Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Oil prices sold off almost 5% on what many people attributed to a story that some unnamed Russian oil company source said that Russia was against a production cut. Today those sources are still unknown, but really the sell-off in oil probably had more to do with the fact that Saudi Arabia cut prices to Asia as the kingdom was losing market share to Iraq and Iran that has been raising output and taking away business from the Saudis. Reuters News reported that OPEC exports increased last month. OPEC exported 25.92 million barrels per day in June, up 450,000 bpd from May and 1.9 million bpd more than a year earlier and reports of rising production from Nigeria and Libya is giving the perception that the OPEC/non-OPEC accord is becoming strained and that might cause the whole production cut deal to fall apart.
Yet while the market speculates on reports from unnamed Russian sources and conflicting data on OPEC exports, an earlier report showed that OPEC exports fell and it seems that many are looking at data with bearish blinders on. The reality is that we are seeing US oil supply still decline at record pace. The American Petroleum Institute (API) reported that US crude oil supply plunged by 5.8 million barrels last week. That drop comes as the rise in US rig counts paused and we saw a drop in US oil production. Where the trend of falling US oil supply is most evident is in the NYMEX delivery point of Cushing, Oklahoma where supplies fell again by a hefty 1.4 million barrels.
The API also reported a large 5.7 million barrel drop in gasoline supply as gas went up on the rack ahead of what may have been a record breaking demand weekend for gasoline as prices hung around a 12 year low for the holiday. While the market did see a 400,000 barrel build in distillates, the overall bullish nature of the data does not fit the bearish oil narrative. That makes today’s Energy Information Administration (EIA) report very big to see if oil can regain the nearly 5% loss it suffered yesterday.
Not only do we have to watch the total inventories but also the US oil production number. We saw a fall last week and many traders want to know if that was a fluke or is it a sign that US oil output has hit a short term peak. We know we are seeing an uptick in uncompleted wells and the wells that are being completed are seeing less production per well. Those are warning signs that the shale producers are struggling to deal with the ramifications of the recent oil price crash.
The oil market also took note of Volvo’s announcement that they are planning to phase out gas only car production by 2019, and only produce electric or electric hybrid cars. The company also said that it would launch three new fully electric Volvo’s between 2019 and 2021. They also plan to make two high performance electrics under the Polestar brand that is expected to challenge Tesla. Yet the move by Volvo may not be as devastating to future gasoline demand as many think as we will see the internal combustion engine satisfy most of the growth for new vehicles in the developing world but is still a glimpse into a future where we will need less gasoline per car but we will still see a lot more cars being built.
Lower temperature forecast and rising production forecasts sunk that natural gas. Fears of a storage squeeze has been cooled as the temperatures are not supposed to be as hot and dry in the US. Gas production is ahead of expectations.
Questions? Ask Phil Flynn today at 312-264-4364
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