The Energy Report 06/06/19

The Great Flood

Did you hear about the great flood? No not the one that has plagued the Midwest and the Plains, but the flood of crude oil that supposedly hit our shores along with the major builds in gasoline and distillate. The Energy Information Administration (EIA) stunned the market by reporting a massive 6.771-million-barrel increase in crude supply, a big 3.205-million-barrel increase in gasoline supply and a whopping 4.572-million-barrel increase in distillate. The massive flood of inventories had total commercial oil stocks increasing by a whopping 22.4 million barrels, the highest levels since September of 2017.

Apparently based on these numbers the global economy ground to an abrupt halt last week and countries like Canada and Columbia decided to flood the U.S. shores with incredible amounts of crude oil. Crude imports shot up 1M bpd to 7.9M bpd! This comes as we have had a run of rising inventories, which by seasonal standards, should be falling

Yet perhaps the other great flood in the Midwest and the Plains, along with other acts by mother Nature, may be part of the reason we saw these massive increases in oil inventory.

In fact, I would argue that these historic storms and floods may have had more impact on overall economic activity than many people thought. Not only did we see a dip in manufacturing earlier, we saw the ADP Jobs number miss in a big way. The ADP said we created only 27,000 new jobs in April; a far cry from the 180,000 plus that the market was looking for. Small businesses were laying off and not hiring in part due to the impacts of the great floods.

We know that U.S. farmers are way behind on planting and that millions of acres of grain will go unplanted with diesel burning tractors remaining parked. We also know that gasoline demand, that was up last week, would have been even stronger if it were not for all the rainy weather. We also know that the flooding shut down a major pipeline out of the Cushing Oklahoma delivery hub. That backed up supply, leading to a 1.791-million-barrel increase in Cushing Oklahoma.

Yet that does not fully explain the massive surge in oil imports to the U.S.. But there is an explanation for that. Part of that comes in the form of adjustments and some of that comes down to another shutdown in the Houston Shipping channel last week and at the end of March. That caused, because of tracking issues, the EIA overestimating U.S. oil exports in previous months and the EIA has been making upward revisions on supplies to correct previous errors. The EIA adjustment number added 876,000 barrels a day which is ridiculously high. Part of the issue is the weather plagued Houston Shipping Channel. Shut down by fog and chemical fires; it made it almost impossible for the EIA to track real numbers and whether oil tankers were coming or going, and whether they were full or empty. Also, the EIA is having trouble tracking oil because the jammed-up Houston shipping channel has issues with very large crude oil carriers.

The EIA explained the problem like this: “U.S. crude oil exports averaged 1.1 million barrels per day (b/d) in 2017 and 1.6 million b/d so far in 2018, up from less than 0.5 million b/d in 2016. This growth in U.S. crude oil exports happened despite the fact that U.S. Gulf Coast onshore ports cannot fully load Very Large Crude Carriers (VLCC), the largest and most economic vessels used for crude oil transportation. Instead, export growth was achieved using smaller and less cost-effective ships.”

The EIA continued “Each VLCC is designed to carry approximately 2 million barrels of crude oil. Because of their large size, VLCCs require ports with waterways of enough width and depth for safe navigation. All onshore U.S. ports in the Gulf Coast that actively trade petroleum are in inland harbors and are connected to the open ocean through shipping channels or navigable rivers. Although these channels and rivers are regularly dredged to maintain depth and enable safe navigation for most ships, they are not deep enough for deep-draft vessels such as fully loaded VLCCs. To circumvent depth restrictions, VLCCs transporting crude oil to or from the U.S. Gulf Coast have typically used partial loadings and ship-to-ship transfers. The ship-to-ship transfer process known as lightering refers to a larger vessel partially unloading onto a smaller vessel. Reverse lightering occurs when smaller vessels load onto a larger vessel. These transfers take place in designated lightering zones and points that exist outside many of the largest U.S. petroleum ports.”

The EIA said that “Currently, most U.S. Gulf Coast petroleum ports are capable of accepting vessels with capacities of approximately 500,000 barrels of crude oil (AFRAMAX). The number of ports that can accept vessels with capacities of approximately 900,000–1,000,000 barrels (SUEZMAX) is relatively limited. Four AFRAMAX-sized vessels or two SUEZMAX-sized vessels are required to carry the same amount of crude oil as a single VLCC.”

Still we must acknowledge weak demand. The EIA said total demand on the U.S. system fell 2.2 million barrels a day last week. How much of that was rain and how much was signs of economic pain?

Natural gas report today. Look for another bearish report.

Today we Remember the brave that gave their lives and survived to defend freedom 75 years ago on the beaches of Normandy. God Bless Them all.

Watch all the events surround the commemoration of D Day on the Fox Business Network.

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Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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