The Energy Report 03/28/19
Oil demand is on spring break and is breaking the market off. Oil bulls are starting to waver a bit, taking profits after a bearishly construed Energy Information Administration (EIA) status report. Not only did we see overall crude supply increase for the first time in three weeks, we saw oil production rise, and refinery and gasoline demand drop. Total domestic demand fell 1.36 million barrels a day to 20.1 million barrels a day, the third lowest number this year. While the report for this time of year was not really that bearish, due to maintenance season, it caused some to sell on concerns about a looming economic slowdown and causing hedge funds fat with profits to peel off some of their positions. Still, tough talk from President Trump on Venezuela, and the in-house debate about getting tougher on Iran by not granting waivers to buyers of Iranian crude, is lending support along with the fact that maintenance season will soon be coming to an end.
The EIA said that crude oil inventories increased by 2.8 million barrels from the previous week; much more than expected. Yet overall at 442.3 million barrels, U.S. crude oil inventories are still 2% below the five- year average for this time of year. The main reason for the drop- in supply was a drop in crude exports and a surprise pullback in refinery runs. The EIA said that U.S. crude oil refinery inputs averaged 15.8 million barrels per day during the week which was 367,000 barrels per day less than the previous week’s average. Refineries operated at 86.6% of their operable capacity last week. Gasoline production decreased last week, averaging 9.7 million barrels per day.
Still a weekly gasoline demand drop caused RBOB gasoline traders to take profits. RBOB gasoline futures, along with gasoline demand, has been the leader of the complex moving higher. While EIA did report that gasoline inventories decreased by 2.9 million barrels last week it was a smaller drop than reported by the American Petroleum Institute (API) yesterday. Still gasoline production decreased last week, averaging 9.7 million barrels per day and gasoline demand is averaging 9.2 million barrels per day, down by 1.9% from the record levels last year.
Distillates are falling deeper in the whole, feeling the pinch from the second week of low Saudi imports and zero imports of heavy Venezuelan crude. The EIA says that distillate fuel inventories decreased by 2.1 million barrels last week and are about 5% below the five-year average for this time of year.
Bottom line hedge funds like profits at the end of the month, yet the reality is that despite the weakness the trend on U.S. oil supply will be on a downward trajectory. EIA weekly production data is becoming more suspect as it crept to a record that everyone knows will soon be subject to a downward revision in the monthly report. We believe the demand drop was a weekly blip. Use weakness to get hedged.
The EIA also reported officially that U.S. petroleum product exports set a record high in 2018. While not a surprise, it is a sign of exciting things to come. The U.S. exported an annual average of 5.6 million barrels per day (b/d), an increase of 366,000 b/d from 2017 levels. The three largest individual petroleum product exports in 2018 were distillate, propane, and motor gasoline. U.S. exports of motor gasoline (including blending components) and propane set record highs in 2018 and exports of distillate were the second highest on record, following the high set in 2017.
Natural gas is under springtime pressure as it appears we might get spring for a few hours. Traders are awaiting todays EIA report for an excuse to tank the market. Bloomberg reports a median estimate 39bcf withdrawal and an average estimate 40.57 bcf withdrawal with a high estimate -29 bcf and low estimate -54 bcf. The 5-Year Average is -41 bcf, last year was -66 bcf, with last week -48 bcf.
The AFP is reporting that U.S. President Donald Trump demanded Wednesday that Russia remove troops from Venezuela and said again that he was not ruling out military action to topple far-left President Nicolas Maduro. Russia’s deployment of troops and equipment to bolster Maduro has ratcheted up already high international tension in Venezuela where the Trump administration is pushing hard for regime change amid mounting chaos in the once rich country. “Russia has to get out,” Trump said at the White House alongside Fabiana Rosales, wife of opposition leader Juan Guaidó, who has been recognized by the United States and more than 50 other countries as Venezuela’s interim president in place of Maduro. Russian foreign ministry spokeswoman Maria Zakharova dismissed Trump’s demand, asking in return why U.S. troops were still in parts of Syria, where the Assad regime relies heavily on Russia support.
OIL PRICE reports that according to sources, the group taking a hardline approach favoring no more waivers includes the National Security Council—John Bolton specifically. Other hardliners include presidential advisor Larry Kudlow, and Republican Senator Ted Cruz. Their argument is that Iran is not being squeezed tightly enough, and that it may be able to withstand the incomplete nature of the U.S. sanctions, and that as a result, it may be unmotivated to make concessions to forge a new nuclear deal.
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
Contributor to FOX Business Network