WTI Oil prices are pulling back as oil starts to trickle down the Keystone Pipeline. TransCanada Corp restarted the Keystone crude oil pipeline that leaked in South Dakota and caused a  drop in Cushing Oklahoma crude supply, is now running at reduced rates on Tuesday according to the company. The leak which caused WTI to move higher recently against the Brent crude that has held a commanding premium could ease some oil product tightness concerns against very strong domestic and global demand. According to our estimate global demand is rising by 1.8 million barrels a day this year and could increase by 2 million barrels a day next year. 

Oil is also waiting on OPEC. While an extension of a production cut is widely priced in, the OPEC cartel could try to jolt the market by leaving the door open for an extension beyond 2018. OPEC now sees oil market rebalances after June of 2018 according to Reuters but, they might be late with that prediction. Global demand has surprised OPEC and is over a million barrels a day in demand growth above earlier predictions and based on global economic data the global oil demand number is tighter. According to our estimates we are already in a global supply deficit and that is explaining why global oil inventories are falling and floating storage has all plummeted. Reuters News reported recently that the amount of oil stored on tankers around Singapore has dropped sharply in the last months, the latest indication that OPEC-led supply cuts are successfully tightening crude markets even as U.S. exports have soared. Shipping data in Thomson Reuters Eikon shows around 15 super-tankers are currently filled with oil in waters off Singapore and western Malaysia, storing around 30 million barrels of crude. That is half the number of ships in June and down from 40 tankers holding surplus fuel in mid-2017.

That drop-in storage, as well as the drop in crude inventory around the globe, should tell OPEC that their job is done. Yet the market will not want to hear that, but an extension of cuts will push the globe into a bigger supply deficit and while shale oil producers in the U.S. try to respond, the recent uptick in drilling activity won’t arrive in time to offset the big supply drain.

John Kemp, of Reuters, points out that U.S. shale producers have started adding more drilling rigs in response to rising oil prices and improving confidence about the outlook for 2018. He says that experience shows changes in the number of rigs drilling for oil in the United States tends to follow changes in WTI prices with a lag of about 16 to 20 weeks. Kemp says that thee active rig counts peaked in mid-August and then declined through September and October, in response to the earlier peak and fall in prices between February and mid-June. But as WTI prices have soared back the rig count has climbed from a low of 729 on Nov. 3 to 747 on Nov. 22.

Kemp says that shale firms are adding rigs in response to a big increase in spot prices, which is improving their short-term cash flow, and a brightening outlook, which should make production more profitable over the next year. Front-month WTI futures prices have climbed by more than $16 per barrel or almost 40 percent since their trough in late June. Front-month prices are now above their previous peak in February and at the highest level in almost 31 months.

He says that the WTI calendar strip for 2018, the benchmark against which shale producers execute hedges for next year, has climbed by more than $11 per barrel to the highest level since the start of 2017.  The strip is now trading above $56 per barrel, high enough for most shale firms to ensure basic profitability in 2018.  He says that the renewed rise in the U.S. rig count underscores the delicate balance Saudi Arabia, Russia and other OPEC and non-OPEC oil exporters must strike this week at their meeting in Vienna.

Saudi Arabia and its allies have indicated they want to prolong their output cuts to reduce OECD commercial crude and products inventories nearer to their five-year average. Saudi Arabia’s oil minister has said the rebalancing process is still unfinished and he wants a further decline in stocks. But the kingdom is also anxious to avert a spike in prices that would encourage a resumption of the shale drilling frenzy in late 2016/17. For their part, shale company executives have promised they will be more disciplined in the future and will prioritise increasing profits over production. Beneath the cautious rhetoric, most companies are targeting increases in both profitability and production in 2018. For all the talk about restraint, the U.S. shale sector is already adding more drilling rigs in response to the rise in prices.

