Despite the bearish outlook for crude oil based on a global economic slowdown, IMO rules, plunging U.S. rig counts and failing shale firms paint a more bullish picture, writes Phil Flynn.
The big bear oil case consistently has been based on fears of a slowdown in the global economy. The case is that as the global economy slows, demand will fall, leading to a massive oil glut and low prices. The only problem is that, once again, if you look at oil inventories, that case looks a bit flimsy. In yesterday's report, we spent a lot of time focusing on U.S. inventories, but if you look at the global picture, we are seeing things that just don’t fit the bearish narrative. The best example is the fact that at the time of year when oil supply normally rises, like this maintenance season, inventories are instead falling.
A report from research firm HFSI Research on the Seeking Alpha website pointed out that total global oil inventories are in an astounding counter-seasonal decline. They point out that total oil stock inventories dropped 4.5 million barrels globally last week, and they say that the global crude draws are going to be more “staggering” going forward in that we are just starting to see the global inventory decline accelerate. They also agree with my assessment that “the macroeconomic landscape has so far won against the fundamentals, but we don't think this will persist any longer.”
Refiners are going to have to ramp up globally and while demand growth may indeed slow, it is still on track to be at record highs. Add to that the displaced barrels of ultra-low sulfur diesel that are now going to power ships instead of planes, trains, and automobiles, and even raise gasoline prices, which will make it more expensive to get home for Thanksgiving.
Reuters reports that those barrels are already moving. They write “Stockpiles of low-Sulphur marine fuels held in floating storage around the Singapore trading and pricing hub are steadily growing ahead of a 2020 global deadline for rules that have shaken the global oil refining and shipping industries. A total of 32 ships, mostly supertankers capable of carrying 300,000 tons or more of oil, are currently anchored in Malaysian waters near Singapore accumulating stores of International Maritime Organization-compliant fuels on board, according to data released by intelligence firm Kpler on Thursday.”
The barrels would be elsewhere but now refiners have a big challenge. To meet demand at a time when Incentives are tightening and ahead of another potential production cut by the OPEC cartel.
The oil market will also look at the plunging U.S. rig count this afternoon. The plunging trend of falling U.S. rigs reflects the lack of profitability by many U.S. shale firms. Banks are not very friendly to lending money and many are saying that this shale cash squeeze will ultimately force the Energy Information Administration to reduce its lofty production forecast. On the positive side, there are reports that the North Sea buzzard production will restart this weekend.
Russia is following in the steps of Saddam Hussein in Iraq and Giselle Bündchen and now wants to be paid in euros instead of dollars for its oil. Reuters reports that “Russia’s largest oil company Rosneft has fully switched the currency of its contracts to euros from U.S. dollars in a move to shield its transactions from U.S. sanctions, Chief Executive Igor Sechin said on Thursday.”
Make sure you get on my intraday updates for breaking news and trade levels. Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with our daily analysis. We had a great response to our Money Show in San Francisco! Watch for our Videos! Thanks to all. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn
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