Oil prices and oil supplies are going in the same direction. Down! The crude oil market is seemingly ignoring the oil supply tightness as prices hit a new low for the year on economic pessimism. The market is ignoring a supply versus demand deficit and on the verge of trying to price in a glut. Ok, we know there are two sides to the equation, like supply and demand, but based on the data it seems that right now demand is pretty darn good. Supplies are tightening at a pace that far exceeds the ten-year moving average.
The American Petroleum Institute (API) reported a considerable 7.4-million-barrel draw in crude oil supply as well as a 300,000-barrel drop in crude supply and a 400.000-barrel drop in distillate. And oil watcher Tim Dallinger says that while the WTI futures contract does not reflect what is happening with some refineries that are paying a premium for light sweet oil over and above the future price, so to say things are disjointed might be an understatement.
We do know that we are headed into the refining shoulder season that reduces demand for oil yet there are concerns that the market complacency about the tightness of supply against a dangerous global geopolitical environment might cause a price shock to the economy if we experience any supply disruption. In fact, that is a warning from Dr. Doom otherwise known as Nouriel Roubini that is warning that the deepening conflict in the Middle East could cause a 1970-style oil price shock.
The market also is flip-flopping on OPEC oil cut production uncertainty. On one hand, the markets sold off on the fact that OPEC was planning to go ahead with their planned production cut reversal with a slight tapering back of cuts. Then it sold off later on the fact because OPEC reversed course and might keep the cuts in place. They just can’t please this oil market. Yet even the most pessimistic people are saying that if the OPEC production cuts stay in place, it would avoid a stockpile build in the fourth quarter. I still think we’re going to have a supply deficit in the fourth quarter but that’s the debate in the market right now.
The market popped on high volume then dropped on that headline and instead planned to keep production cuts in place. Yet then the market took that as a negative because if OPEC is keeping production cuts in place that must mean that global demand is worse than the market thought it was or at least that’s how the market took it. What’s interesting though with the type of supplies of oil in the United States and the fuzzy account of Libyan oil production supposedly coming back online at some point, the razor-thin margin between supply and demand could easily flip the world into a major supply deficit. But once again the market is pinning its hope on a slowing economy and perhaps even an economic collapse to keep the market well balanced into the end of the year. Reuters is reporting that “Oil tanker Kriti Samaria was approved for entry into Libya’s Zueitina port on Thursday evening or Friday to load 600,000 barrels of crude oil and will head to Italy. Stay tuned.
There is also a lot of speculation that hedge funds are doing their utmost best to keep prices down ahead of the US presidential election. Even comments from Goldman Sachs touting Democrat Presidential nominee Kamala Harris's economic program have many economists scratching their heads trying to figure out how a respectable organization like Goldman Sachs could come up with such fanciful economic predictions about Kamala Harris’s economic programs that aren’t very clear and seem to be changing by the minute.
The real reason for the concerns about the global economy has been the weakness in manufacturing data both in the United States and in China. India’s demand continues to be relatively strong but there is concern about a global slowdown in manufacturing. Yet despite these concerns, the supply versus demand numbers continue to tell a different story and even while we have seen hard data showing the slowdown in manufacturing, the supply side of the equation continues to tighten. Oil prices below 70 are probably too cheap and above 80 have proven to be very formidable. Our bet is that we are close to the lower end of the trading range.
Today of the Energy Information Administration report that comes out at 10:00 central, 1/2 an hour later than normal because of the holiday. It will reflect what we saw from the API and the market will have a very difficult time ignoring the tight supply situation. We will focus of course on demand and keep in mind that shoulder season is ahead of us but based on current supply versus demand numbers, we are running on fumes and we better see a slowdown in the economy otherwise it’s going to get very dicey. On the natural gas side, we’re also going to get the inventory report at 9:30a.
Seeking Alpha reported that European natural gas prices are trading lower due to signs of plentiful supply and storage levels across the continent. European Union storage is currently 92.4% full ahead of the winter season, according to data from industry group Gas Infrastructure Europe, while industrial demand remains weak. In North America, strong natural gas production and limited incremental demand are the main drivers behind storage builds months ahead of withdrawal season, “and winter demand may not help strengthen prices,” Bank of America analysts said, as reported by Dow Jones. Last winter’s mild temperatures weakened residential and commercial demand, leaving the U.S. with inventories nearly 40% above average, but “so far this summer the opposite has occurred, with temperatures across the country warmer with stronger power burn, but not nearly enough to balance the production gains and ample supply from the end of winter,” BofA wrote. Forecasts for another winter of above-normal temperatures “create further downside risk to basis pricing at hubs across the country,” according to the bank.