Dog days of crude

August 17, 2017 09:15 AM

Crude oil prices were a dog yesterday as the summer doldrums and rising U.S. oil production failed to inspire the market despite another near record crude oil draw. The market also fell on a report that the United States will sell more oil out of the Strategic Petroleum Reserve. Shale hopes may run high as we get into shoulder season yet the drop in oil inventory will start to become a concern as soon as the normal players start paying attention to massive crude drawdowns and near record global demand. The mood for oil is weak as we approach shoulder season and it's still a week until we have news that will awaken us out of our summer slumber.

U.S. production rising was really the only bearish indicator in the whole report. The Energy Information Administration (EIA) reported the US oil production increase of 79,000 barrels a day is near record highs to 9.502 million barrels a day with a big jump in Alaskan production and the lower 48 states as well. That overshadowed the massive and historic 8.9-million-barrel crude drop because supplies are still in the upper half of the average range for this time of year even as demand is blowing away the five-year average. Some pointed to the 678,000-barrel increase in Cushing, Okla., stocks as they rose to a hefty 57 million barrels.

U.S. refiners are on fire running at a much higher than expected 96.1% of capacity, that's 17.6 million barrels of crude oil a day.  The demand for oil products supplied during the last four-week period averaged a whopping 21.2 million barrels per day, up by 2.0% over a year ago. While gasoline demand fell to an average of 9.7 million barrels per day, which was down by 0.3%, it was made up by explosive distillate demand that is averaging 4.3 million barrels a day up by 15.9% over a year ago as the U.S. manufacturing industry starts to sizzle.  

With these strong demand numbers, oil will be well supported on breaks even as we may experience some seasonal weakness. Look to use breaks to buy calls going into next year. Also, the bull spreads on oil should start to work as the refiner demand for heavy crude will keep the front end strong with the realization that a lot of the shale condensate that is being counted in storage cannot be used by U.S. refiners. 

Oil also saw weakness on the SPR news. The UPI reported that the U.S. Department of Energy said it plans to sell some of the oil from the Strategic Petroleum Reserve, the world's largest emergency supply of oil. The department's Office of Fossil Energy said the sale from the federally owned stockpile was scheduled for late August. The office aims to draw down and sell 14 million barrels of oil in order to meet the requirements of bipartisan legislation, most recently enshrined in the 21 Century Cures Act. 

Under the measure, signed in January, the government aims to sell off 25 million barrels of oil over the next three years, with 9 million on tap for sales next year. "Revenues from the sale will go to the general fund of the United States Department of the Treasury, to carry out the National Institutes of Health's innovation projects," the department reported.This would be the second release from the SPR this year and would come at a time when analysts and investors are watching for data indicating the degree to which the market is balanced between supply and demand.

A report from S&P Global Platts that followed the first SPR release indicated the volume of crude oil injected into the market from the SPR would be relatively negligible and the long-term impact on the price of oil should be relatively minor. To put it in perspective, total U.S. crude oil production per day is around 9 million barrels. Based on what we have seen lately, it will only replace two weeks' worth of draws from U.S. crude oil stockpiles.

Worries, do we have worries. Not only must worry about replacing Venezuelan heavy crude to feed U.S. refiners, but a big drop in Saudi imports to the US may leave some refiners stressed. The risk to supply also includes Mother Nature as the National Hurricane Center storm map looks like Pacman with one storm chasing another and then another storm after that! There are three tropical waves that will impact oil shipments and have the potential to disrupt oil and gas production next week.

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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.