The Energy Report 11/21/19
The Adjustment Begins
Oil prices snapped back as it appears that the oil supply adjustment is about to begin. Oil refiners are finally turning the corner, ramping up production to meet outstanding seasonal demand. Refineries operated at 89.5% of their operable capacity last week, better than expected. The uptick in refining came as U.S. exports finally showed that they were bouncing back and imports increased by a less than expected 222,00 barrels a day.
A big 2.2 million barrel drop in Cushing, Oklahoma supply shows that pipeline issues have been resolved and we should start to see substantial crude draws in the coming weeks. This week it took a 1.97-million-barrel release from the Strategic Petroleum Reserve (SPR) and 7.3 million barrels since October to give us a crude build. Yet despite that effort, commercial petroleum stocks still fell by .2 million barrels leaving the year over year surplus at just 17 million barrels. That number obviously would be much tighter without the SPR releases as well as the magical EIA upward crude adjustments of over 500,000 barrels a day.
While week over week gasoline demand slipped and distillate supply slipped, in the big picture demand is very strong. Demand, based on products supplied over the last four-week period, averaged 21.4 million barrels per day, up by 0.5% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 9.4 million barrels per day, up by 1.9% from the same period last year. Distillate fuel product supplied averaged 4.4 million barrels per day over the past four weeks, down by 1.3% from the same period last year. Jet fuel product supplied was virtually unchanged compared with the same four-week period last year.
Product inventories are, to say the least, a bit disturbing. With the International Maritime Organization (IMO) ship pollution rules going into effect January 1st, the U.S. supply of the preferred fuel fell yet again. Distillate fuel inventories decreased by 1.0 million barrels last week and are about 11% below the five-year average for this time of year. In fact supply of distillate is only 1.7 million barrels above a 5-year low. The potential for a squeeze is rising even as the forecasts for warmer weather may take some heat off of the heat!
Speaking of weather, meteorologist Bret Walts at BAMWX says that, “into December we are likely to get into a pattern favorable for numerous storm systems and winter storms for parts of the Midwest which will help pump warmth into the southeastern and south-central U.S.. However, due to notable warmth and high pressure near Greenland, cooler than normal air is likely to develop in the northeastern U.S.. This pattern will favor very cold air in the Pacific NW and help keep heating demand above normal (though nothing to the extent of last week). Further into December we would not be surprised to see transient shots of cold and warmth, however, we believe there can be better chances for Eastern U.S. cold as we work into the last third of the month.”
Yet it was cold last week and that could give natural gas an upshot. Some are calling on a big supply withdrawal in todays report! Stay tuned.
Reuters reports that, “OPEC and its allies are likely to extend existing oil output cuts when they meet next month until mid-2020, with non-OPEC oil producer Russia supporting Saudi Arabia’s push for stable oil prices amid the listing of state oil giant Saudi Aramco.” So far no need for a bigger cut, probably because demand is growing twice as fast as it did last quarter.
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The PRICE Futures Group
Senior Market Analyst & Author of The Energy Report
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