Oil Prices Move Lower for Second Week on Continued Talk of Production Increases

Crude oil inventories data released yesterday, May 31,  witnessed a drawdown of 3.6 million barrels (MMBbl) for the week of May 20-26 according to the Energy Information Administration (EIA). The EIA report is released each week and measures the change in the number of barrels of crude oil held in inventory by commercial firms during the prior week.

Despite the drawdown in inventories, oil prices actually moved lower due to Saudi Arabia, Russia, and other OPEC countries announcement to increase production by 1.0 MMBbl/d to meet global demand. As reported in our May 25 post, Saudi energy minister Khalid Al-Falih said OPEC and Russia would supply more oil to offset the declines from Venezuela and the potential impact from US sanctions on Iranian supply.

No word was mentioned as to how soon the production increase will take place, though some unofficial reports have the current quotas remaining in place until the end of the year, which should provide near term support for prices. Both Saudi Arabia and Russia signaled that the fate of the curbs will be addressed at the upcoming OPEC meeting in Vienna on June 22nd.

Oil prices moved lower last week after reaching a new 2018 high of $72.87/barrel, a few cents above the 71.93 target in mentioned in our Mar 9 forecast. Futures traders began unwinding speculative long positions after the oil ministers announcement of production increases though traders have bids are lined up between 55.00-62.44. CFTC data which tracking speculative long and short positions show that long positions declined 34,798 contracts or 9.1% of open positions. This selling was met with new short selling by the managed money short sector, which increased 18,496 contracts. The chart below brings into perspective the liquidation that has occurred from the speculative sector as it has reduced positions by over 100,000 contracts the last four weeks. However,  oil broad outlook remains very bid as short term price fluctuations will continue as buying on dips will remain the preferred strategy.

US rig count has nearly doubled in the last two years while production is at all time highs. Currently US produces 10.4 million barrels per day with US to soon become the worlds leading producer of oil within the next few months. Currently US, Saudi Arabia and Russia are the three largest producers of oil in the world.

 

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Oil Moves Lower This Week as US Dollar Gains

West Texas Intermediate (WTI) currently trades at 70.18 at this writing and is set to close lower this week after reaching a new 2018 high of 72.87, just a few dollars shy of the 76.47 target cited in our January 2018 forecast.  Oil moved lower this week mostly due to strong gains in the US dollar and a surprise surplus in last weeks crude oil inventories.  The US dollar was broadly bid this week and achieved new 2018 highs against a basket of global currencies fueled by European and far east markets net long equities covering positions and moving funds back to US dollars. The US dollar is the largest and most liquid market and remains the worlds reserve currency as the majority of global funds denominate in USD as their base currency. The USD also had additional buying interest this week out of Turkey and Venezuela as both countries central banks raise interest rates in their efforts to slow capital flows out of their country. The US dollar has gained 5 out of the last 6 weeks while oil has moved higher 8 of the last 9 months as historically when USD gains, oil falls.  In recent months, however, oil has remained bid despite USD gains as global demand has and will keep oil bid well into 2030.

Earlier today Russian Energy Minister Novak stated that the global oil glut is over with expectations for long-term rise in demand and prices while also today Saudi Oil Minister Falih said that Saudi will boost supply to meet expected rising demand. Russia, USA, and Saudi Arabia are the 3 largest producers of oil with all three each producing 10.5-11.5 million barrels per day.  WTI dropped from today’s earlier high of 70.72 on news that Saudi will increase production to meet current demand. From a technical basis, WTI has achieved the 71.93 target cited in my Mar 3, 2018 forecast with near-term support at 67.26 and 61.09 as buy orders build at these levels just as the northern hemisphere moves into seasonal high oil demand. Look for WTI to continue to find dips as buying opportunities with 76.47 as the upside target. Look for daily prices to open above 72.87 and close higher followed by a weekly open and higher close to confirm further price rise is once again underway to our next target 76.47.

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Oil Reaches $71.85, Next Target $76.47

West Texas Intermediate reached $71.85 last week, just shy of the $71.93 target cited in my March 3rd forecast. The new 2018 high of $71.85 is the highest price for a barrel of oil since November 2014. At that time, crude oil inventories were in a surplus as prices in the months to follow would eventually fall to $26.03 per barrel by Feb 2016. However, unlike the 2014 -2016 period where prices declined from 107.65 to 26.03 during a period of stagnant growth and oil surplus, last week’s $71.85 price was achieved during an environment of sustained global industrial rebound and rising oil demand.

Additionally, global oil production and consumption are at historic levels with consumption outpacing supply. Added to this situation are geopolitical issues in Iran and Venezuela, leaving a razor thin margin of 1.5 million barrels per day between global surplus and deficit. With total global output and demand both approaching 100 million barrels per day and world wide production at 93% capacity utilization, little room remains to fill the void being created by rapidly expanding emerging market economies (EME’s). At the present EME’s growth rate and current global oil production capacity, it is a mathematical certainty that within the next decade, more like 2025, the world will find itself in a global oil deficit.

Many “experts” have denounced such a possibility, which in itself will only exasperate the problem by eliminating any sense of urgency to address this potential global oil shortage. However, realization of this potential global shortage will initially be reflected in the futures markets as oil futures traders will bid oil higher well before the reality of the shortage has become accepted. It is very likely that even now we are witnessing the beginning of a long term multi decade rise in oil prices as futures markets have already been net long oil since November 2017 and surprisingly during low seasonal demand.

