Crude: Night moves

June 7, 2017 08:01 AM
Daily Energy Market Analysis

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It was an active night for global markets, including a terror attack in Iran, the takeover of Banco Popular in Spain--not to mention the American Petroleum Institute (API) Report that showed a big drop in crude supply but big increases in gasoline and distillates. 

Fox News reports that ISIS has claimed its first attack in Iran after suicide bombers and gunmen stormed into Iran's parliament and targeted the shrine of Ayatollah Khomeini, killing a security guard and wounding 12 other people, with the siege at the legislature still underway. The attack comes just days after Saudi Arabia, the UEA and Egypt cut diplomatic ties with Qatar in part over its dealings with Iran. Talks to ease the tension are being led by Kuwait and the market seems less concerned about a possible breakdown of the OPEC production cut agreement.

Markets were initially rattled on reports that Spain’s biggest bank, Santander, came in and bought the failing Banco Popular for a whopping one euro. The problems with Banco Popular were a worry for markets and after European officials decided the bank was close to being insolvent, they paved the way for the overnight sale. The markets view this as a victory for post-financial crisis reforms using private money as opposed to taxpayer money to bail out banks, but we may not be out of the woods yet. 

Stockholders of Banco Popular are left with nothing and bond holders take a big haircut. This reminds me of the attempt to save MF Global by selling them in the middle of the night to Interactive Broker but the sale fell apart when it was determined there was a lot of customer money missing. Reports say that Santander will ask investors for around €7-billion (£6.1 billion) of fresh capital to cover the cost of bolstering Popular holding that lost billions of euros on risky property loans. One wonders if this system would work if many banks were failing, but right now this will be a good test.

Crude oil prices rallied into the API report on talk that we would see a big drop in crude supply. That was correct but the increase in gasoline and distillate raised concerns about product demand once again. The API reported crude supply fell by 4.62-million-barrels last week and a twice as large fall as expected 1.56 million barrels drop in the Cushing, Okla., delivery point. The API though reported an equally large 4.08 million barrel increase in gasoline supply and a 1.75 barrel increase in distillate supply. The market will now await the Energy Information Administration (EIA) supply report to decide oil's next move.

The EIA reported: “U.S. crude oil production in 2018 is forecast to average 10 million barrels per day, well above the previous annual record production level of 9.6 million barrels per day set in 1970. Increased drilling activity in U.S. tight oil basins, especially those located in Texas, is the main contributor to oil production growth, as the total number of active rigs drilling for oil in the United States has more than doubled over the past 12 months.”

Gasoline/Refined Products: “U.S. gasoline prices are forecast to be about 10% higher this summer than last, but higher pump costs aren’t expected to cut into vacation driving plans, as summer gasoline demand is expected to reach a record high.” “Stability in crude oil prices along with high gasoline inventories since the beginning of the year have helped U.S. retail gasoline prices remain unusually stable, with the average price for regular gasoline increasing just four cents a gallon from January to May, much lower than the average 39-cent increase seen over these months over the previous five years.”

Natural gas: “After declining during 2016, U.S. natural gas production is forecast to increase in both 2017 and 2018.” “U.S. natural gas exports are expected grow at double-digit rates both this year and next year, averaging 10 billion cubic feet per day in 2018.”

Electricity: “The amount of U.S. electricity supplies from natural-gas fired generation is expected to decline this year in response to higher natural gas prices, as generation from coal, hydropower, wind and solar all increase.”

Coal: “U.S. coal production is getting a boost from higher coal exports and increased electricity generation at coal-fired power plants. The amount of electricity produced by coal-fired generating units is forecast to increase this year in response to higher costs for natural gas-fired power generation.”

Renewables: “Wind, solar and other non-hydro renewables are expected to account for nearly 10% of U.S. electricity generation during 2018, as total generation by these energy resources continues to rise." The EIA did make news with their Short Term Energy Outlook released yesterday. 

Crude oil must also worry about a strike. Dow Jones reports that Norwegian oil workers will hold wage talks with their employers on Friday to avoid a strike that could cut 10 percent of crude output from western Europe’s largest producer.

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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.