Recent market activity suggests that the energy sector saw supply builds coming, notes Phil Flynn.
The oil market knew something was suspicious. Despite a rocketing stock market after Federal Reserve Chairman Jerome Powell sent a message that the Fed was ready to cut rates and a risk-on frenzy, the oil market struggled. Powel set off a massive risk-on trade saying the Fed would “act as appropriate to sustain the expansion” amid the economic impact of escalating trade wars.
It was clear when the market euphoria about easy money failed to inspire crude that something bearish was going on. The market knew something most analysts did not know, something not even some of the very expensive data analytics and intelligence firms knew. The market somehow suspected that we were going to see what can only be described as massive builds in crude oil, distillate and gasoline supply.
The American Petroleum Institute (API) came up with one of the most shocking weekly inventory reports in memory, stunning the market with a 3.545-million-barrel crude build, a +1.408, million barrel crude build in Cushing Oklahoma, a 2.696 million barrel build in gasoline and to top it all off a record breaking 6.314 million barrel distillate build. Now I know that Midwestern farmers are having a hard time planting due to the wet spring, but a build of 6.314 million barrels? Are you kidding me?
Yes, I know data shows some sectors of the economy are slowing down. Yes, I know we have seen weaker manufacturing data around the globe. I know that shale oil producers are producing light oil at a record high, yet I still believe these numbers look crazy. Not one analyst or major data provider seemed to suggest anything close to these numbers, yet the market action was making it clear that the market knew better. Crude oil’s inability to join stocks in the major risk-on rally meant the collective knew something was up.
Yet at the same time, action following through on the downside overnight might suggest the market suspects a slightly more bullish outcome from today’s Energy Information Administration (EIA) report. That or it realizes that the Federal Reserve and central bankers around the globe are going to juice up the global economy with monetary policies and the promise of other tools.
Get those printing presses ready. China, in response to the trade war, is already spending more money on infrastructure. The European Central Bank will offer Eurozone banks generous terms on its upcoming long-term loans when it meets, but won’t do anything to soften the impact of negative rates according to Bloomberg.
You also have OPEC and Russia talking about an extension of production cuts despite some whining from Russian oil companies. Reuters reported the head of Russian oil giant Rosneft, Igor Sechin, said on Tuesday that Russia should pump at will and he would seek compensation from the government if cuts were extended. Russia’s average oil output was 10.87 million barrels per day on June 1-3, down from an average of 11.11 million barrels-per-day in May, two sources familiar with official data said.
So even as oil inventories rise, it will be tough to fight the Fed. This build will cement continued OPEC cuts and the weak prices are not going to help U.S. shale producers.
Natural gas got beat up, but it deserved it. Production is far exceeding demand. Stay short young man.
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