The Phil Flynn Energy Report
Stop The World
The oil process wants to get off. Oil prices got crushed as supply data and economic data was a stark reminder that the world has stopped. Not only did weekly crude supply see the most significant weekly increase in history, but we also saw reports that the Trump Administration is working on a plan to pay U.S. oil producers not to produce. Bloomberg News reported that the U.S. Energy Department has a plan to pay oil producers to sit on as much as 365 million barrels worth of oil reserves. That would effectively make that untapped crude part of the U.S. government's emergency stockpile, said senior administration officials, who asked not to be identified describing deliberations before a decision and announcement.
While that may sound crazy, it's not without some precedent, at least in the agriculture sector. For years the U.S. government has paid some growers of grain not to produce grain to thwart oversupply. The government has also bought the U.S. supply. This is an attempt to save more U.S. energy companies from bankruptcy and that's the key. The truth is that those that survive this Covid-19 shakeout will prosper when demand comes back.
When is the come back is the big question? The hit to U.S. oil producers means that we will be more dependent on foreign suppliers of oil. We know that because of recent anti-competitive actions by Saudi Arabia and Russia, it's our nation’s best interest to protect as many producers as possible during this unprecedented hit to global oil demand. A hit that was laid bare in the EIA weekly status report. The EIA reported U.S. commercial crude oil increased by 19.2 million barrels from the previous week. At 503.6 million barrels, U.S. crude oil inventories are about 6% above the 5-year average for this time of year. The largest weekly crude build in history that saw oil supply above the 500-million-barrel level for the first time since June 2017.
U.S. crude oil refinery inputs plunged, averaging 12.7 million BPD during the week ending April 10, 2020, which was 1.0 million BPD less than the previous week’s average. Refinery runs fell, operating at 69.1% of their capacity last week. Still gasoline production increased last week, averaging 5.9 million BPD still well below where we were just weeks ago. Reports show that refiners will be cutting back more.
DTN reports that Valero Energy Corp., in a federal filing on Monday, April 13, said it began reducing crude runs "at most of its refineries, temporarily idled various-gasoline making units at certain refineries" and reduced jet fuel production in late March and early April in response to lower product demand as a result of the collapse in oil prices and the coronavirus pandemic.
The EIA also reported that distillate fuel production decreased last week, averaging 4.9 million BPD Total motor gasoline inventories increased by 4.9 million barrels last week and are about 12% above the 5-year average for this time of year. Distillate fuel inventories increased by 6.3 million barrels last week and are about 7% below the 5-year average for this time of year.
Propane on the other hand saw supply fall by decreased by 2.2 million barrels last week and are about 18% above the 5-year average for this time of year. With drilling cutbacks propane production is falling.
Total commercial petroleum inventories increased last week by 27.2 million barrels as demand destruction was unbelievable. The EIA reported that demand based in products supplied over the last 4-week period averaged 16.4 million BPD, down by 18.5% from the same period last year. Over the past 4 weeks, motor gasoline product supply averaged 6.4 million BPD, down by 31.6% from the same period last year. Distillate fuel product supply averaged 3.6 million BPDover the past 4-weeks, down by 8% from the same period last year. Jet fuel product supply was down 39.7% compared with the same 4-week period last year. I was going to mention the EIA weekly oil production number, but why bother. No one believes it anyway.
Today, for the oil market, it is option expiration day. The big question is whether the soon to expire May contract will settle above or below $20 a barrel. Oil is up as the market is getting a risk on bid on talk that the U.S. may be passing the peak of the coronavirus. The Trump Administration is already talking about ways to start reopening the U.S. economy and start putting laid off and fired workers back to work. We know that jobless claims will be ugly so it will be interesting to see if the market looks beyond the bad data but to what will be better days ahead.
RBOB gasoline still seems to be the best of the oil bunch. The market is start to believe measures to contain the spread of the coronavirus are working. Refiners may be slow to ramp up gas production in time to meet demand.
Reuters reports that the U.S. diesel market is weakening as the nation's economy crashes, cutting demand for the refined product that had until recently been a lifeline for refiners dealing with the sharp fall in gasoline and jet fuel consumption. Refiners are trying to figure out what to do and may make some mistakes. Take diesel for example. Reuters reports that U.S. demand for diesel, which fuels farming equipment and trucks that haul goods across the country, had held up relatively well as governments ordered residents to shelter at home. Refiners responded to trucking and farming demand by increasing their slate of diesel as processing margins remained higher. However, diesel consumption is falling now as well.
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