Oil prices fought off a strong dollar and a downbeat assessment of future oil demand and instead focused on the realities of rip-roaring oil demand and falling supply. Not only did the Energy Information Administration report some very bullish numbers on supply and demand, the OPEC cartel is signaling to the market that they have no intentions to raise oil production on what they think is just a speculative price spike in the market. So, the world looks to the US shale producer to fill the void and while they are producing a lot more oil they are still not producing profits. That is making it difficult for the companies to spend the money that is needed to clean up the bottlenecks that have developed, especially in the shale sweet spot, the Permian Basin.

Let’s start with shale oil. Many times, we have warned the market that while shale oil is a historic game changer in global energy markets you still must be careful putting all your production eggs in the shale basket. I warned about shale production decline rates and the possibilities of growing logistical issues that could cause bottlenecks that would eventually lead to a shale production plateau. We also famously warned about the financial condition of many shale companies and advised them if they are losing money on every barrel, do not try to make up for it in volume.

Well, the shale prophets and oil bears who told us a few years ago that shale producers could adjust and make money at $30 or $40 a barrel are surely making money now that oil is at $70. Well, not so fast.

In today’s Wall Street Journal the headline reads that “Oil’s at $70, but Frackers Still Struggle to Make Money. Most of top 20 shale-oil producers spent more than they made in the first quarter”The Journal writes that of the top 20 U.S. oil companies that focus mostly on fracking, only five managed to generate more cash than they spent in the first quarter, according to a Wall Street Journal analysis of FactSet data.

The Wall Street Journal says that shale companies have helped propel U.S. oil output to all-time highs, surpassing 10 million barrels a day and rivaling Russia and Saudi Arabia. But the top 20 companies by market capitalization collectively spent almost $2 billion more in the quarter than they took in from operations, largely due to bad bets hedging crude prices, as well as transportation bottlenecks, labor and material shortages that raised costs. Many of the producers did better to start this year than at any point since 2014 when oil prices began a crash that the industry is fully recovering from only now. Still, the companies spent about $1.13 for every $1 they took in. The Journal says investors are pressuring these companies to start making money. A MUST read in the Journal.

Forget that record global demand thing! This rally is all about speculation, so says OPEC. Reuters reports that OPEC sees oil’s rally towards $80 a barrel as a short-term spike driven by geopolitics rather than any supply shortage, four OPEC delegates said, a sign the group is not rushing yet to rethink its supply-cutting agreement. This comes as the Energy Information Administration (EIA) released a very bullish report, the EIA reported a 1,404-million-barrel drop in US crude supply. The drop would have been even larger if it were not for the 1.5 million barrels of oil sold out of the Strategic Petroleum Reserve. Supply in Cushing Oklahoma rose a less than expected 53,000 barrels.

Gasoline supply fell by a much larger than expected 3.790 million barrels as U.S. gas demand hovers just below record highs. Distillate inventories also fell by 92,000 barrels driving those supplies further below the average range. Refining runs surprisingly jumped, raising gasoline production but not enough to offset record demand and exports. While overall fuel demand is down 1.12% in the last four weeks, it is expected to rise as the winter weather finally abated. The Bottom line is that we are seeing a very supportive backdrop looking at supply versus demand.

Geopolitical risks can also cause price spikes in gasoline and diesel. Hedges are appropriate as refiners are cutting it close before an expected demand surge around the Memorial Day Weekend! It isn’t all bad news. The demand is signaling a robust economy and despite the doom and gloom, if you focus on oil demand it is showing the economy is doing great. China demand is strong. Venezuela supply is tanking and we have issues in the Middle East that could blow up anytime. 

Today is a big day for natural gas. The Bulls have ridden the anti -Goldilocks market. It was either too cold or too hot not allowing the record U.S. production to show up in storage. Yet now, the weather may be just right, so the bulls need a bullish report to keep the drive alive. If not, it is likely that a spring top in the market is in. Look for a build of 105 bcfs on today’s inventory report.