A slowdown in Chinese manufacturing and a breakdown of the U.S.-North Korea talks has caused a pause in the crude oil rally, writes Phil Flynn of Price Futures Group.
A slowdown in Chinese manufacturing and a breakdown of the U.S.-North Korea talks has caused a pause in crude oil after yesterday’s impressive rally. The catalysts for yesterday’s upward move was a very bullish Energy Information Administration (EIA) inventory report that for the second time showed the U.S. a net exporter of petroleum products, and the fact that OPEC dismissed President Trump’s tweet pressuring the cartel to raise oil production.
OPEC production cuts are more of a concern because if you look at yesterday’s 8.6-million-barrel crude supply decline, it is clear that OPEC production cuts are already taking a toll on U.S. oil supply. Sure, the number was perhaps enhanced by weather issues down in the Gulf of Mexico, but the fact is that OPEC cuts and sanctions on Venezuelan oil will start to be a challenge for U.S. refiners going forward.
Speaking of U.S. refiners, they showed a surprise increase in runs even as we are in the heart of refinery maintenance season. Refineries operated at 87.1% of their operable capacity last week, increasing runs averaging 15.9 million barrels-per-day. Yet despite these efforts, petroleum products fell. Gasoline inventories decreased by 1.9 million barrels last week and are about 3% above the five-year average for this time of year. Distillate fuel inventories decreased by 0.3 million barrels last week and are about 2% below the five-year average for this time of year.
Overall, the EIA reported petroleum demand at 20.8 million barrels-per-day, up by 2.1% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 8.9 million barrels-per-day, down by 1.5% from the same period last year. Distillate fuel product supplied averaged 4.2 million barrels-per-day over the past four weeks, up by 4.5% from the same period last year.
The EIA also showed that U.S. oil production hit a new record of 12.1 million barrels-per-day last week. Yet despite that effort, U.S. inventories dropped. We may see more of that after the Houston shipping channel shut yet again. While at some point we may get some of that crude back, ultimately the United States is on a path to lower supply and higher prices.
Venezuela sanctions are biting but the Wall Street Journal reports that some oil from there is getting out. In a must read, they write that “Venezuela, under U.S. embargo, has shifted some crude exports from American refiners to India and Europe, according to the country’s oil minister and ship-tracking firms. But it will be difficult for President Nicolás Maduro’s government to generate a profit from these sales and counter U.S. pressure, analysts said. Since late January, the regime’s oil exports have come under U.S. restrictions aimed at redirecting crude revenue to opposition leader Juan Guaidó, whom the U.S. recognizes as the country’s legitimate president. Even so, Venezuela’s oil exports stood at 1.2 million barrels-per-day this month, the country’s oil minister, Manuel Quevedo, said Wednesday at an energy conference in Saudi Arabia. London-based shipping tracker Kepler showed exports as slightly lower than Mr. Quevedo’s numbers, saying they declined by 247,000 barrels to 1.1 million barrels-per-day in February.”
Fox News reports that President Trump abruptly walked away from negotiations with North Korea in Vietnam and is headed back to Washington on Thursday afternoon, saying the United States is unwilling to meet Kim Jong Un's demand of lifting all sanctions on the rogue regime without first securing its meaningful commitment to denuclearization. Trump, speaking in Hanoi, Vietnam, told reporters he had asked Kim to do more regarding his intentions to denuclearize, and “he was unprepared to do that.”
“Sometimes you have to walk,” Trump said at a solo press conference following the summit.
For oil, that means that oil sanctions and product caps remain. Crude oil is having its best start to a year in history. Of course, that comes after one of the worst Decembers in history. While the market starts to recover, the cuts in spending by energy companies and the fact that demand is not crashing will lead us to a path where the market will feel undersupplied. Look for breaks to get hedged as the crude price may look cheap by the time refiners start to come out of maintenance.
