As the week closes, we see oil prices poised to post their tenth consecutive weekly gain, something that apparently hasn’t happened since 2012.

What are we to make of this? Is it a breakout? Are prices stabilizing? Are we setting the stage for a sustained rally as production numbers decline in the US and rig counts continue to fall?

It’s hard to be a true believer just yet. At this stage, the market is trading off of marginal bullish signals and there is a capital reallocation happening from an over-valued US stock market. Both bullish and bearish bets are declining. For several weeks now, the price has been trying to make a sustained break above the $60 mark and hasn’t been able to. The US dollar sag that helped prop up prices appears to have run its course. This suggests the current rally is running out of steam. While next week could be fairly benign, the action will undoubtedly heat up as we get closer to the OPEC meeting on June 5 even though the consensus is that nothing of significance will come out of that session. Market participants should be prepared for volatility over the next several weeks until some type of significant supply event happens.

A couple of items or food for thought heard over the last week.

• The stimulative effects of low oil prices to consumers in the US have yet to show up in the GDP numbers. In fact, the opposite is happening – the more than 50% decline is investment in drilling and production in the US oil sector is estimated to have shaved about 0.75% off of GDP growth in Q1. So if Q1 GDP in the US disappoints, there’s your main culprit
• A prominent analyst has suggested that the production estimates prepared weekly by the EIA (quoted below) may be overstated by as much as 1.5 mm bbls. Seems a bit of a stretch, but we will dig into it.

Prices as at May 22, 2015 (May 15, 2015)

• WTI Crude: $59.92 ($59.90)
• Nymex Gas: $2.887 ($3.014)
• US/Canadian Dollar: $0.8129 ($ 0.8320)

Highlights

• The price of oil continues to trade in a narrow band of $58 to $62, as traders, speculators and analysts continue to battle over who is right on the next significant directional move in the price of oil.
  • Storage declined more than expected
  • Production declined more than expected, but this was due to a decline in Alaska, not the lower 48/tight oil
  • The rig count continues to fall, although at a slower pace
• Natural gas lost ground during the week as milder weather beat out a lower than expected storage injection for price influence.
• As of May 15, 2015, US natural gas in storage was 1989 billion cubic feet (Bcf), which is 1.7% below the 5-year average and about 59% higher than last year’s level, following an implied net injection of 92 Bcf during the report week.
• As at May 15, 2015, US Crude oil supplies were at 482.2 million barrels, an decrease of 2.6 million barrels from the previous week and 90.7 million barrels ahead of last year.
• The number of days oil supply in storage was 29.8, ahead of last year’s 24.7.
• Production decreased to 9.262 million barrels per day from 9.374, with the decline coming entirely from Alaska crude
• Oil rig count was down to 659 from 660 the week prior, the lowest since August 2010
• Natural gas rigs drilling in the United States decreased this past week to 222 from 223.
• As of May 19, the Canadian rig count is 70 (9% utilization) (44 Alberta (8%), 17 BC (20%), 9 Saskatchewan (7%)). Typical utilization for this time of year is about 20%.

Drillbits

• US-based Noble Energy will acquire Rosetta Resources, valued at US$2.1 billion, plus the assumption of Rosetta’s net debt of US$1.8 billion. This deal will net Noble its first shale positions in the Eagle Ford and Permian Basin
• Forecasts for crude by rail shipments continue to be revised downward
• The B.C. government and Petronas signed a memorandum of understanding that could lead to a project-development agreement and eventually the construction of an LNG plant. Major hurdles for this project remain as an investment decision is still not forthcoming and opposition grows
• A 100,000 + gallon on-shore pipeline rupture in California that made its way out to sea and onto a popular Santa Monica beach is likely to generate negative attention for and provide ammunition to various opponents to Canadian pipeline proposals. Further to this, a Gulf of Mexico production platform off of Louisiana was shut in due to fire, taking 2,200 barrels per day off-line which should only heighten attention to risks associated with energy production. Stay tuned.