Coronavirus fears overshadowed yesterday’s very supportive Energy Information Administration (EIA) status report. Ten U.S. states saw a record number of new COVID-19 cases this week and a cluster of new infections in Beijing, China that caused them to close schools and cancel flights.
The news had oil traders wondering about a potential new second wave of the COVID-19 virus. They feared that what had been an impressive comeback in global energy demand could be thwarted. Yet traders were torn, trying to balance the risk of a second wave, versus the chances that the increase may not be a second wave but just a reflection of better testing.
Dr. Anthony Fauci told the Wall Street Journal earlier this week:
“People keep talking about a second wave. We’re still in a first wave.”
It is also unlikely that the global economy will shut down, so at some point, oil traders might focus on the fact that demand is recovering exceptionally well, and production is still falling. That trend, assuming we do not take a big coronavirus to step back, means that we could see a very tight global oil market later this year, despite what OPEC says.
Reuters reports that OPEC warned in a monthly report the market would remain in surplus in the second half of 2020 even as demand improves, as it now expects supply from outside the group to be about 300,000 bpd higher than previously thought.
Of course, I am not buying it. I believe OPEC is talking about their book and trying to pressure OPEC cheaters to improve compliance, which they have. OPEC+ compliance with crude production cut commitments in May was 87%, two OPEC+ sources said on Wednesday. Private sources put that number higher, and Russia has complied with 100 percent of their cuts.
The EIA also reported a supportive report. While the 1.22-million-barrel crude build was a bit higher than expected, a significant 2.608-million-barrel drop in Cushing, Oklahoma and a big drop in US oil production was very supportive. Even though a big part of the production drop this week was tropical storm Cristobal related with a fall to 10.5 million barrels a day, the lowest level since 2018, was eye-opening.
We also saw more oil stored in the Strategic Petroleum Reserve to the tune of 1.7 million barrels. Also, total demand on the U.S. petroleum system by 525,00 barrels a day was due in part to storm-related disruptions.
The reports showed another drop in gasoline supply, falling by 1.6 million barrels and also the first drop in distillate stocks in 11 weeks, falling by 1.2 million barrels last week. That reflects increasing jet fuel consumption as planes start to fly again. Refiners also focused less on the production of distillate as it dropped by 264,00 barrels a day and changed the focus to increasing gasoline demand.
While gasoline demand dipped slightly, week over week by 118.00 barrels a day, it is still just shy of 8 million barrels a day. Based on reports of traffic congestion in cities like Chicago coming back, it is coming back faster than refiners had expected. The EIA showed US crude refinery inputs averaged 13.6 million barrels per day, which was 116,000 barrels per day more than the previous week’s average. Refineries operated at 73.8% of their operable capacity last week. Gasoline production increased last week, averaging 8.4 million barrels per day. Distillate fuel production decreased last week, averaging 4.5 million barrels per day.
This also means that the days of low gasoline prices will be ending. Refiners are starting to fall behind the demand curve. The EIA reports today on natural gas and we are expecting an 85bcf increase in supply. This market has gotten trounced on weak demand and excessive production. A weak global LNG market has hurt as well. Still, we look like we might be getting ready for a bounce. Look to try a catch a falling knife trade if you are brave and have money to spare. Of course, it would also help if you had steel gloves.