The Energy Report 04/11/19
Smoke and Mirrors and the International Energy Agency!
Oil supplies increased because of smoke and mirrors. Ok, maybe mainly smoke, as inventories are still being impacted from the chemical fire that belched a cloud of toxic smoke over the city of Deer Park, Texas and shut down the Houston Shipping Channel. The Energy Information Administration (EIA) reported that U.S. crude supplies increased by 7.029 million barrels, 5.4 million barrels of which were stuck in the gulf coast. Combined with an increase in the West Coast, crude oil inventories pushed back to the highest level since last November.
At the same time a weekly surge in U.S. gasoline demand caused gasoline supply to fall by 7.7 million barrels, the biggest weekly drop in gasoline supply since Sept 2017. That means the very real prospect of continuing price spikes at your neighborhood gasoline pump. Part of this big drop in gasoline supply was getting rid of winter blend gasoline. Yet you must also look at the weekly gasoline demand number that surged to 9.8 million barrels a day. This comes as the International Energy Agency (IEA) tells us that global oil supplies are tightening but warns that demand might falter. Of course, the IEA has continually warned of faltering demand and so far, it has not really happened.
In fact, the IEA said that OPEC cuts and plunging Venezuelan oil output played a part in the tightening of the oil marketed because of demand. The IEA said that “In recent months, the resilience of demand has received less attention than the vicissitudes of production, but it is very important too. Data for 2018 is still incomplete but we can be confident that demand growth was about 1.3 mb/d. As far as 2019 is concerned, amongst the analyst community there is an extraordinarily wide divergence of view as to how strong growth will be. We maintain our forecast of 1.4 mb/d but accept that there are mixed signals about the health of the global economy, and differing views about the likely level of oil prices.”
They also said that global oil supply dropped in March as U.S. sanctions and power outages pushed Venezuela’s crude output to a long-term low of 870,000 barrels per day (bpd), lower than OPEC reported the day before, but not as low as some of the private estimates we have been hearing. Venezuela is a mess and it is getting worse as oil production fell for the 21st consecutive month.
As far as demand growth for 2019, the IEA says that while it is still in the early days, the major centers of oil demand growth are performing strongly. They say that in China, the economy seems to be reacting to the government’s stimulus measures with purchasing managers’ indices increasing and export orders recovering, although there are signs that air cargo volumes might be falling. Preliminary oil demand numbers for the January-February period show solid growth of 410 kb/d year-on-year.
We have been saying for months that China oil demand has not been showing signs of faltering. In fact, it has been setting records. The IEA says that demand in India was solid, growing by 300 kb/d, and in the U.S., which continues to be supported by the petrochemical sector, demand grew by 295 kb/d.
The IEA says that while the main sources of growth are doing well, there are mixed signals from elsewhere. Overall demand in the OECD countries fell by 0.3 mb/d y-o-y in 4Q18, the first such fall for any quarter since the end of 2014, and it is likely to have fallen again in 1Q19 due to weakness in some European economies, with perhaps more to come if there is a disorderly Brexit. There are uncertainties in Argentina and Turkey and signs of only modest demand recovery in the Middle East despite the stimulus provided by rising crude oil prices.
Concerns about trade talks linger, and the mood will be influenced by the recent downgrade to global GDP growth by the International Monetary Fund, although it should be noted that the IMF does not expect a recession in the near term. Clearly, oil prices at $70/bbl for Brent, are less comfortable for consumers than they were at the start of the year and the IEA has regularly warned of the dangers of prices rising even higher. Only time will tell if our current demand forecast proves accurate, but the risks are currently to the downside.
Natural gas report today as winter makes a return. Reuters says that “U.S. utilities likely injected 29 billion cubic feet (bcf) of natural gas into storage last week as near-record production offset higher than usual heating demand during cooler than normal weather. The build for the week ended April 5 compared with a decline of 20 bcf during the same week a year ago and a five-year average injection of 5 bcf for the period.”
If analysts’ estimates are on target, the increase would boost stockpiles to 1.159 trillion cubic feet (tcf), which would still be the lowest for that week since 2014. That would be about 13 percent below the same week a year ago and about 29 percent below the five-year average. The amount of gas in storage has remained below the five-year average since September 2017.
Output in the Lower 48 U.S. states averaged 89.4 bcfd during the week to April 5, just off the all-time daily high of 90.2 bcfd hit on March 29, according to Refinitiv Eikon data.
The weather, meanwhile, was slightly cooler than normal last week with 105 heating degree days (HDDs) versus a 30-year norm of 98 HDDs for the period. There were 117 HDDs in the same week a year ago. HDDs measure the number of degrees a day’s average temperature is below 65 Fahrenheit (18 Celsius) and are used to estimate demand to heat homes and businesses.
Reuters polled 19 analysts, with estimates ranging from injections of 17 bcf to 41 bcf, and a median build of 31 bcf.
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
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