Macro Commentary
America has got gas. Lots of it. According to the most recent U.S. Energy Information Administration (EIA), natural gas inventories were 49% higher than a year earlier and 47% higher than the previous five year (2011-2015) average. According to projections, they expect the inventory will balloon up through October (the end of the seasonal inventory injection period) to the highest end-of-October level on record. This is after years of very low prices has caused the rig count drilling for gas to stay well below the peak level around 1,600 back in 2008. It is again a testament to how technology advancements in energy production has massively increased productivity.
It is a good lesson to remember in thinking about the oil picture. Spot oil prices have continued to rally as supply disruptions in Canada and Nigeria pull barrels offline at the same time that we reach the summer driving season when seasonal demand for gasoline increases. Oddly, the rig count for oil also peaked around 1,600 (this time in 2014) and remains below 400 today. US production is expected to fall this year to around the mid-8 million barrel range from the mid-9 million barrel range at its height. Meanwhile global demand is on the rise. The excess supply picture last year which caused the spot oil price to fall close to 70% was only estimated to be around 1.2-1.5mm barrels (versus a mid-90mm barrel supply/demand aggregate). With the US supply estimate coming down and periodic supply disruptions balanced against rising supply from Iran and others, there is the possibility we see a quick squeeze on price at some point. That said, we are conscious of what seems like the new price paradigm in global oil. OPEC is now at the bottom of the production stack (with their low cost of production) and the swing producer is now likely the US. With advancement in oil production methods, the US has a quicker ability to turn on/off supply which implies that any big spike in price will quickly come down. That might imply “low prices” for oil in the medium-term (relative to the $100/barrel price of the not so distant past) but longer term the quicker response in supply might create better stability in price.