Let’s Get Physical. The Energy Report 07/18/2024

We better start paying attention to the global oil physical market as the global oil supply deficit is getting priced in. Global oil markets are tightening on the physical side as time spreads are expanding in Europe and the US where we saw a whopping 4.87 million barrels crude draw even as they imported a record amount of oil from Canada and total oil demand fell in part due to Hurricane Beryl.

U.S. imports of crude oil from Canada rose to 4.4 million barrels a day last week to its highest on record, data from the Energy Information Administration (EIA) showed because of the startup of the newly expanded Trans Mountain (TMX) pipeline. I wonder how much cheaper those Canadian barrels would have been if we had Keystone XL pipeline open as well.

Those Canadian barrels are a welcome sight as US oil production stagnated at 13.3 million barrels. The US Baker Hughes total rig count fell 91 rigs, or 13%, below this time last year. Baker Hughes said oil rigs fell by one to 478 this week, their lowest since December 2021, while gas rigs fell by one to 100.

But don’t count on those Canadian barrels in the coming weeks as it is being reported that out-of-control wildfires have in Alberta threatened more than 400,000 barrels a day of oil production.

So now US oil supply has fallen to 440.2 million barrels, 5% below the five-year average for this time of year and at their lowest level since February. That is as we have a depleted oil reserve that did see 650,000 barrels added.

Yet we saw a big build in oil products as Hurricane Beryl most likely impacted demand. The Wall Street Journal wrote that, “US Refinery runs were lower, with capacity use falling by 1.7 percentage points to 93.7% against expectations in the Journal survey of a 0.6 percentage-point decline. Capacity utilization on the Gulf coast fell to 92.7% from 97% but rose everywhere else.

The EIA said that motor gasoline inventories increased by 3.3 million barrels from last week and are slightly above the five-year average for this time of year. Distillate fuel inventories increased by 3.5 million barrels last week and are about 7% below the five-year average for this time of year.

The ensuing squeeze on crude supplies and the increase due to the storm of product supplies cause the crack spreads to fall near the contract lows. The crack spread is still decent enough to inspire refiners to come back online if they can but if you’re in the Midwest don’t assume that the crack spreads are going to bring your gasoline prices back down.

And while the markets tighten there still is focus on Chinese oil demand and unconfirmed rumors about Chinese President Xi’s heath. Reuters reported that, “China’s crude oil market is unambiguously weak. Not only has the world’s biggest importer seen a fall in arrivals in the first half of the year, it has also been boosting the volumes being added to stockpiles. China added 1.48 million barrels per day (bpd) to either commercial or strategic oil stockpiles in June as lower refinery throughput outweighed soft crude imports.

For the first half of 2024, China put about 900,000 bpd into storage tanks, and this amount has been accelerating in recent months.

The global is reporting that European refiners are at a crossroad due to the energy transition many are being forced to consider shutting refining capacity down and oil production but on the flip side of that that’s going to leave the European markets under supplied the combination of short sighted energy policies is gonna continue to leave Europe very vulnerable and maybe another reason why we’re seeing the European spreads just go totally out of whack.

Oil prices continue to look very strong and the only thing holding them back right now are the products. Still, the way the spreads are acting it’s very clear the market is facing significant tightening that means for hedgers there’s not a lot of room for error. Volatility has been relatively low. We expect it to pick up .

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