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 is getting hit with shocks. No, I am not talking about the fact that waivers to buyers of Iranian crude go into effect. I am also not talking about the uprising in Venezuela. I am not talking about continued fighting in Libya. I am talking about the 6.81-million-barrel API build. Even bearish traders are left scratching their heads trying to figure out what caused this massive oil supply increase. Part of the answer may be in the fact that stocks in the Cushing Oklahoma delivery point increased by a whopping 1.35 million barrels, and maybe all the refinery outages slowed output. Yet even with that, the increase was stunning and almost inexplicable. We did see another big drop in products with a 1.06-million-barrel withdrawal on gasoline and an even more bullish 2.06 million barrel drop in distillate, but it is the big crude build that is grabbing all the attention.
This comes against an otherwise bullish backdrop. The situation in Venezuela is still hot but hopes that embattled Venezuelan President Nicolas Maduro might leave could be bearish as it would lift U.S. sanctions and allow people into the oil fields that might actually know what they are doing. We have the end of sanction waivers on Iran, but also bullish news on the supply side as well. OPEC production is plunging, and U.S. production is not as big as advertised.
Reuters reported that “OPEC oil supply hit a four-year low in April, a Reuters survey found, due to further involuntary declines in sanctions-hit Iran and Venezuela and output restraint by top exporter Saudi Arabia. The 14-member Organization of the Petroleum Exporting Countries pumped 30.23 million barrels per day (bpd) this month, the survey showed, down 90,000 bpd from March and the lowest OPEC total since 2015, the Reuters survey showed. The survey suggests that Saudi Arabia and its Gulf allies are maintaining even larger supply cuts than called for by OPEC’s latest deal, shrugging off pressure from U.S. President Donald Trump.”
Bottlenecks in shale as well as Gulf issues are impacting U.S. production. Reuters reported that “U.S. crude oil production fell 187,000 barrels per day in February to 11.7 million bpd as output dropped in the Gulf of Mexico and key on-shore oil-producing states including Oklahoma and North Dakota, according to U.S. government data on Tuesday. The production decline was the second consecutive slip, following a fall in January, according to the U.S. Energy Information Administration data. Rising output to record levels due to increased production from onshore shale formations and an uptick in the Gulf of Mexico has made the U.S. the top global oil producer and has shifted global trade flows of crude. As a result, monthly production is closely watched. Crude output in the Gulf of Mexico dropped 9.8 percent from a month earlier to 1.7 million bpd, the EIA said in its monthly 914 production report. Production fell 4.6 percent to 1.3 million bpd in North Dakota and 1.1 percent to 573,000 bpd in Oklahoma. The losses were not offset by slight production increases in Texas and New Mexico where the Permian Basin, the largest U.S. oilfield, is located. Output in Texas, the largest-producing state, rose 1.3 percent to 4.8 million bpd, while in New Mexico, it rose 3.2 percent to 843,000 bpd.“
The EIA inventory report today will be big. The market wants to get a sense whether the API is out of their minds.
We also get the Fed decision today. They will not move rates, but the Fed fund futures are pricing in a cut because of the lack of inflation. Yet while President Donald Trump is calling for a full point rate cut, it is likely that the Fed may go in the other direction. They may damper expectations for a rate cut. That will be the big question for Chairman Jerome Powell. Whatever he says in the Press conference, we know that the President will not be happy.
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