Oil prices were able to overcome a supply increase, but were not able to overcome the Federal Reserve Minutes. The Fed sent the dollar on a tear, because in the Fed minutes they said they wanted to send a message that a June interest rate increase was on the table.
Oil had been rallying despite an unexpected 1.31-million-barrel increase in oil supply and record supply in Cushing, Oklahoma was up 461,000 barrels at 68.273 million barrels, because product demand in gas and distillate was on fire. Not only is gas demand hovering near a record high, but total product demand is at the highest level since January. Gasoline inventories fell by a more than expected 2.50 million barrels as demand increased to a whopping 9.7 million barrels a day. Distillate fuel inventories also fell by a more than expected 3.17 million barrels a day. Refining runs were up to 90.5% but will have to move higher to meet surging demand.
Yet after the Fed Minutes, fortunes were changed. The dollar soared and oil and other commodities broke down. Oil seemed reluctant to break because the product prices were staying somewhat firm, yet as the stock market weakened, the short end of the yield curve went whacky and it was hard for the petroleum market to stay solid.
If the Fed wants to make a case for raising rates, they may look to oil product demand. The surge in demand helps make the case that perhaps the economy is stronger than some of the data suggests. Record demand is a sign that there is something going on in the economy. While in the short term the Federal Reserve may thwart the advance, the truth is that oil demand should ultimately carry the day. Near record product, demand should encourage refiners to ramp up production and that should cut into excess supply.
The risks to supply are still high. Not only did we see another drop in U.S. oil production to 8,285 million barrels a day last week, it is unclear that oil's short-term rejection of $50 a barrel will allow oilrigs to come back on line. With historic pain in the oil patch and bankruptcies soaring, it may take a much more sustainable oil price to get production on line. We also have the Canadian wildfires still burning out of control with the hope that forecasts for rain may help get the out of control fires back into control. Nigerian production is still off by 800,000 to a million barrels a day and they face a strike. Venezuela is in shambles as their President Nicolás Maduro is cracking down on protestors who are complaining because he bankrupted the country. With a shortage of food, water and possibility a civil war, the reliability of Venezuela’s production is increasingly suspicious.
Long-term, our bullish view has not changed. Short-term, the market is under pressure from the Fed. If we see the market continue to decrease, use this as an opportunity to add to the long -term option plays.