The Energy Report 07/09/2020

Building Momentum

Crude oil prices are building a base as economic momentum starts to build and oil demand starts to rise. A snap-back in gasoline demand in yesterday’s Energy Information Administration (EIA) report offset concerns about a build in US crude oil supplies. The talk is that the building crude may be the last for an awhile as US exports will pick up and OPEC imports will dry up. Believe it or not.

One of the reasons for the surprise crude oil build was oil to the US from Mexico. That hit 1.3M bpd last week, the  most in weekly data since 2012, and well above the prior week’s 498k bpd. Net imports also surged, reaching 5M bpd last  week, the most in nearly a year, though analysts say it is unlikely to remain this high for long according to Dow Jones. The market also took note that supply into the Strategic Petroleum Reserve was the smallest in weeks and US refinery runs that are showing some life.

The EIA showed that, “U.S. crude oil refinery inputs averaged 14.3 million barrels per day during the week ending July 3, 2020, which was 315,000 barrels per day more than the previous week’s average. Refineries operated at 77.5% of their operable capacity last week. Gasoline production increased last week, averaging 9.0 million per day. Distillate fuel production increased last week, averaging barrels 4.8 million barrels per day. U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 5.7 million barrels from the previous week. At 539.2 million barrels, U.S. crude oil inventories are about 18% above the five-year average for this time of year. Total motor gasoline inventories decreased by 4.8 million barrels last week and are about 8% above the five-year average for this time of year. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories increased by 3.1 million barrels last week and are about 27% above the five-year average for this time of year.

As other assets recover from the coronavirus meltdown and even exceed prepandemic highs, natural gas has lagged behind. There is simply too much of it. Stockpiles of the power-generation and heating fuel are bloated world-wide. The international trade in liquefied natural gas, or LNG, has collapsed, squeezing an important outlet for U.S. shale gas. And with crude prices back up to around $40.00 a barrel, oil producers are reopening the spigots and, as a byproduct, putting a lot of cheap gas into the market. Natural-gas futures for August delivery ended Tuesday at $1.876 per million British thermal units. That is up 27% since June 25, when futures for July delivery closed at $1.482—their lowest level since August 1995. Yet it is still 23% below the price this time last year and 34% less than the price two years ago. The heights of summer and winter are when gas prices are typically at their highest, given the demand to power air conditioners and fuel furnaces. But the global gas glut and diminished demand due to the pandemic shutdowns have produced not only the lowest June prices ever in the U.S. but also the lowest price on record for any month in Europe.

The collapse in European prices has been especially problematic for U.S. producers. BofA Securities analysts describe Europe as the “dumping ground” for LNG. Buyers there are usually eager for shipments to augment local production and compete with Russian pipeline exports. Local prices crashing to all-time lows. With tanks and storage caverns filling up around the world, LNG buyers canceled orders. More than 110 cargoes for export have been scrapped, according to the U.S. Energy Information Administration. The amount of gas delivered to U.S. shipping terminals has fallen by more than half since late March, when a record 9.8 billion cubic feet a day was piped to such facilities.

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