Crude oil demand seems to be exceeding supply, suggesting that the global economy might not be as slow as feared or that global production is falling faster than global demand, writes Phil Flynn.
OPEC, along with their coconspirator Russia, may force the world to drop the "OPEC always cheats" moniker as compliance to cuts are running at an astounding 159% according to data from Tass and the OPEC monitoring committee. The non-OPEC cut to 166% is making up for lost time. On top of that, Iran oil exports have fallen to a very insignificant 450,000 barrels-per-day as President Trump’s sanctions put more pressure on the Iranian regime. The Guardian reports that Iran is likely to step up its floating storage capacity considerably over the remainder of the year if it finds its exports squeezed due to increasing scrutiny on movement of its crude-carrying vessels. The report says that Iran would need 30 to 40 million barrels of fleet capacity to continue exporting 300,000 to 500,000 barrels-per-day of exports using its own vessels, which means the country would have to double its capacity to around 80 million barrels.
Regardless, the reality is that it looks like oil is poised to move higher from here, with help from global economic stimulus and the draining of the U.S. energy storage hub in Cushing, Oklahoma. Global economic stimulus from Germany and China should keep oil demand solid.
The American Petroleum Institute set the stage for a bullish day when they reported a massive 2.8-million-barrel draw from Cushing, Oklahoma. That helped overall crude supply fall by 3.5 million barrels suggesting that U.S. oil demand is very solid. Gasoline supply fell 0.4 million barrels while distillates rose by 1.8 million barrels. As usual we will wait to see what the Energy Information Administration (EIA) has in store for us this morning. We will also look at the Fed minutes to get a sense where the Fed is on more interest rate cuts.
We know where the President is on rate cuts as he called on the Fed to cut its benchmark rate by at least one percentage point. President Trump said he and his administration were exploring lowering capital-gains taxes by indexing gains to inflation, which he suggested he could do through executive action rather than through Congress. He is also suggesting a payroll tax cut which would be another kick start to oil and gasoline demand.
One bearish overhang to the market could be the exit on embattled Venezuelan President Nicolás Maduro. There are reports confirmed by Nicolás Maduro himself that the U.S. and top Venezuelan officials have been talking to members of the Trump administration. There are reports his second-in-command had been negotiating his exit with the United States meaning that perhaps the U.S. can get rid of Maduro without any violence and bring back hope to the people of Venezuela. Maduro said, “I confirm that for months there have been contacts between senior officials from Donald Trump’s government and from the Bolivarian government over which I preside – with my express and direct permission.” Maybe Maduro is smart enough to take the money and go instead of going down like Saddam Hussein. If Trump achieves a peaceful transfer of power, it will be a great achievement. He may be criticized, or he will be criticized for letting a thief like Maduro go, but it is better than having a military conflict. For oil it would be a bearish event as the market would bask in the return of that coveted heavy Venezuelan crude.
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The EIA writes that, "The U.S. leads global petroleum and natural gas production with record growth in 2018. U.S. petroleum and natural gas production increased by 16% and 12%, respectively, in 2018, and these totals combined established a new production record."
The United States surpassed Russia in 2011 to become the world's largest producer of natural gas and surpassed Saudi Arabia in 2018 to become the world's largest producer of petroleum. Last year’s increase in the United States was one of the largest absolute petroleum and natural gas production increases from a single country in history. For the United States and Russia, petroleum and natural gas production is almost evenly split. Saudi Arabia's production heavily favors petroleum. Petroleum production is composed of several types of liquid fuels, including crude oil and lease condensate, natural gas plant liquids (NGPLs), and bitumen. The United States produced 28.7 quadrillion British thermal units (quads) of petroleum in 2018, which was composed of 80% crude oil and condensate and 20% NGPLs.
Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn
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