stock exchange board for oil

Crude Oil Moves Higher on IEA Global Deficit Warning

Crude oil moved higher on Wednesday after the US weekly crude oil inventories report came in worse than expected with a -2.6 million barrel in inventories from last week, maintaining a draw down in inventories for 2018 and 45 million barrel draw down last 6 months. Other factors cited as motivation for traders to bid crude oil futures contracts are record gasoline demand, falling Venezuelan production and rising tensions between Iran and Saudi Arabia.

Iranian backed rebels in Yemen continue to show little regard for civilian casualties in what the United Nations is calling “the worst man-made humanitarian crisis of our time.” The war has had many atrocities and the players have broken down into multiple factions.

Trump will push the Saudi Crown Prince to try to find a way to end the conflict, yet at the same time work together to push back on Iran’s nuclear ambitions and crack down on their involvement in the war in Syria. Saudi Crown Prince Mohammed bin Salman said that Saudi Arabia would develop nuclear weapons if Iran persists with it’s nuclear weapons development.

From a technical perspective, West Texas Light Crude trades within a consolidating wedge formation with a series of daily lower highs and daily higher lows with a break out imminent.  To the upside, look for a daily open and higher close above $64 to support further rise to the 2018 high of $66.63 with a sustained move above this level targeting 68.65, 69.91 and 71.93 into the days ahead.

crude oil futures chart

Earth globe

International Energy Agency Warns of World Oil Deficit

Crude oil prices have remained firm this week despite Wednesday’s U.S. Energy Information Administration’s (EIA) weekly report on the change in the number of barrels of crude oil held in inventory by commercial firms during the past week coming in at +5.0 million barrel surplus.

U.S. oil output hit a record last week rising to 10.38 million bpd according to the Energy Information Administration. However, for the year inventories still remain in draw down and last 6 months a -42 million barrel draw down in inventories.

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Also this week, the International Energy Agency (IEA) issued a stern warning that oil demand could outstrip supply despite the ramp up in recent shale output. IEA stated in its monthly report “With supply from Venezuela clearly vulnerable to an accelerated decline, without any compensatory change from other producers, it is possible that the Latin American country could be the final element that tips the market decisively into deficit.” U.S. Venezuelan sanctions and political unrest has driven capital investment away from Venezuela and specifically the countries oil industry.

IEA also revised higher its estimate of daily global oil demand growth in 2018 to 1.5 million barrels per day (bpd) which brings the total global daily oil demand nearing 100 million barrels per day with forecast exceeding this number within the next 12 months.

The recent increase in U.S. output is viewed as one of the headwinds for oil prices, though continued emerging market demand fueled by unprecedented emerging market growth will likely keep oil prices firm into the months ahead as the northern hemisphere moves into high demand season. Long-term forecast views a steady rise in global oil demand well into the mid 21st century.

charts outlining projected growth

Inflation Concerns on Hold with Today’s CPI

Dollar suffers broad based selling during today’s early US session as US CPI data came in as expected with +0.2% for February.  The prior January  +0.5% may have been an anomaly and is a relief to market participants.  Additionally, the US Dollar was weighed down today by political turmoil in the White House. Headline CPI accelerated to 2.2% year on year (yoy) with core CPI unchanged at 1.8% yoy, with both meeting expectations. However, today’s CPI data will not change Fed’s path to hike in rates during next week’s 2 day Federal Open Market Committee meeting and likely hike rates again in June.  However, a 4th rate hike this year is looking unlikely unless CPI data between now and June shows unexpected rise.

West Texas Intermediate (WTI) remains firm holding above $60 currently at $60.62 ahead of tomorrows weekly crude oil inventories data to be released at 10:30 am EST.

On a separate note, US Secretary of State Rex Tillerson was fired by President Donald Trump after numerous clashes. Trump confirmed by tweeting “Mike Pompeo, Director of the CIA, will become our new Secretary of State. He will do a fantastic job! Thank you to Rex Tillerson for his service! Gina Haspel will become the new Director of the CIA, and the first woman so chosen. Congratulations to all!”

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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 lead the way with a catalog 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

  • 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.
  • 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.
  • 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.
  • 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.
  • 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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March 7 Weekly Crude Oil Inventories

This week’s Energy Information Administration (EIA) change in the number of barrels of crude oil held in inventory by commercial firms during the past week rose by 2.4 million barrels, just shy of the 2.6 million barrel forecast. Although last week witnessed a surplus in weekly inventories, for the year 2018 inventories are down by 6 million barrels.

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