Oil Traders Speculate Shock and Awe Major Production Cuts, OPEC Disappointed With Demand  

OPEC Disappointed With Oil Demand  
Traders positioning for tail risk to upside
The Energy Report

The Energy Report


The Energy Report - August 15, 2019



The Yield curve un-inverted and with strong U.S. economic data, oil and oil products are making a strong comeback. Oil, instead of worrying about a recession a year or two or 5 years from now, will have to find an answer for strong U.S. oil demand. Oil did seem to sell off on Bloomberg News reporting Gibraltar’s decision to release Iran’s Grace 1 oil tanker on Thursday sparked the ire of the U.S., even as it signaled a possible thawing in recently tense relations between the Persian Gulf state and Europe.  While a court in Gibraltar ruled that the ship is free to sail -- following weeks of detention on suspicion of violating European sanctions -- the U.S. may yet seek to block this from happening. The Trump administration reacted angrily to the release, saying the U.S. was gravely disappointed.


OPEC is disappointed with oil demand, but reports are circulating that they may shock and awe the market with a major production cut.


Reuters reported that OPEC on Friday provided a downbeat oil-market outlook for the rest of 2019 as economic growth slows and highlighted challenges in 2020 as rivals pump more, building a case to keep up an OPEC-led pact to restrain supplies. In a monthly report, the Organization of the Petroleum Exporting Countries cut its forecast for oil demand growth in 2019 by 40,000 barrels per day (bpd) and indicated the market will be in a slight surplus in 2020. The bearish outlook due to slowing economies amid the U.S.-China trade dispute and Brexit could press the case for OPEC and allies, including Russia, to maintain a policy of cutting output to boost prices. Already, a Saudi official has hinted at further steps to support the market.


U.S. refinery runs may slow for the first time in 10 years according to the Energy Information Administration. U.S. gross inputs to refineries, also known as refinery runs, have increased each year since 2009, most recently reaching a record high of 17.3 million barrels per day (b/d) in 2018. However, based on its monthly refinery run data through May and forecast for the remainder of 2019, the U.S. Energy Information Administration (EIA) expects refinery runs to decline and average 17.0 million b/d in 2019. U.S. refinery capacity was at a record high of 18.8 million barrels per calendar day as of January 1, 2019. EIA’s annual Refinery Capacity Report shows that U.S. refining capacity will not expand significantly during 2019. EIA surveys refinery capacity annually, so any changes to refinery capacities during a calendar year will not be captured until the next survey at the beginning of the next calendar year. In late June, “damage from an explosion at the Philadelphia Energy Solutions (PES) refinery in South Philadelphia led PES to discontinue operations. The PES refinery had the largest refining capacity among East Coast refineries (335,000 b/d), but it experienced financial strains in recent years. In the six weeks since the explosion, refinery runs in the East Coast region (defined as Petroleum Administration for Defense District 1) have averaged 897,000 b/d, a decline of about 211,000 b/d from their averages in the six weeks before the explosion.”


Nat Gas is still supported by demand. For now. MarketWatch’s Myra P. Saefong reported that domestic supplies of natural gas rose by 49 billion cubic feet for the week ended Aug. 9. The average forecast of analysts polled by S&P Global Platts had called for an increase of 54 billion cubic feet. Total stocks now stand at 2.738 trillion cubic feet, up 357 billion cubic feet from a year ago, but 111 billion below the five-year average, the government said.




About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.