Oil Futures Back To Prices Before Drone Attack On Saudi Oil Facilities

Impeachment odds fall
More progress on the U.S./China trade
Crude oil filled the technical trading gap after the drone missile attack
The Energy Report

The Energy Report

Energy Report 09-26-2019

Inverse Correlation


While the impeachment odds fall, the market rallies in an inverse correlation. So instead of the market fearing a long divisive impeachment process, the market can focus on some of President Trump’s accomplishments at the UN. Forget the fact that for many press outlets, impeachment was the only story and barley took note of all of Trump’s accomplishments on the world stage. They seemed to miss the U.S. trade deal with Japan or the fact that the U.S. is building a coalition to offset the growing risk from the terror sponsor nation Iran. So in case, you missed it, let’s touch on a few points.


Secretary of State Mike Pompeo announced a crackdown on Chinese shipping companies and tanker firms for continuing to carry Iranian crude after sanctions waivers ended in May. President Trump and Japanese Prime Minister Shinzo Abe announced the completion of an agreement that will greatly improve access for U.S. red meat imports to Japan. There was also more progress on the U.S./China trade. This came even as President Trump laid out his case for his tough stance on China trade. Trump said, “ For decades the international trading system has been easily exploited by nations acting in very bad faith. Not only has China declined to adopt promised reforms, it has embraced an economic model dependent on massive market barriers, heavy state subsidies, currency manipulation, product dumping, forced technology transfers and the theft of intellectual property and also trade secrets on a grand scale," Trump said. China apparently listened and despite his tough talk on China, President Trump said there would be more Chinese purchases of U.S. agricultural products.  That came quickly as China reportedly bought close to 100,000 tons of pork from pork exporters including Smithfield Foods Inc., owned by China’s WH Group Ltd., and Tyson Foods Inc.


Crude oil, for its part, filled the gap that was left after the gap opening after the drone and missile attack on the Saudi oil facilities. The reason why we had the opportunity to fill the gap was due in part to the dollar or more impeachment crude price drop. Oh sure, there was talk about the quick return of Saudi oil production, yet no one is telling us how they plan to process that crude with their processing plant that will be down longer than expected. There are claims that Abqaiq is back at pre-attack processing capacity levels of 4.5 million barrels of oil per day but there are many who doubt that. The 1.45 million barrel a day Khurais oil field reportedly is producing 1.3 million barrels a day.  That puts the market in a vulnerable technical situation. That allowed the market to get close to the gap. The gap was filled within seconds of the release of the Energy Information Administration (EIA) status report that was bearish, based on expectations, but not as bearish as the price action that came because of the impeachment price drop.


The EIA reported that U.S. commercial crude oil inventories increased by 2.4 million barrels from the previous week most of that in Cushing, Oklahoma. At 419.5 million the EIA says that put supply at the five-year average for this time of year. Gasoline inventories increased by 0.5 million barrels last week and are about 4% above the five-year average for this time of year. Yet a 3 million barrel drop in distillate supply was supportive even as supply is 7% above average for this time of year. Once the gap was filled the crude oil market closed back above a key moving average but not higher on the day. A strong close today should solidify a bottom and we more than likely then have set the low for the year. That is barring any major breakdowns in stocks or China talks. 


The Energy Information Administration (EIA) also reported that U.S. gasoline prices saw the biggest one-week spike since Hurricane Harvey. “As of Monday, September 23, 2019, the U.S. average retail gasoline price increased by more than 10 cents per gallon (gal) from the previous Monday, based on data in the U.S. Energy Information Administration’s (EIA) Gasoline and Diesel Fuel Update. This weekly increase was the largest since early September 2017, when the national average gasoline price rose 28 cents/gal in the aftermath of Hurricane Harvey. EIA surveys retail gasoline and diesel fuel stations each Monday morning. In its Gasoline and Diesel Fuel Update, EIA estimates that slightly more than half of the regular retail gasoline price in August 2019 was based on the price of crude oil. Other components, such as taxes (18% of the price) and distribution and marketing costs and profits (17%), tend to fluctuate less than refining costs and profits (12%) and crude oil prices (53%).


As we have said before, the most important fuel source for the next 50 years is going to be liquefied natural gas. Today Reuters reported that “Record investments of $50 billion have turned 2019 into a banner year for liquefied natural gas (LNG), with Canada and the United States being the main drivers, the chief of the International Energy Agency (IEA) said on Thursday. The industrial sector is Asia’s biggest driver of LNG growth, with China expected to overtake Japan as the world’s top importer of the fuel in five years, said Fatih Birol, the agency’s executive director. “This year, 2019 already broke the highest amount of (final investment decisions) for the first time ever, $50 billion,” he told the annual LNG Producer-Consumer conference in Tokyo. More than 170 billion cubic meters (bcm) of natural gas liquefaction capacity is due to take a final investment decision this year, a record far surpassing the previous high in 2005 of 70 bcm, according to the IEA. The recent boost in contracting activity and project sanctioning follows the growing adoption of the equity offtake marketing structure, where companies have access to LNG volumes according to their equity stake, reducing the need for long-term sale and purchase agreements, the agency said in a report released this month.




About the Author

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