Saudi Arabia was testing the waters by sending a signal that the kingdom might cut crude exports by 1.0 million barrels to shock and awe oil out of this sideways trading range ahead of Monday’s OPEC technical meeting. While the market did respond positively to the news, there was still some skepticism that the Saudis would make that happen Yet with the market so focused on supply, the untold story is rising demand at a time when shale producers are on shaky economic ground.

The American Petroleum Institute offered a surprise in its weekly oil inventory data that does not fit market thinking. A huge 5.448 million barrel drop in gasoline supply as well as a 2.888 million barrel drop in distillate supply seems to suggest that product demand is gaining momentum. The crude oil increase of 1.628 million barrels seemed to disappoint the bulls and the product drop offset that disappointment. All eyes will be on the EIA and they will also be looking at the SPR oil release number that was probably responsible for the crude oil supply number to post an increase. 

As far as supply next week, Genscape reported that oil flows were temporarily shut on the Enterprise-operated 850,000 bpd Seaway pipeline system earlier in the week due to an earthquake. The system, which carries crude from Cushing, OK to the Gulf Coast, resumed normal operators shortly after the shutdowns occurred and may not materially impact supply.

I head from a lot of shale oil producers yesterday that agreed with my assessment that the Energy Information Administration (EIA) production expectations for shale next month were probably too optimistic. This comes as the shale investment market is looking like a subprime bubble. Many small shale firms borrowed as much money as they could to raise production and they did it on a mountain of debt that many will not be able to pay off.

An article from Business Insider also is reporting on shale woes and the challenges they are going to have for the second half of the year.  The Insider reports rising concerns about U.S. oil drillers’ debts. Bloomberg reported that shale bondholders are no longer optimistic about a sustained recovery in the shale oil play and are dumping shale bonds. In June Bloomberg data shows junk bonds in the energy industry lost 2 percent. To compare, last year energy junk bonds were up 38 percent despite 89 bankruptcies in the sector. The S&P 500 Energy Sector Index has shed 16 percent since the start of the year. Moody’s warned that oil and gas drillers and service providers face a debt load of US$110 billion, maturing by 2021. Next year alone the industry would have to repay US$21 billion. By 2021 this will grow to US$29 billion. What’s more, Moody’s said 65 percent of that debt is speculative-grade, or junk.

This comes as drillers costs are rising as frac crew expenses are rising and service cost and employment costs as well. It is likely that we will see more bankruptcies and a pullback in  investment at a time when oil prices will start to rise.

More changes are coming to even more established companies. Reuters is reporting that BP Plc is considering spinning off certain U.S. pipeline assets in the U.S. Gulf and Midwest in an initial public offering, the company said in a statement on Tuesday. Reuters says that the potential IPO would structure the assets as a master-limited partnership (MLP), a frequently used corporate structure for pipeline companies. The plan, first considered about five years ago, was shelved when oil prices declined sharply in 2014, according to one-person familiar with the earlier talks. Both BP and its underwriters have retained advisors to explore the sale, the person said. If successful, the deal would be one of the largest initial public offerings of the year, the person said, speaking on the condition of anonymity as the talks were private. Assuming we discount Saudi Aramco for this year.

Summer is back and so in natural gas. The close above $300 should open the door for further upside movement. Look for a below normal 25bcf injection into supply that could set the stage for a test of 330.