The Phil Flynn Energy Report
Oil and products had the risk premium sucked out after President Trump suggested that Iran will “stand down” after Iranian ballistic missiles struck Iraqi military bases that house U.S. military personnel. The word that the U.S. had advanced warning of the attack seemed to suggest that Iran wanted to strike back but not escalate the situation. Oil traders that were positioning for a major war got taken out, and it did not help that the Energy Information Administration blindsided the market with a bearish report.
The reports that saw huge increases in oil products and a surprise build in crude supply was helped by a fog-related shutdown in the Houston Shipping Channel as well as last-in, first-out (LIFO) tax considerations. LIFO is a method used to account for inventory that records the most recently produced items as sold first. Under LIFO, the cost of the most recent products purchased (or produced) is the first to be expensed as cost of goods sold (COGS), which means the lower cost of older products will be reported as inventory. In other words, some of the inventory reported was not reported in inventory as they wanted it taxed in the new year. Now the new year is here, and magically more supply appears. There was product in the Houston Shipping Chanel that also led to big drops in oil and gasoline exports.
Crude oil increased by 1.2 million barrels from the previous week. Yet with total supply, we are still just at the five-year average for this time of year. Loyal reader John Eisenbeiser said that, “It is interesting to note that at the Cushing delivery hub supply stands at 35,501. The last time Cushing was at these levels in January week one was in 2015 but was shouldering from lower levels during peak time 2014.” In other words, even though the U.S. is producing a record 12.9 million barrels of oil a day, U.S. inventories are not in a glut. Oil supplies are average.
Gasoline supply, right now, is ample. The EIA says that, "Total motor gasoline inventories increased by 9.1 million barrels last week and are about 5% above the five-year average for this time of year. Ready to use ‘gasoline’ stocks increased by 7.2MB, Gas production fell by 1.3 million barrels and demand fell as well by a whopping 1.05 million barrels a day not to mention a drop in exports that led to the gasoline supply surge.
We saw another big build in distillates. The EIA reported that ULSD stocks increased 6.2MB. The higher sulfur distillate stocks fell 0.8MB while total distillates increased 5.3MB. Still, even with the sizable increases in supply the last two weeks, ULSD stocks are starting the year at the bottom of the 5-yr range. This is an issue as the new IMO rules demand on distillates and pricing some grades of crude at just shy of $100 barrel.
Bloomberg News reports that, “Australia’s Santos Ltd this week is seeking to sell a cargo of March-loading Pyrenees, a dense and low-sulfur oil, at a premium of $32 a barrel or more above Dated Brent, according to traders taking part in the tender. While it hasn’t been sold at that level yet, it would be equivalent to about $100 a barrel given that the global physical benchmark is trading at about $65 a barrel. They write that the, “Demand for so-called heavy-sweet oil like Pyrenees has surged in recent months due to cleaner global ship-fuel standards, known as IMO 2020, which took effect Jan.1. The new rules have boosted the value of these crudes that are low in sulfur and also viscous, which makes them better for marine engines. Low-sulfur marine fuel, another IMO compliant type of oil, cost about $640 a ton this week in Singapore, the equivalent of about $95 a barrel.” They also point out that ship fuel is more expensive than car fuel for the first time in history! Better get your cruise booked before they have to raise prices!
So oil got hit hard also on the fact that it is unlikely that Iran will target oil or anything else in the near term. That takes some fear out of the oil market. Yet a Chinese trade deal and stronger than expected global demand should send prices higher. U.S. stocks setting records should keep demand expectations rising. The uptrend in oil is still intact.
As far as natural gas goes, Andrew Weissman of EBW Analytics says, ”warn that while natural gas prices may rise near-term, the vast oversupply implies a bearish outlook for early spring. He says that near term, the market will likely transition from significantly bearish weather-driven demand for natural gas toward a more supportive, colder regime—providing a tailwind for bulls and laying the groundwork for an NYMEX natural gas relief rally. This spring, however, will likely provide a reckoning for bulls as vast oversupply conditions reassert themselves. The current storage trajectory is on pace for 1,712 Bcf—375 Bcf above either of the past two years. The last time storage exited winter this high (in March 2017), gas production was 24.7 Bcf/d lower. Oversupply may create gas prices under $2.00/MMBtu—potentially forcing producers to revise drilling programs this spring sharply and, in conjunction with soaring LNG exports, help natural gas prices to rise toward the mid-$2.30s/MMBtu. By late summer, however, fears of LNG shut-ins may reach a crescendo, leading to relapse in NYMEX futures toward $2.00-$2.25/MMBtu. Amid the major downside price risks in 1H2020, the gas market may overcorrect—yielding upside risk heading into winter 2020-2021.
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