Oil drawdown eclipsed as refiners go wild

Products Overwhelm

Forget about that surprise drawdown in crude oil (NYMEX:CLG14), the focus should be on that massive build in products. Who said U.S. refiners would not be able to handle all of that cheap crude oil? Refiners went wild and produced near record amounts of gasoline (NYMEX:RBG14) for this time of year leading to a massive 6.2 million barrel increase in supply as daily production coming in at 912,000 barrels per day exceeded daily usage. This came as U.S. oil production soared to highest level since September 1988, and despite the surprise drop in overall supply we saw a 1.1 million barrel increase in Cushing, Okla. The distillate fuels also should make you feel warm as supply of distillates increased by 5.8 million barrels and heating oil stocks rose by 1.3 million barrels. The report more than justified the recent bearishness in the marketplace.

Yet concern over Libya kept Brent solid as the spread between Brent and WTI is widening again. The Wall Street Journal reports that “Libyan government and a rebel group stepped up rhetoric Wednesday as Tripoli responded to a vow by dissidents to sell oil with a threat to sink their cargoes. The exchange, which comes after Libya shot at a tanker it said was illegally entering its waters, raises concerns about whether the chaos that has more than halved oil production in the North African nation and rattled oil markets could get worse”.

The Journal reported that on Sunday, the Libyan Navy stopped a tanker it said was about to load at the blocked Es Sider terminal—though the shipper said it had already renounced entering the oil port. The government has banned shippers from lifting oil at several ports in eastern Libya, including Es Sider, after they fell under the control of a rebel militia seeking autonomy for its region, Cyrenaica. Sunday's incident and the verbal escalation that followed came as the rebels are making greater efforts to sell oil.

Iraq is also a reason the Brent crude is staying strong. Reuter’s reports that Iraq's oil industry and its foreign investors see no cause to panic after al Qaeda militants seized major towns last week — troubled Anbar province, they note, could hardly be further from the main oilfields. Yet the violence, in part a spillover from Syria's civil war into Iraq's western desert, has brought new unease about the security of pipelines and other facilities, which are concentrated in the northeast and southeast of the country. And new evidence of the Baghdad government's trouble in winning acceptance by Sunni Muslims, who make up a third of the population, clouds long-term prospects for a stable economy, fully a decade after U.S. forces toppled Sunni leader Saddam Hussein.

Iraq is looking to 2014 to show the biggest annual rise in oil exports since then, confirming its No. 2 position behind Saudi Arabia in OPEC as investments bear fruit. Ending a row over revenue sharing between Baghdad and Kurdish leaders that has blocked exports from the north would also be a big boost. International experts mostly view the government's official export target of 3.4 million barrels per day (bpd) this year — an increase 1 million bpd on 2013 — as pure fiction. But 2.8 million bpd seems feasible — if militants can be kept at bay. "Iraq has the potential for record growth this year," said a senior executive involved in a major oilfield project near the southern oil hub city of Basra. "But I'm quite uneasy about the deteriorating security situation."

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.


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