the possibility of sanctions on Venezuela.

"Both would take barrels off the market [and] that would take crude prices higher."

Kilduff agreed that the replacement is feeding speculation that Trump will follow through on his threat to scrap the Iran nuclear deal, which could disrupt supplies from that country: "You've got to jump through a couple of hoops to get there, or connect a couple of dots to make that a bullish story for oil, but at the same time there's been a lot of tensions."

For those inclined to court American favour rather than bowing to nations openly hostile to the west, this could indeed be viewed as a potentially positive development, as is the latest news of swelling U.S. production that is generally portrayed negatively in mainstream media circles.

Timothy Dove, president and CEO of Permian driller Pioneer Natural Resources, summarized the view of the west at CERAWeek in Houston by stating the industry is at a technological "tipping point" that could lead to higher efficiency in the oil patch.

He remarked, "We have the golden goose right before us, and it's our job as operators to perform at a very high level of efficiency to bring this to bear."

That is not to suggest the road ahead is trouble-free: critics believe shareholder demands for frackers to rein in spending and start returning cash to investors will limit production growth in the medium term; and experts such as shale drilling pioneer Mark Papa believe frackers have already burned through the best wells in the Bakken and Eagle Ford.

Jim Ritterbusch, president of Ritterbusch and Associates, earlier this week stated that the bearish market will continue in the short-term at least, with "a range in nearby WTI between about $58 and $63."