Crude Supply Builds Leaving it Out Rate Cut Euphoria

06/12/2019 2:20 pm EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Major markets tend to benefit from expected interest rate cuts, but crude oil’s increasing supply is leaving it out of the party, notes Phil Flynn.

Did you ever get the feeling that the world was a tuxedo and you were a pair of brown shoes? Oil traders probably feel like George Gobel once did because in a world of risk-on tuxedos, petroleum has been the proverbial pair of brown loafers. Let’s face it as S&P 500 and gold traders party because the Federal Reserve is promising more punch in the punch bowl, crude oil has been left at the alter because of an incredible surge of oil supply and concerns about global demand.

Those fears became even more acute after the American Petroleum Institute (API) reported another massive 4.852-million-barrel increase in crude supply. While some believe that the API is just playing catch up with the Energy Information Administration (EIA) report and their massive 24-million barrels of upward revisions in supply, the number still was a bull killer. While the rest of the commodity risk complex assumes that Fed rate cuts and global economic stimulus will increase demand, the oil market is going to have a hard time looking past these massive increases in U.S. crude supply. The build was led by another major 2.365-million-barrel build in flood plagued Cushing Oklahoma and a crazy West coast crude surge.

The good news, the API reflects what we saw in the USDA crop progress report. Farmers are going back to work and they are burning a lot of diesel. The API reported a major 3.461-million-barrel drop in distillate stocks. This is a very bullish number, but it is late in coming because of the slow pace of U.S. planting. Gasoline supplies came in as expected with supply rising by a barely noticeable 829,000 barrels.

This comes as the EIA lowers their global oil demand forecast. In their Short-Term Energy Outlook, they said that “EIA now forecasts that Brent crude oil spot prices will decline from an average of $71 per barrel in 2018 to $67 per barrel in 2019. The 2019 price forecast dropped $3 per barrel from EIA’s forecast in last month’s Short-Term Energy Outlook, largely because of changes in macroeconomic conditions.” They said: “In its June outlook, EIA forecasts that global demand for oil will outpace supply in 2019, largely because of decreased production in several OPEC countries and supply challenges in Russia and North Sea oil production operations. However, EIA expects supply and demand overall to reach rough balance next year, because we expect non-OPEC production to grow strongly even as declines in OPEC slow.” Yet while the recent data of rising supply may support this call, we cannot deny that last year when everyone was calling for a demand drop, interest rate cuts caused demand to surprise to the upside.

They also raised their oil production forecast, “EIA expects U.S. crude oil production will continue to set new records in 2019 and 2020, culminating with average production of 13.5 million barrels-per-day by the end of 2020.” The EIA also reported that “U.S. natural gas exports are on pace to set new records over the next few years as additional export facilities and infrastructure come online. EIA forecasts that U.S. natural gas exports will reach almost 18 billion cubic feet per day by the end of 2020.

By comparison, the United States exported roughly 9.9 billion cubic feet per day on average in 2018. Yet despite the drop in prices some think oil production will rise regardless of price. In a CNBC interview Energy Secretary Dan Brouillette said that the U.S. will continue to produce 12 million barrels a day — which are all-time highs — throughout next year, and perhaps going up to as high as 13 million barrels.  He said that while the number of operating oil rigs have declined this year, production is not actually the biggest problem. Meanwhile, Chinese tariffs on U.S. natural gas will not put a dent in the country’s ambitions to be a top energy exporter, he indicated, citing high demand from the rest of Asia.

The EIA, in its June Short-Term Energy Outlook, continues to forecast a shift in the U.S. electricity fuel mix, reflecting the power sector turning to natural gas as a result of costs considerations, at the same time as renewable capacity sees significant growth. EIA is forecasting that natural gas and renewables will generate an average of about 57% of U.S. electricity by 2020. “Despite expected outages and closures, EIA continues to forecast that nuclear power will make up about 19% of U.S. electricity generation in 2019 and 2020, on average. EIA attributes that forecast to operational advancements in the nuclear power sector and increased capacity among existing power plants.” For coal: “The outlook for U.S. coal consumption continues to trend downward in 2019 and 2020, as demand from the power sector continues to abate and exports fall from 2018’s recent highs. EIA forecasts that U.S. coal consumption will decrease in 2020 below 600 million short tons for the first time since 1975. U.S. electricity generation from wind reached nearly 1 million megawatt hours per day in April 2019, according to the June outlook. The milestone marks a new record for wind’s contribution to U.S. electric generation, which EIA forecasts will exceed the contribution from hydropower generation for the first time this year.”

Oil traders still question the data. Either U.S. oil producers are producing a lot more oil than they say they are or imports and exports in the reports are being miscounted. Regardless we feel that at some point low prices will stir demand. That along with U.S. rate cuts will cause a reversal in fortunes. In the short term enjoy the volatility as the charts and technical trading rules.

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