Quick Draw
While most analysts were coming to the conclusion that the crude-oil supply would start to draw down eventually, the process may be starting a little quicker than anticipated. The American Petroleum Institute shocked the market by reporting that the crude-oil supply fell by 4.3 million barrels. That was a far cry from the 3.5 million barrel build that was anticipated and probably puts to rest the hype that the U.S. is going to run out of crude oil storage. This early draw in supply may put the momentum back on the bull’s side because what we have here may actually be the top of U.S. oil inventory.
A report released by the highly respected research firm Genscape said that while North American crude inventories will stay at historically high levels this year, they will start to see material draws in crude inventory beginning in May 2016, as strong demand takes hold for the summer. Genscape says we will see production declines slowly materializing in the face of stronger pricing, coupled with significant outages at oil sands facilities reducing imports from Canada in the spring, stocks are expected to peak in April 2016 drawing down through the summer.
Genscape’ s balance forecast for 2016 through 2018 calls fo material production declines in most of the major U.S. basins: Genscape expects North American production to fall by -581 Mb/d in 2016, and -317 Mb/d in 2017, as surging blended Canadian production is expected to grow at +84 Mb/d year-over-year in 2016. The biggest U.S. declines will occur in the Eagleford and Bakken, with resiliency in the Permian. Heavy upgrader turnarounds in spring 2016 will impact near-term U.S. imports from Canada.
Demand will also be stronger than expected as refining margins have stabilized due to the transition to summer gasoline blends, after a dreadful first quarter marred by economic run cuts. RBOB prices have increased 40 percent since late February 2016. Utilization rates will exceed previous forecasts. That means they expect that we will see inventories decreasing through 2016, with pressure towards continuing builds as runs slow.
We are also seeing U.S. crude exports start to increase. Bloomberg News reports that U.S. average daily crude exports were up 3% to 374.5k b/d in Feb. vs ~363.6k b/d in Jan.
The American Petroleum Institute also sees the strong demand for gasoline continuing even as retail price edged higher. The API reported that gas inventories fell by 116,000 barrels.
The one bearish number in the report was a larger-than-expected increase in distillate supply of 2.7 million barrels as farmers can’t get going in the fields just yet due to snow.
But there is another reason for lackluster. Matthew Smith, the energy guru at ClipperData, points out that the movement from coal to natural gas has reduced the demand for the locomotives to move that coal. So not only are we getting cleaner air from burning natural gas, we are seeing less diesel emissions from trains.
Diesel has fallen drastically. Smith points to data that shows U.S. rail freight declined more than 6 percent in the first 12 weeks of 2016 compared with a year earlier, according to the Association of American Railroads (AAR). Reuters reported that most categories of bulk freight were down compared with 2015 but by far the largest drop occurred in coal, the single-largest commodity hauled on the network. The number of railcars loaded with coal in the first 12 weeks was down by 32 percent compared with 2015 (“AAR reports weekly rail traffic for the week ending March 26”). Coal loadings are down because power plants have switched to burning inexpensive natural gas, which has left them with record stockpiles of unburned coal and cutting deliveries. That in turn is reducing the number of railcars moving across the tracks and the railroad companies’ purchases of diesel, leaving diesel stocks at a seasonal record.
So Reuters says that in a roundabout way, the shale (gas) revolution has battered the U.S. coal industry and in turn hurt the railroads and in the process, is worsening the imbalances in the diesel market.
The oil market is also getting support from more conciliatory comments from Kuwait’s OPEC Minister said Nawal al-Fezaia. “Oil-producing countries have no option but to reach an agreement to freeze output when they meet on April 17 in Doha, Qatar, because prices are low.” You can take that to the bank despite the Saudi Prince's tough talk for his home audience. Still he did say the freeze may be at February levels which is slightly higher than January levels.