Crude traders take step back

April 30, 2018 08:14 AM

Crude oil prices are taking a step back on Monday as an increase in rig counts and a drop-in supply in Cushing, Okla., and a perceived drop in Geo-political risk premium are causing traders to take a step back. The U.S. oil rig count increased by five rigs last week, as U.S. producers are responding to higher prices and demand; but the real reason for weakness in oil may have been the fact that refinery maintenance is slowing the ravenous U. S. appetite for crude oil temporarily. Private forecasters are calling for a sizable 700,000 barrel plus increase in Cushing oil supply this week, even as overall crude, gas and diesel supply should fall.

The other reason is potential progress with North Korea. The New York Times reported that Kim Jong-un said he would abandon his nuclear weapons if the United States promised not to invade North Korea, a South Korean official said. While there is much skepticism, a peace deal with North Korea would be a major historic turning point in world history.   

France and Iran are trying to work on an agreement to save some type of nuclear deal even if the United States decides to back away from the Iranian nuke agreement. The fact that Iran is talking could ease the fear premium of what happens after the United States pulls out of the deal. 

Still, despite Monday’s weakness, oil is still in very good shape. Global demand is rising and U.S. demand is strong against a backdrop of uncertain production issues. While U.S. shale output continues to rise, production outside of the United States falters. Venezuela is collapsing and now there is plunging output in Angola as well. Bloomberg reports that “Angola, once Africa's biggest crude producer, is suffering sharp declines at underinvested offshore fields, with output dropping almost three times as much as the nation pledged in an accord with fellow OPEC members. With the losses set to accelerate -- a shipping program seen by Bloomberg News shows crude exports will fall in June to the lowest since at least 2008 -- the cartel risks tightening supply too much.”

Corn is king! China trade war fears are easing and that is a good thing for farmers who saw a big pop in grain prices as well as surging demand for their products. That includes U.S. ethanol, the subsidized built market. The Energy Information Administration reports that the United States exported nearly 1.4 billion gallons of fuel ethanol in 2017, surpassing the previous record of 1.2 billion gallons set in 2011. U.S. imports of ethanol in 2017 increased compared with 2016 but remained relatively small at 77 million gallons, resulting in the United States being a net exporter of ethanol for the eighth consecutive year. 

The United States has seen continued growth in fuel ethanol exports during the past eight years as increases in both corn production and ethanol production capacity have outpaced domestic fuel ethanol consumption. U.S. fuel ethanol was exported to 35 countries in 2017, but more than half of all exported fuel ethanol went to Brazil and Canada.

Refiner madness! It is a great time to be a refiner and that means big deals. The Wall Street Journal reports that Marathon Petroleum is expected  to buy Andeavor for more than $20 billion. The Journal reports that the cash-and-stock deal, which values Andeavor at about $150 a share, is expected to be announced Monday. That would be a roughly 23% premium over Andeavor’s closing price Friday after the stock surged about 50% in the past year. Marathon, based in Findlay, Ohio, is the second-largest refiner in the United States, according to its web site. Marathon-branded gasoline is sold in 20 states, and its Speedway unit owns the nation’s second-largest convenience-store chain. It also owns a midstream master limited partnership with about 11,000 miles of crude oil and light-product pipelines. Andeavor, based in San Antonio and formerly known as Tesoro, operates 10 refineries in the western United States with total capacity of more than 1.2 million barrels a day. Part of the rationale of the deal centers on the companies’ complementary footprints; with Marathon in the East and Andeavor in the West, regulatory approval could be easier to win. The deal is expected to produce $1 billion of synergies, people familiar with the matter said. 

Natural gas has fought off cold, but is there a spring in our future? Andrew Weissman, of ECB Analytics, says that this has been the coldest April in 35 years, adding more than 175 Bcf of demand for natural gas. Notably, however, despite record demand, the June contract never closed above $2.821/MMBtu and relinquished all its gains for the month late last week. This weak performance is a sign of the strength of bearish sentiment. During the next three weeks, weather-driven demand will fall to its lowest point of the year, potentially leading to record injections. As this occurs, the June gas contract is likely to drop to $2.61-2.68—if not lower. With colder-than-normal weather firmly in the rearview mirror, falling springtime power demand across the Midwest and Northeast is likely to exert considerable downward pressure on regional day-ahead electricity prices this week.

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.