The U.S. refining system sunk deeper into hibernation as the Energy Information Administration reported that U.S. refineries fell to only 83.1% of their operable capacity last week, the lowest level since 2017. This caused the production of gasoline to fall to 10.0 million barrels per day and distillate fuel production to fall to 4.7 million barrels per day. This caused big product draws and made distillates fall further below the five-year average. That made the market eventually ignore a massive 9.3-million-barrel crude oil build and included a 1.3million barrel release from the SPR into commercial stocks.
Distillate fuel inventories decreased by 3.8 million barrels last week and according to EIA we are 11% below the five-year average and are now at the lowest level this year. This is disturbing as winter is coming along with new IMO rules. Check out this week’s Barrons for an article about how your heating oil bills will be impacted.
Total motor gasoline inventories decreased by 2.6 million barrels last week and are about 2% above the five-year average for this time of year. The market has lost a lot of cushion to the five-year average. Ready to use ‘gasoline’ stocks fell by 1.4 million barrels. So the tightness in products and the fact that the death of China oil demand may be exaggerated means that we should be at seasonal lows for prices. If you are not hedged it is probably time to do it now. I would not wait much longer. Despite the fact that China’s third-quarter GDP was up only 6% year-on-year, slowest growth in nearly three decades, China’s September refinery output actually increased by 9.4%.
The National Hurricane Center is warning that Gulf of Mexico oil operations is going to get messed up. Ok, maybe they didn’t put it quite that way but they are warning that a weather disturbance “Potential Tropical Cyclone Sixteen” is. This is, "A disturbance a little better organized and will likely be a tropical or subtropical storm." The storm, if formed, will be named Tropical Storm Nestor.
Bret Walts at Bamwx.com a top-notch commodity weather service says that "This system looks to develop into Tropical Storm Nestor later this afternoon and make landfall overnight Friday or early Saturday in the panhandle. The greatest winds/storm surge will be on the right side of the storm so I’d look for an area near Panama City down towards Clearwater as the areas with the greatest storm surge/coastal flooding threat. There’s a *small* chance that it could develop into an upper-end tropical storm or low-end Category 1 hurricane given much above normal Gulf of Mexico ocean temperatures. However, chances are better it remains at tropical storm criteria as it moves inland given strong wind shear. The heaviest rain will be in the panhandle but heavy rain will continue into coastal Georgia and North/South Carolina.” Bret says that the good news might be that, "Some of this rain will actually be very beneficial for these areas given severe to extreme drought conditions.” You can keep on the storm by going to Bamwx.com website.
Natural gas is still getting supported by a forecast of a late October winter blast. Yet the big news is that for the first time in years, natural gas supplies are above the five-year average. The EIA also reported that "working gas in storage was 3,519 Bcf as of Friday, October 11, 2019, according to EIA estimates. This represents a net increase of 104 Bcf from the previous week. Stocks were 494 Bcf higher than last year at this time and 14 Bcf above the five-year average of 3,505 Bcf. At 3,519 Bcf, total working gas is within the five-year historical range.”