Supply Today Demand Tomorrow
The energy complex has to decide whether to focus on supply today or demand tomorrow. Despite the bigger than expected 3.1 million barrel increase in weekly crude supply, the bulk of the Energy Information Administration (EIA) weekly petroleum status report was impressive. While the market failed to focus on the bullish aspects of the report because of the worries about a global manufacturing slowdown, the truth is that a slowdown in petroleum demand is not showing up in U.S. data. While many fear it will in the future because of weak manufacturing data, it is not happening yet.
In fact, a look at total demand in the report actually came in based on total product supplies at a hefty 20.9 million barrels a day on the four-week moving average. That is actually 2.1% more than a year ago. Gasoline demand is a healthy 9.3 million barrels a day, almost on par with a year ago and shows the U.S. consumer is still driving. Distillate demand also remains strong hanging around 3.9 million barrels a day. Yet it is the supply story of diesel that would have normally given support to the complex if it were not for the fact that global stock markets were getting trounced.
US diesel supply is going in the wrong direction. The EIA reported that the U.S. diesel supply fell by 2.4 million barrels putting them 8% below the five-year average. This is a concern as the new IMO rules go into effect January 1st and if they are not delayed, we may be short of distillate.
Besides, while the U.S. manufacturing data really disappointed, it is possible that the worst is behind us. Sometimes a number like that is a bottom, not a trend. In fact, if you look at other data, manufacturing should ramp up again despite the U.S./China trade war. If U.S./China trade talks go well, they may have to really ramp up. Let’s hope they will have enough diesel.
In fact, many are asking why the API showed a big draw that was in line with my expectations but not on the EIA. Some market talk suggests that the EIA underestimated U.S. exports and will have to show a big downward adjustment next week. That, along with refinery outages in California and the Midwest to contend with. So next week oil traders have to be ready for a big drop in crude supplies, assuming that supplies matter if we are still fearing an imminent drop in oil demand.
In fact, I hear a lot of loose talks that there is a lot of supply. Well, that is really wrong. I know we are in the aftermath of the Saudi oil attacks and the fact that oil is lower than it was before the attack. The reality is that supply in the U.S. is the highest its been in five years. Record exports and supply in new pipelines are giving many this perception that there is plenty of supply. Actually we have a global supply just in balance. U.S. production may be peaking as rig counts fall and investment dries up. The EIA showed that production dipped slightly from a near-record high. If we see a turnaround in the global market economic sentiment you will see people wondering where all that supply went.
Today we get ISM non-manufacturing! A strong number should boost oil.
Natural gas will get a reporting today! The market is bracing for a triple-dip injection. Record production is going to refill the coffers.