The brief period to minimize the impact of this potential global oil deficit is now.  It is imperative that oil producers across the global lead by the United States and Saudi Arabia continue to expand production, refinery, and delivery capacity to minimize the impact of this potential global oil shortage. For those who recognize and seize this opportunity, the rewards will be great as unlike the oil booms of the 1970’s 80’s and 90’s where the financial beneficiaries were the Middle East, this time it will be the United States and it’s oil producers and partners. This dramatic wealth transfer will be unlike any ever witnessed as the Untied States will soon become the world’s largest producer of oil into the decades ahead.

From a technical perspective, WTI will reach $76.47 and long term targets of $88.39.  This $88.39 is a key mathematical level as a sustained move above $88.39 will yield a 93% probability that prices will challenge the 2014 high of $107.65.  Above this level, $107.65, futures traders could easily drive prices to $138-158 zone purely on speculation. As many of you recall, such an event occurred in 2008 when at that time futures traders bid prices from $81 to $147 in a matter of a few weeks solely on futures market speculation. However, by July 2008 it was evident rapidly rising oil prices were having an affect on economic growth and coupled with supply surplus witnessed speculators covering their net longs positions with sell orders and dramatically moving prices lower to $35.08 by December 2008. Such is not the case this time as unlike 2008, global demand is currently at all time highs and will sustain due to dramatic emerging market growth thus witnessing long term sustained rise in oil prices. Prices will soar initially due to futures markets speculation but sustained prices will remain due to unprecedented global demand.

See the below video link for more details.

15 minute video

http://fxlivetrader.omnovia.com/archives/356220

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West Texas Intermediate (WTI) 2018 Forecast…Posted January 3, 2018

OIL (WTI)

WTI (60.09) WTI’S fall from the 2014 high of 107.65 is complete at the 2015 low of 26.03 as December 2017 prices opened above the 38.2 of the 107.65-26.03 fall at 57.21 and closed bid in December thus confirming further price rise is now underway to 66.84 next target.  In that next target 66.84 represents the 50% of the 107.65-26.03 fall as well as the 200 month simple moving average, expect offers at this level initially to move prices lower though bids ahead of 57.21 will support further rise and breakout above 66.84 to 76.47.

Look for a daily, weekly and monthly open and higher close above 66.84 to confirm prices continuing higher to 76.47. Additionally, crude oil inventories have been in deficit for most of 2017 and throughout the early winter of 2017 as continued deficit during seasonal low demand would witness risk of a dramatic rise in prices throughout 2018 supported primarily by emerging market demand. For 2018, look for prices to reach 76.47 in the first half of 2018 as a monthly open and higher close above 76.47 will confirm further rise underway to 88.39 while bids in the $46-57 zone support.

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Tax Benefits for Oil and Gas Investors

There are several major tax benefits available to oil and gas investors which makes this investment unique above all others. U.S. tax codes favor investment in energy resources and oil and gas leads the way with a catalogue of incentives for investors as well as oil producers. Below are just a few of the key incentives.

Primary Tax Benefits of Investing In Oil

  1. Intangible drilling cost:
    These include everything except the actual drilling equipment. Labor, chemicals, mud, grease, paraffin, and other miscellaneous items necessary for drilling.  These expenses generally constitute 65-80% of the total cost of drilling a well and are 100% tax deductible in the year incurred. So, a million dollar investment could deduct approximately $800,000 right away, which would generate a net tax savings of approximately $280,000 in year one (assuming a 35% tax bracket), reducing the net investment by 28%. Furthermore, it doesn’t matter whether the well actually produces or even strikes oil. As long as it starts to operate by March 31 of the following year, the deductions will be allowed.
  2. Tangible drilling costs: Tangible cost are those directly related to the cost of the drilling equipment. These expenses are also 100% deductible, but must be depreciated over seven years. Therefore, in the example above, the remaining $200,000 could be written off according to a seven-year schedule.
  3. Active vs. Passive Income: The tax code specifies that a working interest (as opposed to a royalty interest) in an oil and gas well is not considered to be a passive activity. This means that all net losses are active income incurred in conjunction with well-head production and can be offset against other forms of income such as wages, interest and capital gains.
  4. Small Producer Tax Exemptions: This is perhaps the most enticing tax break for small producers and investors. This incentive, which is commonly known as the “depletion allowance,” excludes from taxation 15% of all gross income from oil and gas wells. This special advantage is limited solely to small companies and investors. Any company that produces or refines more than 50,000 barrels per day is ineligible. Entities that own more than 1,000 barrels of oil per day, or 6 million cubic feet of gas per day, are excluded as well.
  5. Lease Costs: These include the purchase of lease and mineral rights, lease operating cost and all administrative, legal and accounting expenses. These expenses must be capitalized and deducted over the life of the lease via the depletion allowance.

 

DISCLAIMER: Viper Capital Partners LLC, is not a Tax Advisor, CPA, or Tax Attorney and is not certified to give any tax advice. The information on this page is for educational purposes only. Individuals should consult their own tax professional for advice. Viper Capital Partners LLC offers no professional tax advice.

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