Crude Oil Bears Get Wake Up Call

06/26/2019 1:13 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

 Crude oil supply is correcting from the inflated numbers from last month and U.S. and Chinese demand appears to be growing, reports Phil Flynn.

Crude oil is getting a big wakeup call after the American Petroleum Institute (API) reported a big draw in crude oil and refinery outage plagued gasoline. This comes as Chinese oil imports come in at near record levels and the name calling between the U.S. and Iran heats up. U.S. President Donald Trump threatened on Tuesday to obliterate parts of Iran if it attacked “anything American.” Exit strategy? We won’t need an exit strategy. Iranian President Hassan Rouhani angerly complained that sanctions on his Supreme Leader Ali Khamenei were "outrageous and idiotic" and that sanctions were “mentally retarded.” The back and forth shows that President Donald Trump can out name call Iran any day of the week. If I were them, I would just give up. 

It looks like the massive crude builds have come to an end and now it’s payback time. The API stunned many in the market by reporting that U.S. crude supplies plunged by 7.55 million barrels last week. That reverses some of the crazy adjustment builds and it may be a sign that the oil market has been too confident about supply. More talk of shale oil production leveling off along with stronger than expected demand in the U.S. and now China, according to data released yesterday, is causing a major rebound. With demand strong, refiners have a lot of work do.

Gasoline supplies suddenly look a lot tighter after the API reported that U.S. gasoline supply fell by 3.17 million barrels. This looks more ominous as U.S. gasoline demand hits records. Now it looks like after the refinery explosion at the Philadelphia Energy Solutions Refinery, the refinery may be closed permanently. No one wants a refinery in their backyard until their gas prices start shooting up 30¢ to 50¢ per gallon. Distillates held in only rising by 160,000 barrels yet is getting caught up in the oil and gasoline rally.

Reuters Is reporting that Philadelphia Energy Solutions (PES) is expected to seek to permanently shut its oil refinery in the city after a massive fire caused substantial damage to the complex, two sources familiar with the plans said on Tuesday. Shutting the refinery, the largest and oldest on the U.S. East Coast, would cost hundreds of jobs and squeeze gasoline supplies in the busiest, most densely populated corridor of the United States. The refinery, which could still change its plans, is also expected to begin layoffs of the 700 union workers at the plant as early as Wednesday, the sources said. The layoffs could include about half of the union workforce, with the remaining staff staying at the site until the investigation into the blast concludes, the sources said. PES is expected to file a notice of intent with state and federal regulators as early as Wednesday, setting in motion the process of closing the refinery, the sources said. 

Iran tensions are costing you more money. Bloomberg News reports that the “So-called war risk premiums for a standard oil cargo from the Persian Gulf and the tanker hauling it can now cost upwards of $500,000, according to people familiar with the insurance market. Earlier this year, the same premiums would have cost owners less than 1/10 of that.”

Natural Gas may be getting a pop as the first big heat wave of the summer may hit the Midwest. On one hand that will lead to lower injections supporting price. On the other hand, it is almost freaking July.

Chinese Demand

What China slowdown? Based on Chinese oil imports their economy is fine, or at the very least their stimulus spending is kicking in. China imported 786,638 metric tons of U.S. crude oil in May, the equivalent of 186,000 barrels-per-day, the most since September, data released by the General Administration of Customs show. Shipments in May from Iran fell two-thirds from the month before to the lowest level since October 2018, while receipts of Venezuela crude more than halved from April’s big increase in Chinese fuels consumption and steel production surged and according to Reuters. On a barrels per day basis, Chinese oil imports were up 4% from a year ago but were flat versus April when China’s total crude oil imports hit a monthly record.

Russia was the biggest provider to China for oil, but the United States did their part despite U.S. sanctions. Bloomberg News wrote that “Oil-hungry refiners across China ramped up purchases of U.S. crude in May amid an erosion of supplies from sanctions-hit Iran and Venezuela, even as trade tensions rage on between Beijing and Washington.”

Steel Wheels

Reuters reported “alien iron ore prices fell for a third straight session on Wednesday as concerns about tight supply eased, while steel futures extended a rally partly driven by production cuts imposed in some of China’s heavily polluted industrial areas. Worries eased a bit about a global iron ore shortage that had sent spot prices to five-year highs and futures to record peaks in recent weeks, after Brazilian miner Vale SA resumed full operations at Brucutu mine. Vale, the world’s No. 1 iron ore producer, said on June 19 that it would fully resume Brucutu operations within 72 hours, after an appeals court overturned an earlier ruling that halted processing amid concerns about the safety of a nearby dam. The mine was fully restarted on Saturday and should be back to 100% capacity.” 

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