Bullish Crude Supply News vs. Bearish Economic Outlook

10/02/2019 12:50 pm EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

While the weak manufacturing data has buoyed crude oil bears, inventory data tells a different story, reports Phil Flynn.

The oil inventory report is not fitting the bearish narrative that is being exposed as global manufacturing data takes a dive. The surprise plunge in the ISM purchasing managers’ index to 47.8 in September raised concerns about a major global economic slowdown and a bad start to the fourth quarter of the year. Yet the American Petroleum Institute (API) report seemed to show data that seems to fly in the face of the doom and gloom.

Instead of the projected increase in crude supply that many analysts were calling for, we instead saw a sizable 5.92-million-barrel drawdown. The draw came as U.S. exports flourished and global demand for products tighten inventory.

Reports that distillate supply in New York Harbor had taken a major tumble were confirmed as the API reported that distillate supply fell by a very large 1.74 million barrels. That is going to be the one to watch as the new International Maritime Organization (IMO), the 171-member state United Nations agency that sets standards for shipping, is set to reduce the maximum amount of sulfur content (by percent weight) in marine fuels used on the open seas from 3.5% to 0.5% by 2020. These regulations are intended to reduce sulfur dioxide, nitrogen oxides, and other pollutants from global ship exhaust, yet will also tighten distillate supply.

The API did report a 2.13-million-barrel increase in gasoline supply but that contrasted with private reports that show big supply drops in New York Harbor.

In fact, oil supply is tighter than the market thinks as supply is ready to fall below 400 million barrels. Anas Alhajji points out that after accounting for line fill in new oil pipelines supply is really at the lowest levels since 2014.  In fact, he says that U.S. crude inventories will be too close to the five-year average between 2010-2014. They are even lower when you adjust for rising exports.

So, while oil struggles on slowing growth fears and impeachment fears, the global oil market is going to see meaningful tightening this year. We are going to see significantly higher distillate demand and despite the calm recently, the tensions in the Persian Gulf have not gone away.

Iran’s Grand Poohbah and Supreme Leader Ali Khamenei is stating that they will continue reducing its commitments under the nuclear deal until it reaches a “desired result” like the removal of sanctions.

Still Reuters is reporting: “A plan for talks presented to the United States and Iran by French President Emmanuel Macron is broadly acceptable to the Islamic Republic, President Hassan Rouhani said on Wednesday during a cabinet meeting that was broadcast live. He said some wording needed to be changed in the plan, which outlines that Iran will not pursue nuclear weapons and will help the security of the region and its waterways, while Washington will remove all sanctions. It would also allow Iran to immediately resume oil sales.”

But Rouhani also told the cabinet meeting, broadcast on state TV, that mixed messages about sanctions received from the United States while he was there last week had undermined the possibility of talks. Rouhani attended the United Nations General Assembly in New York. He added that it was not acceptable for U.S. President Donald Trump to say in public that he would intensify sanctions while European powers were telling the Islamic Republic in private that he was willing to negotiate. "The American president on two occasions, once in his speech at the United Nations and another time, said explicitly that we want to intensify sanctions. I told these European friends, so which part should we accept? Should we accept your word that you say America is ready?" Rouhani said. 

Goodbye Ecuador!

Ecuador said it wants out of OPEC. Ecuador is a very small producer and wants to leave the group so it can pump more oil and not be restrained by the cartel. I would hate to be the guy that had to break the news to Crown Prince MBS. I don’t think he will be pleased. 

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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