New Cold War? U.S. Shale Producers Shouldn’t Panic

There are cold winds blowing across the energy complex, and weather is only part of it. Oh sure winter’s early return is juicing the natural gas for its biggest string of up days in almost 14 years, and oil is finding support as demand for diesel skyrockets and ahead of the polar blast, yet it is talk of a new cold war and chilling news out of Nigeria and Libya that is really lending support ahead of the Organization of the Petroleum Exporting Countries (OPEC) meeting. In Ukraine violence is escalating as talk of a new Cold War is being taken seriously.  Reports of Russian tanks and trucks heading to rebel held Donetsk despite warnings from the West to back off from supporting the separatists is raising risks that the recent gas deal between Russia and the Ukraine could fall apart. This comes after former Soviet leader Mikhail S. Gorbachev says that “the world is on the brink of a new Cold War”. Some are even saying that “it’s already begun” at a ceremony commemorating the fall of the Berlin Wall. In Libya, the uneasy calm that helped return Libyan oil to global markets is not so calm now. Last week port strikes and attacks on oil fields and closed and reopened ports and oil fields due to strikes are bringing into question the reliability of Libyan supply. In Nigeria a despicable suicide bombing in a school is another reason why the market is concerned about whether the spreading of violence will hamper more African supply. Don’t Panic! That is the message from OPEC’s secretary-general Abdullah al-Badri. He begged OPEC members that were clamoring for a production cut and said "please do not panic, things will fix itself.” That of course is an easier sell now that oil prices have stabilized somewhat. OPEC of course is trying to continue to flood the market to try to shake up the shale producer. In the short term they may be having a little success.  Rig counts for oil fell last week to 1,568 down 14 from the week before. The sharp drop in price had some projects put on hold until we see where prices fall to. Yet shale producers should take OPEC’s advice not to panic. The truth is that over all the U.S., producers should be able to outlast OPEC as they have less baggage hanging over their heads. The Motley Fool reported that “Last month Continental Resources, Inc. CEO Harold Hamm called OPEC a ‘toothless tiger.’ Now, he's backing up that comment by unloading his company's oil hedges in anticipation that OPEC won't engage in a price war with American producers. In Wednesday's earnings release, Hamm said: ‘The move, which saw Continental Resources net a $433 million one-time gain, is a big bet that OPEC blinks and cuts oil production, sending oil prices rocketing higher.’” OPEC and Shales pain has been the motorists gain. Trilby Lundberg the “Princess of Petro” reported that gas prices hit a four year low of $2.94 a gallon! That is a 13 cent drop in the last 2 weeks, and the first time we have been below $3 in almost 4 years.  Trilby says that this is the lowest since Dec. 3. This week we should see the impact of cold weather on supply. Pipeline outages and strong buying should draw down crude inventory by 2.5 million barrels. Distillate fuel should fall by 3 million barrels and gasoline by 2.5/ Refinery runs should increase by 2.0, as refiners will run as fast as they can to take advantage of high margins. Margins that are screaming for refiners to kick it into high gear!

Natural Gas up continues to surge as the earliest “polar plunge” since 2000 will take a bite into supply. The recent run-up in price caused drillers to pick up the pace as the Baker Hughes rig count went up 10 to 356. The Price Links Video series gives insight across the financial spectrum.  https://www.youtube.com/playlist?list=PLDq9JQANqxRxCBaHqunzBT4Frxitjw-XV.

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