Oil turning on easing expectations

Ease on Down the Road

Come on and ease on down, ease on down the road. Come on and ease on down, ease on down the road. Don't you carry nothing that might be a load, come on, ease on down ease on down the road. Forget about that economic tough road don’t worry about weak demand because you know that they are going to ease on down, ease on down the road.

China’s CPI grew to 1.8 percent year on year in July, the slowest pace since February 2010 raising hopes that China will soon takes steps to ease lending requirements and perhaps ease on down the road.

In fact the stock market and the oil market has been moving on hopes that the Fed, ECB and China are getting ready to ease on down the road and in fact they have been banking on it. The recent move in oil really started with the pledge by ECB Chief Mario Draghi to do whatever it takes to save the euro. Of course without easing the rally could be in big trouble.

China is significant in the future of oil prices and their economic policy. In fact it may also impact what OPEC does with production in the near term that the slowdown in Asia is a major threat to oil demand. OPEC says that weakness could cut 2013 oil demand growth by 20%. Whenever OPEC starts talking about a demand cut, they are seriously considering a production cut. OPEC production fell by 157,000 barrels in July led by a drop in the suddenly toxic Iranian oil. I would expect that OPEC production should continue to fall.

But on the good news front as reported by Bloomberg News, Iraq’s crude output rose above 3 million barrels a day last month for the first time since the 2003 U.S.-led invasion that toppled Saddam Hussein, according to the Organization of Petroleum Exporting Countries. Iraq pumped 3.08 million barrels a day in July, 115,000 barrels more than the previous month, OPEC’s Vienna-based secretariat said today in its Monthly Oil Market Report. The Persian Gulf state for a second month outpaced Iran, whose output dropped by 173,000 barrels to 2.82 million. Iraq last produced more than 3 million barrels in February 2002, OPEC said after revising its April estimate. The other Issue for oil is oversupply. In the beginning of the year as the market was preparing for the European Embargo on Iran as well as, let’s face it, a possible war. And because of that as Bloomberg News reports that, “Speculation that nations are stockpiling oil at the fastest rate in 14 years is fanning expectations for Brent crude to drop below $100 a barrel. OPEC pumped 2.1 million barrels a day more than projected demand in April through June.

Yet in the US crude surplus continues to fall according the Energy Information Administration. They report that U.S. crude oil imports averaged 8.6 million barrels per day last week, up by 221 thousand per day from the previous week. Over the last four weeks, crude oil imports have averaged 8.9 million barrels per day, 453 thousand barrels per day below the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 457 thousand barrels per day. Distillate fuel imports averaged 71 thousand barrels per day last week.  U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 3.7 million barrels from the previous week. At 369.9 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories decreased by 1.8 million barrels last week and are in the lower half of the average range. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories decreased by 0.7 million barrels last week and are below the lower limit of the average range for this time of year. Propane/propylene inventories increased by 0.6 million barrels last week and are near the upper limit of the average range. Total commercial petroleum inventories decreased by 1.0 million barrels last week.

 

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