The crude oil market is still fixated on trade war news yet behind the scenes, there is a growing supply issue especially when it comes to distillate fuels. Oil prices sank as relations between the U.S. and China seemed to sour. The word that the Trump Administration put visa restrictions on Chinese officials due to the treatment of Muslim minorities in the Xinjiang region, raised fears that the issue of human rights in China might derail any hope of a U.S.-China trade deal. Secretary of State Mike Pompeo tweeted that, “China has forcibly detained over one million Muslims in a brutal, systematic campaign to erase religion and culture in Xinjiang. China must end its draconian surveillance and repression, release all those arbitrarily detained, and cease its coercion of Chinese Muslims abroad.” The U.S. effort to pressure them has put visa restrictions on Chinese officials the day after it blacklisted 28 entities and companies in China. While China vowed to retaliate, overnight the Chinese say, despite the move, they are still open to a partial trade deal. That news seemed to get the oil market focused back on supply and not the potential trade war destruction of dreams.
So now instead of getting bogged down in this crazy macro trade war drama, we can focus on real issues when it comes to the supply tightness. Oh sure, there has not been a lot of focus on it but the tightness in the distillate market is getting disturbing. Last week the Energy Information Administration reported that overall distillate supply is about 8% below average. New IMO rules on diesel are already creating a situation where supplies are well below normal and could cause some major problems. In fact, with winter coming, supplies of heating oil are even more disturbing.
While the Energy Information Administration in their Winter Fuel Outlook report says that they expect home heating oil expenditures to fall by 4%, many look at the numbers and feel that is overly optimistic. Heating oil supplies, while not in use as much as it has been in the past, are far below normal levels. Robert Gibbons, a long-time oil journalist said that "Although the total of all heating oil #inventories in the Northeast was 26% lower than the previous five-year average at the end of September, the EIA does not expect significant supply disruptions or price fluctuations. Okay, we'll soon see (that's -26%).”
The API added to distillate supply worries by reporting a drop of 3.984 million barrels in inventory. If the EIA has a similar drop, the fallout should support the entire complex.
The API also reported that gasoline supply fell by a sizable 5.937 million barrels last week offsetting a bearish 4.1-million-barrel crude oil build. At some point, the market may realize that we are far from being oversupplied in the U.S. markets. Demand is good despite fears and talk of a slowing global economy.
The EIA also made some other interesting predictions. The EIA said that "U.S. crude oil production averaged 11.8 million b/d in July (the most recent month for which data are available), down 0.3 million b/d from June. Declining production was a result of Hurricane Barry, which disrupted crude oil production in the Gulf of Mexico. U.S. crude oil production remained relatively flat during the first seven months of 2019 because of disruptions to the Gulf of Mexico platforms and slowing growth in tight oil production. The slowing rate of growth in tight oil production reflects relatively flat crude oil price levels and slowing growth in well-level productivity in the Lower 48 states. However, EIA expects growth to pick up in the fourth quarter as production returns in the Gulf of Mexico and pipelines in the Permian Basin come online to link production areas in West Texas and New Mexico to refining and export centers on the Gulf Coast. However, EIA forecasts growth to level off in 2020 because of falling crude oil prices in the first half of the year and continuing declines in well-level productivity. EIA forecasts U.S. crude oil production will average 12.3 million b/d in 2019, up 1.3 million from the 2018 level, and will rise by 0.9 million b/d in 2020 to an annual average of 13.2 million b/d.”
I believe that number may be a bit optimistic but I agree on their outlook for natural gas production. The EIA forecast, "that average annual U.S. dry natural gas production will average 91.6 billion cubic feet per day (Bcf/d) in 2019, up 10% from the 2018 average. EIA expects that natural gas production will grow much less in 2020 because the delayed effect of low prices in the second half of 2019 will reduce natural gas-directed drilling in 2020. EIA forecasts natural gas production in 2020 will average 93.5 Bcf/d."
The EIA said that “EIA estimates that crude oil production from the Organization of the Petroleum Exporting Countries (OPEC) averaged 28.2 million barrels per day (b/d) in September. Production was down 1.6 million b/d from August, the lowest level of OPEC production since November 2003—as a result of the disruptions in Saudi Arabia—and down 4.0 million b/d from September 2018. The decrease in OPEC crude oil production during the past year was primarily the result of falling production in Iran and Venezuela as well as the recent disruption in Saudi Arabia. However, EIA estimates that Saudi Arabia’s crude oil production returned to pre-outage levels as of October 3. EIA forecasts that annual average OPEC crude oil production will average 29.8 million b/d in 2019, down by 2.1 million from 2018, and 29.6 million b/d in 2020.”
The EIA continued, "The price forecast for Brent crude oil spot prices averaged $63 per barrel (b) in September, up $4/b from August and down $16/b from the September 2018 average. Brent spot prices began September at $61/b and increased to $68/b after attacks on major Saudi Arabian oil infrastructure disrupted the country’s crude oil production. However, Brent spot prices have subsequently fallen, reaching $58/b on October 4, as Saudi Arabia restored the shut-in production and concerns about oil demand based on the condition of the global economy rose.” "EIA forecasts Brent spot prices will average $59/b in the fourth quarter of 2019 and then fall to $57/b by the second quarter of 2020, which is $5/b lower than forecast in the September STEO. Despite the recent increase in supply disruptions, EIA expects downward oil price pressure to emerge in the coming months as global oil inventories rise during the first half of 2020. EIA forecasts balances to tighten later in 2020 and expects Brent prices to rise to an average of $62/b in the second half of next year. The resulting forecast average price in 2020 is $60/b, $2/b lower than forecast in the September STEO. EIA’s October forecast recognizes a higher level of oil supply disruption risk than previously assumed, more-than-offset by increasing uncertainty about economic and oil demand growth in the coming quarters, resulting in a lowered oil price forecast."