The oil market took out some of the risk premium that had been built in on fears of a major conflict. Yet the market after the close saw some very bullish data from the American Petroleum Institute (API) with big surprise drawdowns in crude oil supply and gasoline supplies.
The time spreads suggest a very tight oil market, but the product crack spreads are signally weak and demand, especially for gasoline. The API reported that crude oil supplies fell by 5.205 million barrels which was lead with a 2.277 million barrel draw down from the Cushing, OK delivery point.
Gasoline inventories also fell by a very impressive 3.689 million barrels. Distilling inventories rose slightly at 612,000. Still, the oil market is suggesting tightness and Libya’s Waha oil output seems to be dropping to 100,000 barrels a day after a pipeline fire. It is now thought their supplies once again not reliable.
While the International Energy Agency warned us about Chinese demand the US demand and global demand is still going to hit a record high and global oil production only rose by 387,000 barrels a day which is a far cry of what we will need to do to keep up with growing demand. The supply deficit is real and likely will get larger.
Product crack spreads that have been beat up lately seem to be trying to turn, at least for diesel. There is concern about tight supplies and an increased risk to supplies from places like Russia and Venezuela. Yesterday it seemed like gasoline cracks were on a free fall while the diesel cracks looked like they were turning back higher.
Russia reportedly extended their ban on gasoline exports until the end of 2024 partly because demand is better than expected and the fact that Ukraine keeps hitting their refineries.
This is raising concerns that this conflict could impact supplies of natural gas and oil at some point. We’re going to stay tuned to this issue.
Yesterday the weak producer price index help support oil with the expectation that the Fed has a clear path to interest rate cuts. Today we have got the consumer price index as well as the weekly inventories.
If the crude oil inventories come in similar to what we saw from the American Petroleum Institute report, it will be very difficult to lower prices. That is unless of course, the inflation number comes out hot. There’s still a lot of concern about global demand. On the supply side, it seems to be unjustified at this point. The ingenuity of the US energy industry is amazing.
Reuters reports, “Greater operating efficiencies in the top U.S. shale patch are squeezing out more oil without higher spending, according to the latest output numbers, which will boost global oil market supplies as OPEC also plans to unwind its output cuts later in the year."
Producers are extending their wells to as much as three miles, squeezing more wells onto a single drilling pad and fracking several wells at once, boosting production, according to industry experts and company executives on recent earnings calls. Reuters says that taken together, these efficiency gains have led several big producers to raise their full-year shale oil production targets.
Chevron (NYSE:CVX), lifted its full-year Permian output target to about 15% gain, up from an earlier forecast of a 10% gain. Diamondback (NASDAQ:FANG), APA Corporation (NASDAQ:APA), Devon Energy (NYSE:DVN), and Permian Resources (NYSE:PR), also forecast higher than expected Permian shale production in coming months.
Occidental Petroleum (NYSE:OXY.N), raised its outlook for the basin for 2024 by 1,000 barrels per day (bpd) excluding its acquisition of Permian-focused CrownRock. Natural gas is hanging in on promises by some producers to cut production.
EBW Analytics pointed out that the September contract gained in five straight sessions to post as much as a 20% low-to-high swing before fading Tuesday.
A near-term upside is possible, but it may require another bullish catalyst to lift prices over resistance. Still, a rare midsummer EIA storage draw is possible on Thursday, producers shutting in 2.5 Bcf/d of production helped reinvigorate the upside, and August 2024 could feature the smallest August monthly storage injection in history.
Modest upside is favored for the October contract should supply cuts deepen, storage surpluses whittle away, and storage containment fears abate. A wide discount to winter 2024-25 contracts may also offer a degree of support. Yet a cascade of returning supply may quickly rebuild storage surpluses in a normal winter weather scenario.
With a gusher of supply likely to add 3.0-5.0 Bcf/d from October to December, the Cal 2025 strip may eventually find itself under pressure absent external support from a cold winter.