Oil prices are popping on reports of the biggest real estate stimulus package in China since the COVID shutdown. China is cutting the amount of cash banks need to have on hand, known as the reserve requirement ratio, or RRR, by 50 basis points and is signaling that more cuts could come down the road. The 7-day repo rate by 0.2 percentage points and signaled that a 0.2-0.25% cut in the loan prime rate could follow.
This comes as Gulf of Mexico oil Infrastructure is missing most of the fury from what soon should be Hurricane Helene even as we have had reports of Chevron (NYSE:CVX) and Shell (NYSE:SHEL) removing some non-essential personnel from the platforms.
Oil did see a drop yesterday on a report that Iranian President Masoud Pezeshkian said that Iran was prepared to de-escalate tensions with Israel if it sees the same level of commitment on the other side. Yet that may be a sign that Israel with their tactics like blowing up pagers had Iran and their foes on their back heels. So perhaps, it’s unlikely that Israel will grab at that olive branch.
All this drama comes at a time when we should see another drawdown in crude oil inventories in the United States, especially in Oklahoma where we’re running near tank bottoms. This week’s inventories will be impacted by the aftermath of Hurricane Francine. Crude supply should fall by 2,000,000 barrels. Overall, we should see a 2 million barrel drawdown in both gasoline and distillate inventories. We expect that refinery runs will be unchanged as Hurricane Francine had more impact on Gulf of Mexico production than it did refining.
Natural gas continues its breakout not only impacted by the reduction of supplies that we saw during Hurricane Francine but also concerns about some pipeline issues that is driving up the cost of Henry hub and while many in the industry are still bearish, in many basins we are seeing prices extremely depressed below the cost of production. The futures chart looks like we could be in for a major move to the upside.
The EIA did report that:
“Financial results for 36 publicly traded U.S. oil exploration and production (E&P) companies show that cash from operations in the first quarter of 2024 has decreased in real terms from the first quarter of 2023 due to lower natural gas prices. Production expenses, which can also affect cash from operations, have stabilized after supply chain issues that caused increased costs appear to be largely resolved. Capital expenditures, which represent investment in oil and natural gas production, were flat over the same period.”
In the first quarter of 2024, lower crude oil and natural gas prices helped reduce cash from operations by 12% compared with the first quarter of 2023, to $23.3 billion. Although West Texas Intermediate crude oil prices declined 2% over this period, U.S. crude oil production by these companies increased 5% to nearly 4.2 million barrels per day (b/d).
Relatively large production cuts by OPEC+ have supported crude oil prices and spurred production among non-OPEC+ sources, including U.S. producers. Increased production would normally result in more cash from operations, but substantially lower natural gas prices likely hampered revenue for these companies.
Natural gas prices fell 26% from the first quarter of 2023 to the first quarter of 2024 and reached their lowest average monthly inflation-adjusted price since at least 1997. Although the companies in this analysis focus on crude oil production, natural gas still typically makes up around 30% of what they produce because of associated natural gas present in crude oil deposits and more diversified operations by some of the E&P companies in the group.