Bullish Supply Report Supports Crude

09/06/2019 2:40 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

A bullish supply report and geopolitical risk is supporting crude prices, notes Phil Flynn

Oil prices gave up some of its fundamental strength after a very bullish Energy Information Administration (EIA) supply report on fears that Hurricane Dorian will adversely impact oil demand as we head into refinery maintenance season. Even news that Iran was threating to abandon all constraints on nuclear development in breach of the 2015 nuclear deal failed to spark an additional geo-political risk rally.

Oil did rally on an earlier report from the Tasnim New Agency that Yemeni troops launched retaliatory missile attacks against Saudi troops in Jizan and Haradh, Saudi Arabia. The news agency said Yemen's al-Masirah news website reported that more than 30 Saudi troops were killed and injured after the missile attacks. The attack from the Iranian backed troops will only further complicate U.S-Iran talks as well. Still, the Trump administration says it is open to talks with Iran. In the meantime, oil sold off on a report that the People’s Bank of China cut reserve requirements for all banks by 0.50 percentage point effective from September 16 and cut its reserve requirements for certain urban banks by another full percentage point, with half effective on October 15 and the rest, a month later. Apparently, the oil market wanted more.

Hurricane Dorian, as it hit Carolina’s coasts, is raising demand. The storm also did major damage to oil facilities in the Bahamas. Terminal News reported Equinor’s South Riding terminal in the Bahamas, which comprises 6.75 million barrels of crude and condensate storage capacity, sustained damage and that oil has been observed on the ground outside of the onshore tanks. The company says it is too early to indicate how much has split and that currently there are no observations of any oil spill at sea. All personnel in the Bahamas are confirmed safe and accounted for. Equinor says oil spill response resources have been mobilized and they are working to establish a better overview of the situation.  

More shale pains

 Reports of declining production rates, as well as the inability to turn a profit, is raising questions about U.S. shale production outlook. The big oil majors are reportedly hovering to pick up distressed shale assets and while that should stem the doom and gloom, it is apparent that the lack of investment in more traditional oil products could leave the market undersupplied in the future. Reuters reported that, “Oil producers and their suppliers are cutting budgets, staffs and production goals amid a growing consensus of forecasts that oil and gas prices will stay low for several years. The U.S. has 904 working rigs, down 14% from a year ago, and even that is probably too many, estimated Harold Hamm, chief executive of shale producer Continental Resources, which has reduced the number of rigs at work Bankruptcy filings by U.S. energy producers through mid-August this year have nearly matched the total for the whole of 2018. A stock index of oil and gas producers hit an all-time low in August, a sign investors are expecting more trouble ahead." There will be trouble for shale if the Democrats get their way.

Crude oil demand is still rocking, and oil supplies are falling. A big surge in U.S. oil imports happened as ships wanted to offload before the storm. U.S. oil exports were above 3.0 million barrels for the second week in a row. But the data will get murkier as the petroleum complex has to recover from storm disruptions. Still, crude oil inventories decreased by an impressive 4.8 million barrels from the previous week. At 423.0 million barrels, U.S. crude oil inventories are at the five-year average for this time of year. Gas demand is still strong as inventories decreased by 2.4 million barrels last week and are about 3% above the five-year average for this time of year.
  
Natural gas had a bearish report, which may be the last hope for natural gas bulls. The natural gas bears have owned this market until the last few weeks. I hope the bulls enjoyed the run. The EIA reported that working gas in storage was 2,941 bcf as of Friday, August 30, 2019, according to EIA estimates. This represents a net increase of 84 bcf from the previous week. Stocks were 383 bcf higher than last year at this time and 82 bcf below the five-year average of 3,023 bcf. At 2,941 bcf, total working gas is within the five-year historical range.

Read Phil’s energy report at Price Futures Group . Get my fabulously exciting Daily Trade Levels and insider update at pflynn@pricegroup.com Twitter: @energyphilflynn  | Facebook: Phil Flynn

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