Crude oil bears are running for their lives as oil hits new highs on strong demand and a trend of falling supply, writes Phil Flynn, senior energy analyst for the Price Futures Group. Flynn will be speaking at the MoneyShow Las Vegas, May 13-15.
Crude oil bears are running for their lives as oil hits new highs on strong demand and a trend of falling supply that will lead to an inevitable tightening of global oil supply. Not only do you have the cumulative effect of OPEC and Russia production cuts, you have the sanctions on Iran and Venezuela adding to the bullish fundamentals. On top of that, you have a shocking report come out about a big 4.9% drop in Brazilian oil production year over year in February when major reporting agencies were predicting an increase.
While the American Petroleum Institute (API) did report a surprise 3-million-barrel increase in supply last week, the reality is that traders know that data was impacted by the closures of the Houston Shipping Channel. The trade is looking at the big picture, especially on the demand side, that is showing some incredible growth trajectories.
Consider for example that the U.S. refining industry is running at record levels. The Energy Information Administration (EIA) reported that “gross inputs to U.S. petroleum refineries, also referred to as refinery runs, averaged 17.3 million barrel-per-day (bpd) in 2018, the highest annual average on record and the fifth consecutive year of record-high refinery runs. Refinery runs peaked in June at an average of 18.0 million bpd, with average weekly runs exceeding 18.0 million bpd during six weeks in 2018. High refinery diesel margins — the difference between the acquisition price of crude oil and the wholesale price of diesel fuel — have provided an incentive for refiners to maintain high runs despite low gasoline refinery margins. The record high U.S. gross refinery input levels are driven in large part by refinery operations in the Gulf Coast and Midwest regions.
In the Gulf Coast, which is home to more than half of all U.S. refinery capacity, refinery runs averaged more than 9.2 million bpd in 2018, 8% higher than the previous five-year average for that region and the first time the annual average surpassed 9.0 million bpd. The Midwest has the second-highest refinery capacity, and refinery runs averaged 3.8 million bpd in 2018, or 6% higher than the previous five-year average."
Peak Oil Redux
Peak oil talk is back! Yes, we went from talking peak demand back to talking peak oil. Traders took note of a Javier Blas piece on Bloomberg that reminded us old timers of a time when people actually believed that the world would soon run out of oil. Blas writes that it was a state secret and the source of a kingdom’s riches. It was so important that U.S. military planners once debated how to seize it by force. For oil traders, it was a source of endless speculation. Now the market finally knows: Ghawar in Saudi Arabia, the world’s largest conventional oil field, can produce a lot less than almost anyone believed. When Saudi Aramco on Monday published its first ever profit figures since its take over nearly 40 years ago, it also lifted the veil of secrecy around its mega oil fields. The company’s bond prospectus revealed that Ghawar is able to pump a maximum of 3.8 million bpd — well below the more than 5 million estimated previously. The EIA, a U.S. government body that provides statistical information and often is used as a benchmark by the oil market, listed Ghawar’s production capacity at 5.8 million barrels a day in 2017. So, the EIA is not only overestimating shale production but also Saudi production. But more importantly, the percentage of production across OPEC nations is based on each nation’s proven reserves. This revelation may cause some controversy within the cartel, which has—uncharacteristically—acted in unison recently regarding production cuts.
Oil products have been calm but that won’t last too much longer. The API reported that gasoline fell by 2.6 million barrels and distillate by 1.9 million barrels. Hopefully, the hedgers are already hedged.
