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 mounted a comeback after taking a big hit when global interest rate cuts raised more fears about the global economy and the Energy Information Administration reported a larger than expected increase in oil inventories with a big drop in U.S. oil exports. But no need to fear, the Saudis are here. And they are not going to tolerate this oil selling any longer.
The oil market was already running scared. Interest rate cuts in India, Thailand and a 50-basis cut in New Zealand rattled markets, along of course with the trade war fallout fears that have reached epic proportions. I guess when you are running scared you do not stop to think that this is actually bullish for oil, not bearish.
Yet what really caused the oil plunge was the EIA report. In was not just the larger than expected 2.4-million-barrel crude build but a sharp drop in U.S. oil exports. The drop-in exports caused a fear trade in this U.S.-China trade war market as traders lamented the drop-in exports and assumed it was because China quit buying our crude. Of course, if traders actually paid attention to the volatility of U.S. oil exports, they would have known that those fears are greatly exaggerated.
China fears are exceeding reality as Brent has plunged nearly 14% since last week as global equity markets went into a tailspin after U.S. President Donald Trump said he would slap a 10% tariff on a further $300 billion in Chinese imports on Sept 1, according to Reuters.
The EIA report was the wrong report at the wrong time and a report that one could see was mainly influenced by a big increase in Gulf Coast inventories and big upward adjustments from previous reports. In fact, if you look at demand it wasn’t that bad.
Despite the fact that gasoline inventories increased by 4.4 million barrels last week, demand was actually higher week over week. Refining demand was spectacular as crude oil refinery inputs averaged 17.8 million barrels per day during the week, which was 786,000 barrels per day more than the previous week’s average. Refineries ramped up to 96.4% of their operable capacity last week. Gasoline production increased last week, averaging 10.4 million barrels per day. Distillate fuel production also increased last week, averaging 5.3 million barrels per day.
Yet the drop-in exports started a sell off to the major 50.50 support level because China might not buy our oil. Maybe not, but I am sure someone will. I can say with a high degree of confidence that U.S. oil exports will rebound next week, I also believe that we will resume the steep drawdowns in inventory, and besides we now know that if oil goes any lower the Saudi’s “won’t tolerate it.”
Oil seemed to be lacking confidence. As we head into shoulder season, slow down fears are having many lower their demand forecast. So even as the stock market rebounded, oil came back only tepidly.
Yet it accelerated after a report that “Saudi Arabia has phoned other oil producers to discuss possible policy responses as oil prices slide to near the lowest this year,” a Saudi official said. “The kingdom won’t tolerate a continued slide in prices and is considering all options,” the official said, asking not to be identified discussing private talks. He didn’t say what measures we’re being discussed as reported by Bloomberg. We know what that means don’t we? Another cut in production. A cut that would be justified if you believe the dour projection for oil demand. Now President Donald Trump may complain about a cut as he has before. Yet if they don’t cut and prices keep going down, we better be prepared for another wave of shale bankruptcies. In fact, they may have to cut output. We do know that the Saudis need a higher price because they want to get going on that Saudi Aramco IPO. The Saudis are dismayed.
Oil also still must worry about tensions in the Persian Gulf. The U.S. Dept. of Transportation issued a new warning yesterday to commercial vessels in Persian Gulf due to “GPS interference” by Iran.
The crude oil market is also getting support after China’s central bank fixed the yuan at a stronger-than-expected level. The currency rose after the daily rate was set at 7.0039 per dollar, marking the first time since 2008 that the fixing was weaker than 7. “China wants to prevent panic,” Scotiabank said. U.S. equity index futures rose with European and Asian stocks after the action. The dollar was lower and treasuries were steady according to Bloomberg.
Natural gas is still dealing with a glut of epic proportions. Overnight there seems to be some short covering ahead of the EIA injection report and is it possible that despite the bearish fundamentals, that we could rally? Andrew Weissman of EBW analytics writes that natural gas has come under significant downward pressure in recent weeks, with the front-month losing 3.8¢ this week despite a bullish weather forecast shift adding 20 CDDs and 24 Bcf of demand. Speculators have built the largest net short positioning in at least a decade as participants look ahead to a weak fundamental outlook this fall. He points to seasonal declines in weather-driven demand, a likely surge in production, and potentially weak LNG demand all increase the likelihood of natural gas prices plunging below $2.00/MMBtu. By early winter, a low natural gas storage trajectory and cold December forecast—together with shorts potentially taking profits—may lift natural gas back to $2.30-$2.50/MMBtu. An even sharper rally cannot be ruled out. Warming temperatures across the southern U.S. are likely to prompt the highest power sector gas demand of the summer, slowing current declines for gas.
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