Oil Futures Pricing in Tighter Supplies

May 15, 2020 09:08 AM
Oil supply to Cushing continues to fall
Nigeria cut its oil output by 417,00 BPD
Governors and House members push to grant a Renewable Fuel Standard waiver
The Energy Report



The Phil Flynn Energy Report 

On the Road Again

On the road again, we just can't wait to get on the roads again. The life we love is working and playing with our friends. America is on the road again. On the road again, Goin' places as the lockdown ends, Seein' things that we hope not see again. We can't wait to get on the road again. 

Crude oil prices are on the rise as cities in the Northeast start to reopen, and gas stations are getting full of drivers that need to fill their tanks, in some cases for the first time in over a month. Oil is getting support from private forecasters that suggest that oil supply in the Cushing, Oklahoma delivery point continues to fall, alleviating fears that oil will trade negatively again. Genscape, the individual Cushing watcher, reported that storage at the Cushing delivery point fell to 62,068,479 million barrels That is down 4.43 million barrels from May 5. 

At the same time there are more signs that crude supplies, contrary to the market's greatest fears, are starting to tighten. Reuters reports that the, "Oil futures market is pricing in tighter supplies due to OPEC-led production cuts and recovering demand as lockdowns to contain the coronavirus outbreak are eased, suggesting a huge inventory buildup could slow and start to be drawn down."

Brent crude futures for July are trading at the smallest discount to the contract 6 months in the future since March LCOc1-LCOc7. A price structure where oil for immediate delivery is cheaper is called contango. A narrowing contango usually points to supplies becoming more constrained. At the same time, the price of North Sea physical oil compared with dated Brent - the benchmark used to price most of the world's cargoes - has recovered from historic discounts and is moving toward parity. 

Oil is also getting support from signs that OPEC+ is serious about production cuts. Even Nigeria, one of OPEC laggards, is showing impressive production restraint. Reports say that Nigeria cut its output by 417,000 barrels per day (BPD) and are in full compliance with their agreed-upon cuts.

There are strong indications that oil demand is coming back much faster than some expected. Reuters reports, "China's daily crude oil throughput rebounded in April from a 15-month low in March as refiners cranked up operations to meet renewed fuel demand after lockdowns imposed to prevent the spread of the coronavirus outbreak were eased. The country processed a total of 53.85 million metric tons of crude oil last month, data from the National Bureau of Statistics showed on Friday, equivalent to about 13.1 million BPD. That was some 11% higher than 11.78 million BPD in March." They also reported that Chinese April crude runs 13.1 million BPD, 11% higher on month though January-April refinery runs down 3.4% on year-official data.  April natural gas output +14% on year; crude oil +0.9%.

The oil outlook is much more supportive. We may see a tight supply of gasoline. Refiners have taken a hit and are looking for relief from quickly switching to being forced to sell summer gas blends of gasoline. DTN reports that a group of 24 members of the U.S. House of Representatives is pushing the EPA to grant a Renewable Fuel Standard waiver request recently made by the governors of Texas, Louisiana, Oklahoma, Utah and Wyoming. The representatives from those states said in a letter to EPA Administrator Andrew Wheeler on Monday that the refining industry cannot wait much longer for agency action. " The current, suppressed worldwide demand for motor fuels has placed the refining sector in a precarious economic situation that is only magnified by these federal regulations," the lawmakers said in the letter. 

Don’t miss out on my wildly popular trade levels on all major markets as well as special subscriber-only updates. Call me at 888-264-5665 or email me at pflynn@pricegroup.com.


About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.