Oil's Shift From Decreasing Supply to Increasing Demand

Deliveries to Cushing hub fell by 3.289 million barrels
Build in gas supply
OPEC and EIA reports out today
The Energy Report

The Energy Report

 

The Phil Flynn Energy Report 

Shifting Inventories

Petroleum inventories are shifting surprisingly, at least according to the API. As we expected, crude supplies increased by a huge 3.857 million barrels. In contrast, supplies continued the drain at the Cushing, Oklahoma delivery point. The API showed that the amount at that delivery hub fell by 3.289 million barrels, further easing concerns that we are running out of storage. Oil obviously went into the Strategic Petroleum Reserve again. The trend of improving demand has taken the possibility of subzero oil prices off of the table. No one right now is talking about running out of oil storage. Those fears that drove oil to the nether regions have all but gone away. Now the talk is about improving demand with Saudi exports of oil to the United Sates hitting an all-time low and the odds of a so-called second wave of the coronavirus.

Yet it was a smaller than expected increase in distillate supply that grabbed the attention of the market. The API reported only a 919,000 barrel increase, and it signals that demand for the oversupplied fuel may be improving. The resumption of flights and refiners starting to focus on gasoline production over distillate could be the start of a trend.

That led to a big build in the gasoline supply as well. The API reported a 4,267 million barrel increase in gasoline supply. The market will want to see if the build was about a drop in demand or an increase in production. They will also look at imports and exports to get a sense of direction later in the day.

Covid-19 concerns are also playing with the mind of oil traders. Talks of the spike in infections are raising concerns that we may have to start reversing the reopening of some economies.  In China, health officials reported 31 new infections for June 16, taking cumulative cases from Thursday to 137 in the city's worst resurgence in 4 months, with 356,000 people tested since Sunday, according to Reuters leading them to cancel some flights and go back to video schooling. Yet despite the infection spikes in some states, it is unlikely that it is significant enough to roll back the openings. Most experts are saying that it isn't a second wave of the virus but just another bump up from the original stream.

In an op-ed in the Wall Street Journal, Vice President Mike Pence very strongly agrees that this isn’t a second wave. Pence writes, "While talk of an increase in cases dominates cable news coverage, more than half of states are actually seeing cases decline or remain stable. Every state, territory, and major metropolitan area, with the exception of 3, have positive test rates under 10%.” Pence says that, "Lost in the coverage is the fact that today less than 6% of Americans tested each week are found to have the virus. Cases have stabilized over the past 2 weeks, with the daily average case rate across the U.S. dropping to 20,000 — down from 30,000 in April and 25,000 in May. And in the past 5 days, deaths are down to fewer than 750 a day, a dramatic decline from 2,500 a day a few weeks ago — and a far cry from the 5,000 a day that some were predicting."

Oil dipped and flipped higher after Federal Reserve Chair Jerome Powell spoke. We had a mini taper tantrum when he said that the Fed might taper off its newly announced corporate bond buying. It had barely begun. Powell gave us a promise to do whatever it takes kept oil robust. He speaks again today. 

A global economic stimulus is a factor supporting stocks and oil. Now it is being reported that the People's Bank of China announced will cut the reserve requirement ratio for banks. That signals that a Chinese interest rate cut is around the corner.

We get the OPEC report on supplies as well as EIA. It should be a good day to trade.

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About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.