Greater gas demand, FOMC telegraphing a rate increase and Iran shooting down a U.S. drone are leading to a sharp rally in crude oil, writes Phil Flynn.
As if crude oil did not have enough reasons to rally. You had the Federal Reserve all but assure us that they were going to raise rates next month, and you had a U.S. gasoline demand record last week, and then you have Iran. Oil prices are spiking on a report that Iran has shot down a U.S. surveillance drone which Iran’s Revolutionary Guards claim was flying over southern Iran, but others are saying was in International waters. This event is raising fears Iran and the U.S. are headed towards a military confrontation that would have serious price consequences for energy. There is too much dangerous activity going on in the Strait of Hormuz, the world most important energy waterway.
Yet oil already had reasons to turn higher. Not only was data from the Energy Information Administration (EIA) supportive, you had the power of the most important central banker in the world saying they would act appropriately to keep the expansion going. In fact, the Fed signaled that they were very close to cutting rates yesterday.
Low interest rates will only feed U.S. oil demand, demand that is already showing signs of expanding. The EIA reported that implied U.S. gasoline demand hit 9.928 million barrels-per-day; the highest that figure has ever been recorded since the EIA began tracking it in 1991. A break in the gas price and a break in the bad weather helped fuel the gains. You can also credit record low unemployment as a driver for drivers. The prior record was set in the week ended Aug. 24, 2018, when product supplied reached 9.899 million barrels-per-day.
Overall demand was also great making oil traders ask, what slowdown? The EIA reported total products supplied (demand) over the last four-week period averaged 20.7 million barrels-per-day, up by 1.8% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 9.7 million barrels-per-day, up by 2.0% from the same period last year. Distillate fuel product supplied averaged 4.0 million barrels-per-day over the past four weeks, up by 0.3% from the same period last year. Jet fuel product supplied was up 5.1% compared with the same four-week period last year. This will improve with low rates.
Low rates will also help the building sector. Already lumber has been screaming and many petroleum-based housing materials will also get a boost. Businesses that have been wary about the trade war will start to invest because this low rate environment is going to be too tempting to sit on your hands and let your competitor get a jump on you.
Natural Gas
Natural gas prices are languishing near the lows as summer in the Midwest refuses to stay and power generation is weak. Yet low natural gas prices will spur demand over the long-term. The EIA reports that “Lower natural gas prices in recent years have spurred the construction of new natural gas-fired power plants in the United States. Of the new U.S. natural gas capacity added since 2016, 31% use advanced natural gas-fired combined-cycle (ANGCC) units. Greater use of the new, larger ANGCC designs has led to efficiency gains and economies of scale, which have resulted in reduced capital construction costs. These lower costs are likely to substantially increase ANGCC’s share of new U.S. natural gas capacity additions in future years.
Natural gas-fired combined-cycle generating technology has evolved over the past few decades. Generators have large, heavy-duty natural gas turbines that are defined by their firing temperatures and unit capacity ratings. Beginning in the early 1960s, 20-megawatt (MW) natural gas-fired turbines became available. By the mid-1980s, the highest natural gas-fired turbine rating reached 100 MW, and it had increased to 200 MW by the late 1990s. With firing temperatures that are more efficient, today’s ANGCC units are rated at 320 MW.”
For the record, the EIA reported that oil production dropped back to 12.2 million barrels a day. U.S. commercial crude oil inventories decreased by 3.1 million barrels from the previous week. At 482.4 million barrels, U.S. crude oil inventories are about 7% above the five-year average for this time of year. Total motor gasoline inventories decreased by 1.7 million barrels last week and are about 1% above the five-year average for this time of year. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories decreased by 0.6 million barrels last week and are about 5% below the five-year average for this time of year.
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