Big crude draw not big enough

June 2, 2017 08:54 AM
Daily Energy Market Analysis

The Energy Information Administration (EIA) failed to wow the crude oil market even after it reported the biggest crude oil drawdown of the year. The reason is a technical weakness on the charts, coupled with the promise of more Libyan oil production and the fact that U.S. oil production increase tied the highest level since November of 2015. Not even President Trump’s withdrawal from the Paris Climate Accord could give the market the lift it needed. Yet, despite the market reaction in the short term, are we putting too much faith in the promise of Libyan oil production and U.S. production and ignoring bullish data and growing demand record exports and refining runs.

The drawdown was large by historical standards with U.S. crude supplies falling by 6.4 million barrels. The draw would have been even larger if it were not for the fact that they released 970,000 barrels from the Strategic Petroleum Reserve. Refining runs came in at a record as refiners ran 17.5 million barrels of crude operating at 95% of capacity. U.S. imports fell on average 309,000 barrels a day and we saw gasoline demand rise to a respectable 9.82 million barrels a day. That drove the supply of gasoline lower by 2.9 million barrels a day. Yet, record demand for oil and record imports seemed to take a back seat to U.S. production that saw an increase to 9.34 million barrels a day from 9.32 million the week earlier. 

The crude oil market also fretted about the increase in Libyan oil output to 827,000 barrels per day, a three-year high according to the National Oil Corporation. This led to speculation that the combination of rising shale output and rising U.S. production would weaken the resolve of OPEC cartel members in adhering to production cuts. This skepticism is happening even though OPEC is mulling the possibility of a further 1-1.5% production cut if inventories remain high.

The oil market also seemed to have a sell the fact effect after the United States withdrawal from the Paris Climate Change Accord even as President Trump seemed to layout a strong case as to why the deal was bad for the U.S. taxpayer and the U.S. economy. Trump said that, “compliance with the terms of the Paris Accord and the onerous energy restrictions it has placed on the United States could cost America as much as 2.7 million lost jobs by 2025, according to the National Economic Research Associates. This includes 440,000 fewer manufacturing jobs – not what we need, believe me, this is not what we need, including automobile jobs and the further decimation of vital American industries on which countless communities rely. They rely for so much and we would be giving them so little.”

President Trump also questioned why the U.S. should kick in 3 billion dollars to support countries that will be allowed to increase carbon emissions while the U.S. cannot. Trump said that, "China will be allowed to build hundreds of additional coal plants. So, we can’t build the plants, but they can, according to this agreement. India will be allowed to double its coal production by 2020. Think of it. India can double its coal production. We’re supposed to get rid of ours. Even Europe is allowed to continue construction of coal plants.” 

In short, the agreement doesn’t eliminate coal jobs. It just transfers those jobs out of America and the United States and ships them to foreign countries. This agreement is less about the climate and more about other countries gaining a financial advantage over the United States. The rest of the world applauded when we signed the Paris Agreement. They went wild. They were so happy.

Well despite what the critics thought, we saw stocks surge after the pullout and oil fall. Cool temps cause a higher than expected 81bcf increase into natural gas storage, but predictions of an active hurricane season and a return to warmer weather may start to support prices.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil 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.