September squeeze as the September futures contract outpaces the back months. The run into today’s contract expiration reflects the fact that U.S. refineries are running at a record pace and that last week’s crude oil build was not enough to satisfy the ravenous crude eating refineries. Yet, with the Trump administration’s promising more oil from the U.S. Strategic Petroleum Reserve (SPR), and with the promise of shoulder season just right around the corner, the fears of a tight oil market are being played out in the September expiration. The back months have a false sense of security that the SPR release is going to make enough of a difference.
Short sellers may want to lean from the September squeeze that demand for oil from refiners is at record highs and despite the China trade war fears and Turkish sanction fears. The oil market is going to have a tough challenge to replace lost Iranian crude oil exports, after sanctions go in November even with the SPR release. The U.S. Energy Department's Office of Fossil Energy, on Monday, announced a notice a sale of 11 million barrels of sour crude oil. The sour crude oil market is tight as U.S. refiners have too much sweet and not enough sour. The move did weigh more on the back end of the curve, but really was not a surprise as it was part of previously announced sales that are expected to draw down reserves by a total of 25 million barrels over three consecutive years, beginning this year. Bids for the 11 million barrels of crude must be received no later than Aug. 28, with delivery to take place in October and November, the government agency said.
The dollar, which had been supported by trade-war fears, and flight to quality buying that was providing a headwind for oil, is now retreating on comments by President Trump to wealthy donors that he thought that Fed Chairman Jerome Powell was a low interest rate guy. The dollar on top of that has been supporting by quality buying as emerging market fears. Any break in the dollar could support prices and slow down the big surge in U.S. oil imports that have gone up in part because of the strong dollar.
After the September crude future expires, we also will get the American Petroleum Institute (API of our weekly crude, gasoline and distillate inventories. Last week’s monster build still has oil bulls wobbly, but there is some talk that this week we could see a big draw. Yet, after last week’s blindside bull traders will be cautious. Products should see reasonable builds as U.S. refiners show no sign of slowing down.
Last week, a big surge in U.S. oil imports caught the market by surprise, but the oil story of last year is the one of the U.S. being a major oil exporter. In facing to the Energy Information Administration, a major turnabout in one of our ports shows the changing face of the U.S. energy Industry.
The EIA writes that “the U.S. port district of Houston-Galveston in Texas recently began exporting more crude oil than it imported for the first time on record. Crude oil exports from the Houston-Galveston port district have increased since the restrictions on U.S. crude oil exports were lifted at the end of 2015. In April 2018, crude oil exports from Houston-Galveston surpassed crude oil imports by 15,000 barrels per day (b/d). In May 2018, the difference between crude oil exports and imports increased substantially to 470,000 b/d.”
Total U.S. crude oil exports rose to a record high of 2 million b/d in May. On average, since mid-2017, the U.S. port district of Houston-Galveston has accounted for slightly more than half of the crude oil exported from the United States, and the share increased to a record 70% in May. A port district is a geographic region defined by U.S. Customs and encompasses several individual U.S. ports of entry. The Houston-Galveston port district includes the port of Houston as well as several other ports along the Texas Gulf Coast, from Galveston to Corpus Christi.
Ongoing efforts to expand crude oil export infrastructure, at the ports of Houston and Corpus Christi, have allowed for increased export flows. The only other port district that has seen significant crude oil export volumes recently is the U.S. port district of Port Arthur, which includes the Texas ports of Port Arthur, Sabine, Beaumont, and Orange. This district has on average accounted for close to a quarter of all U.S. crude oil exports since mid-2017. Despite infrastructure improvements, however, crude oil export capacity is still limited on the U.S. Gulf Coast, because most ports are unable to load larger crude oil vessels. Crude oil is imported into many locations in the United States, but most of the oil goes through the U.S. Midwest or the U.S. Gulf Coast. The U.S. port district of Houston-Galveston accounted for 12% of total U.S. crude oil imports as of May, second only to the U.S. port district of Chicago, Illinois, at 19%.
Its put up or shut up time in the September crude, but weakness in the back should allow us to put on some bullish long term strategies. RBOB is making a counter seasonal bottom and Ultra low sulfur diesel looks to be undervalued. Nat gas is still riding the heat wave.