The Energy Report 11/03/17

Making Oil Great Again


The House rolled out its tax reform bill and not only did it put in a big tax cut for all corporations it also gave oil producers an edge by removing incentives for electric vehicles and solar companies.  It is nice to see a piece of legislation that does not penalize the oil industry just because it is the oil industry in favor of alternatives. That may be important, the great oil and product drain continues as global demand is now exceeding daily production level and is signaling major crude oil and product supply drops into the end of the year. Oil and refiners will have to really ramp up as we could see a supply squeeze next year as Saudi Arabia is saying they want a $60 a barrel floor for oil.


The big point for oil and all corporations is the fact that the corporate tax rate would be lowered to 20 percent from 35 percent. While Fox News report that it is unclear if this reduction would be immediate or gradually implemented, either way this is very bullish for oil demand. The reduction in cooperate tax will unleash those competitive animals spirts and corporations will be expected by shareholders to look to take advantage of the tax break. That will cause a surge in economic activity and will increase demand for oil. There will be even more demand for gasoline as the bills takes away the $7500 credit for buying an electric car, so if you want a Tesla you had better buy it now. It also removes that same credit for some solar and geothermal projects but does keep some incentives for renewables in place.


 For oil and gas, Bloomberg reports that the House proposal protects three provisions that save explorers billions of dollars annually, while chopping a few others. The legislation preserves the use of the so-called last-in- first-out provision, also known as LIFO. These special accounting rules let companies value crude stockpiles at the price they’re selling for, rather than the original purchase cost. The bill also allows continued deductions of so-called intangible drilling costs and preserves a measure that lets explorers reduce taxable income to reflect the depreciation of reserves. All three were thought to be in jeopardy as Republicans searched for offsets to pay for lowering taxes elsewhere. Eliminating the drilling and depletion provisions alone would force energy companies to pay about $25 billion in additional taxes between 2016 and 2026, Congress’s Joint Committee on Taxation estimated last year. The House bill would also end two smaller breaks for “marginal" oil wells and enhanced oil recovery projects, which involve older oil and gas fields. That would cost drillers about $371 million over ten years, the Joint Committee estimated.


 With oil in a tightening cycle the oil industry may need that help as they will have to make major investments by oil companies will have to be made to meet that demand. That may be hard because the oil industry cut over a trillion dollars in oil products that has already reduced future oil production by an estimated 6 million barrels of production a day.


Some of those cuts were forced by the crash in oil prices but some of that was based on a false reading on the realities of shale oil production as well as an underestimation of the potential for oil demand. Doom and gloom predictions of oil prices staying lower for longer and a false belief in so called ‘peak oil demand” caused too much pessimism and now we are going to pay that price.   



Venezuela is looking to restructure its debt saying that U.S. sanctions are making it almost impossible for them to borrow money. President Maduro should look at himself as he and his predecessor Hugo Chavez spend years robbing and looting the nation’s oil supplies. While he drives his people into despair and poverty the Venezualuan oil production is tanking and desperately needs cash and expertise to offset its terminal decline. A sad for a country that sits on some of the biggest oil reserves in the world. The Leadership of Venezulan stole the futures of the Venezulan people when during the glory days of the last oil rally they used the oil industry to increase their power and personal wealth. Now with the next oil boom ahead the country will be ill equipped to take advantage of it.


Saudi Arabia is talking oil price! Not supply or balance. but price. Word is that they want a $60 floor for oil. That is very bullish because that is another signal that they will extend oil cuts all next year, They also raised their prices to some customers showing they have no concern about losing market share to a faltering U.S. shale industry


Nat gas may have hit bottom after yesterdays report. The weather outlook next week is getting friendlier. The Energy Information Administration said that natural gas supply in storage rose by 65 billion cubic. Total stocks now stand at 3.775 trillion cubic feet, down 180 billion cubic feet from a year ago, and 41 billion cubic feet. The tightest market going into winter that we have seen in years.

Also ,I hope you took our advice and locked in your diesel needs earlier. If you have not you had  better get some covered very soon.


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Phil Flynn
The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
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