Oil Heads Higher As Supply Issues Give Momentum

On Tuesday, oil closed higher as there is an expectation that U.S. stockpiles are heading lower. There was news that the wildfires in Canada are now targeting a new oil supply line, which should boost oil prices. U.S. crude oil closed up 1.2% to $48.31 a barrel, which is the best level it has seen since October of 2015. Brent Crude finished up by 0.7% to $49.58 a barrel. Even the Nigerian and Venezuelan outages gave rise to higher oil prices.

U.S. Oil Output Declines Continue

The U.S. government’s forecast, posted on May 16, suggests that U.S. shale output is expected to fall in June. Typically oil sometimes sees a rebound in supply, but not this time because this will be the eighth consecutive month where oil output has dropped. There are two sides to this equation. On the one hand, a decline in supply is seen as being bullish, thus why oil prices went higher. But on the opposite end, that means that oil producers aren’t producing as much oil as they use to because demand is lacking. According to the EIA report released on May 16, total output is expected to fall by 113,000 barrels per day. This would bring total output down to 4.85 million barrels per day.

Breakdown of oil output decline:

• Bakken Production from North Dakota — expected to fall by 27,000 barrels per day
• Eagle Ford Formation — expected to fall by 58,000 barrels per day
• Permian Basin in West Texas — expected to fall by 10,000 barrels per day

Anyway you slice the data, a drop in output of this caliber is a bullish for the price of oil. Oil prices have taken a dive since 2014, falling by more than 60% from their highs because of too much supply in the market. While a drop in supply boosts the price of oil, it is bad for the economy. Oil producers had to lay off thousands of employees, and cut spending by a huge margin.

Fort McMurray Trouble Still Looms

A few weeks back, many workers from oil fields were evacuated by a wildfire which grew out of control in Canada. More specifically the fire hit Fort McMurray which is a huge oil producing center for the country. Now, the fire seems to be heading back in the direction of Fort McMurray, and most were told to evacuate. At least 4,000 people have evacuated the area, and another 8,000 people received precautionary evacuation orders. How exactly is a fire, and the evacuation of Fort McMurray bullish for the oil market? This is because the oil center produces up to 2.3 million barrels of oil per day. Any disruption in such a large amount of supply, causes oil prices to spike higher in the short-term. Officials in Canada state that the fire should burn for at least a few more weeks. Once it is all clear, residents along with workers should be able to make their way back to Fort McMurray. As mentioned before this is a short-term drop in supply, and once the oil center gets back online then expect it to have a huge impact on oil prices thereafter.

Additional Supply Disruption

Oil prices have been heading higher because of other supply disruptions as well. For instance, in Nigeria big oil companies such as Exxon Mobil (XOM), Royal Dutch Shell (RDS-A), and Chevron (CVX) had suffered disruptions by acts of sabotage. These acts of sabotage are not small and inconsiderate, because they managed to take out 1.65 million barrels of oil per day. Lastly, Venezuela’s oil production may see some trouble as well. That is because a big oil producing company, known as PDVSA, has a $5 billion bond payment due by the end of this year. The problems is that the company may not be able to meet this payment, thus investors fear a possible default. A company going under should be very concerning for Venezuela, because that would be a big drop in the amount of oil supply the country produces each day. For the global oil market, a drop in such supply would be bullish. This will mean lower reserves, thus oil prices should head higher.