In the oil market, as in most other circumstances, what matters is what people do, not what they say. Talk about restraint is contradicted by actions that point to growth. If OPEC continues its output restraint and reduces stocks, crude prices are likely to rise further in 2018, which will spur more drilling. Given the strong growth in oil consumption, there is room for both shale producers and OPEC to increase production in 2018. But OPEC must be careful not to tighten the market too much or it risks slowing demand growth and revitalizing shale, putting the organization’s rebalancing strategy back to square one.

Yet, that is assuming that demand slows down. Demand has been the equalizing factor in most oil rallies. Back in the 1999-2008 oil rally there was a lot of skepticism that oil price could rise in the early years above $30 barrel. The reason was twofold. One was technology. Use of computers and new mapping techniques could find new sources of oil and distribution of oil supply would be more efficient. They argued that we had a supply glut. They argued that if oil went above $30 a barrel the demand would slow causing a drop-in price. Yet what they underestimated then as they are today and that is the impact that low oil prices have on demand growth. They tried to downplay China oil demand growth for years until it was so apparent in a few years that it could not be downplayed. It is very important that producers and users of oil and even traders don’t make the same mistake.

Oil traders will also be watching Brazil for the possibility of a strike. Bloomberg news reported that workers represented by oil labor union de Janeiro approved a strike starting on Wednesday, according to Sandpiper’s website.  Workers are against Petrobras’s asset sales and the wage readjustment proposed by the company on Nov. 10. Yet these strikes in Brazil normally don’t last long even if it happens at all.

Dow Jones reports that Venezuela President Maduro's says his decision to move an active military person, National Guard Maj. Gen. Manuel Quevedo, into the dual post of energy minister and head of state oil company PDVSA is aimed at stomping out oil-sector corruption. But Teneo Intelligence says the move, which continues a purge of management within PDVSA and Houston-based refining and distribution subsidiary Citgo.

Bloomberg News reported that Royal Dutch Shell Plc will pay its entire dividend in cash for the first time in more than two years as Europe’s biggest oil company seeks to demonstrate it has left the worst of the crude slump behind. Shell will stop the so-called scrip dividend, which gives part of the payout in shares, from this quarter, it said Tuesday. It also reiterated a 2015 plan to buy back at least $25 billion of shares by 2020, subject to further debt reductions and a continued recovery in oil prices.

Following sweeping cost cuts, the world’s biggest oil producers, including Shell, Exxon Mobil Corp. and BP Plc, have increased profits this year, reduced debt and covered their dividend with cash from operations even with oil at $50 a barrel. Last month, BP gave the boldest signal yet that the industry had emerged from the downturn, announcing that it would buy back shares for the first time in three years. The steps announced by Shell on Tuesday “aim to ensure that our company can continue to thrive, not just in the short and medium term but for many decades to come,” Chief Executive Officer Ben Van Beurden said in a statement. Shell’s B shares, the most widely traded, rose 2.6 percent to 2,422.5 pence at 8:55 a.m. in London, the biggest intraday gain in three weeks.  So Big oil is back!

AAA reported he national gas price average has been trending cheaper for 10 days. At $2.51, today’s price is three cents less than last Monday. On the week, 49 states are paying less at the pump for a gallon of regular gasoline. The District of Columbia and Hawaii saw their gas price increase by one cent. Prices have dropped between one and 15 cents elsewhere across the country. “AAA expects to see gas prices trend cheaper through the year-end, decreasing as much as 20 cents for some motorists before year-end,” said Jeanette Casselano, AAA spokesperson. Today, motorists can find gas for $2.50 or less at 63 percent of gas stations nationwide.

Oil products remain firm. Refiners have to play catch up. Warm weather may be helping us on the distillate front, but we are likely to not get caught up with demand soon. Gas demand is still strong. Stay tuned to the Fox Business Network to give you the best in business news!  I will be among some fantastic speakers at The MoneyShow Orlando in early February. Get signed up early as rooms are filling up fast! Find out why many missed the most significant oil bottom in a generation and what will be the ramification for the global economy going forward. Sign up for my master class.  Go to Flynn.OrlandoMoneyShow.com.