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Crude Supply Checks Rally

04/24/2019 1:20 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Despite an increase in crude oil supply, the bullish trend should continue, especially if Trump Administration holds firm on Iranian sanction waivers, writes Phil Flynn.

Crude oil prices are backing off as soothing oil supply seems to be dousing the raging bullish flames. Not only did we get a shockingly large 6.86-million-barrel increase in crude supply, assuming the American Petroleum Institute (API) report is to be believed, you also had a statement from The International Energy Agency (IEA) that says that oil markets are now adequately supplied, and that global spare production capacity remains at comfortable levels.

Crude Oil

The IEA did warn that further tightening of sanctions on Iran will have an impact on its export capacity. The IEA says that Iranian shipments of crude and condensates are running around 1.1 million barrels-per-day (mbd) in April, 300,000 barrels-per-day lower than March, and 1.7 mbd lower than May 2018. As a result of OPEC’s high compliance rate with the agreed supply cuts in the OPEC+ group, global spare production capacity has risen to 3.3 mbd, with 2.2 mbd held by Saudi Arabia and around 1 mbd by the United Arab Emirates, Iraq and Kuwait. Saudi Arabia’s output in March dropped to 9.8 mbd after it cut far more than required under the OPEC+ supply cuts. That is more than 1 mbd below the record high of 11.1 mbd that Saudi Arabia pumped last November.

Total oil supplies from the United States are expected to grow by 1.6 mbd this year. Furthermore, as infrastructure bottlenecks in the United States are easing, oil exports are now more able to keep pace with production trends. The Organization for Economic Cooperation and Development (OECD) oil inventories at the end of February 2019 were at 2,871 million barrels, which is above the five-year average. The IEA notes that with global economic growth increasingly fragile, consumers and producers should take steps to avoid higher oil prices that will prove painful to all involved.

The IEA recommends that consumers and producers take steps to avoid higher oil prices and that is why we have recommended to get hedged to avoid upside prices risk. Still though, from a technical standpoint oil prices may be ready for some type of price correction. Oil prices ended the best quarter in 10 years, erasing the crash that was based on the waivers by the Trump administration for buyers of Iranian oil. Now of course it looks like there will be no waivers, even as China screams bloody murder about the possibility of getting penalized by the United States for buying Iranian crude. Chinese foreign ministry spokesperson Geng Shuang said that "China opposes the unilateral sanctions and so-called long-arm jurisdictions imposed by the United States. Our cooperation with Iran is open, transparent, lawful and legitimate, thus it should be respected."

This may be a new issue that comes up in the U.S.-China trade talks. According to reports, the Trump Administration wants to get this deal signed, sealed, and delivered. Does that mean that perhaps the Trump Administration might be open to granting a waiver to China for Iranian crude? At the same time, if China stops buying Iranian crude, the U.S. oil producers will be the biggest beneficiary as China will up their purchases here. That should cut into the trade deficit a little bit. U.S.-China trade talks are set to resume April 30 in Beijing.

China also wants a deal. Asian stock markets were weak overnight on signs that China may ease off of stimulus. Reuters reported that “China’s central bank is likely to pause to assess economic conditions before making any further moves to ease lenders’ reserve requirements, after better-than-expected growth data reduced the urgency for action, policy insiders said. Although the central bank’s easing bias remains unchanged, it sees less room this year for cutting reserve requirement ratios (RRRs) - the share of cash banks must hold as reserves - as fiscal stimulus plays a bigger role in spurring growth, according to government advisers involved in internal policy discussions. The People’s Bank of China (PBOC) is also worried that pumping too much cash into the economy could reignite bubbles over time, the policy insiders said, and wants to save some of its policy ammunition. “In the short term, it’s not necessary to use RRR cuts to boost economic growth,” one policy adviser told Reuters. “Monetary policy should leave some room - if economic uncertainties rise or economic conditions deteriorate, the central bank could ease policy.”

Of course, the Trump administration says that in large part they are looking to Saudi Arabia to fill the Iranian oil sanction void. Yet right now, the Saudis are not in a hurry to raise output until they are convinced that there is a need and that President Trump won’t change his mind again on sanctions.

Reuters is reporting Saudi Arabia’s Energy Minister Khalid al-Falih said on Wednesday that the kingdom’s crude production would remain within levels outlined in OPEC-led output cuts, but the top oil exporter would also be responsive to its customers’ needs. Falih said “there will be very little variation” in the kingdom’s oil production in May from the past couple of months, and Saudi Aramco’s crude allocations for June would be made in a couple of weeks.

The API also reported that gasoline supply finally increased, rising by 2.163 million barrels. The increase was welcome as it broke a string of withdrawals. Distillate supply reportedly fell by 865,000 barrels.

And then there is natural gas. The market could not hold onto a rally even after some early spring demand. Andrew Weissman on EWB Analytics says there are declining liquefied natural gas feed gas flows to Corpus Christi precipitating another leg lower despite bullish weather forecasts adding 33 Bcf of demand since Friday. He says that Thursday’s EIA Weekly Storage Report is likely to yield a year-over-year storage surplus for only the second time since December 2016. With a string of eight triple-digit injections potentially beginning next week, further downward pressure is likely on NYMEX natural gas.

In addition to a growing year-over-year natural gas surplus, supply/demand may average 4.6 Bcf/d looser than the five-year average from mid-March to mid-May. Although another 12¢ per MMBtu decline for natural gas may be warranted on a seasonal basis from a fundamental perspective, it is possible that the market overshoots still lower this spring and sets the stage for an early summer recovery rally.

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