Weekly EIA Report Disappoints Oil Bulls

July 23, 2020 08:31 AM
Signs that gasoline demand may be stalling
Chinese backlash concerns have eased
U.S. crude oil production increased by 104,000 bpd according to EIA
The Energy Report



The Phil Flynn Energy Report 

If It Can't Break 

If it can’t break, don’t fix it. Even with signs that gasoline demand may be stalling and increasing tensions between the U.S. and China, the oil market remained resilient. The underlying strength in the face of a bearish EIA report suggests that success on the E.U. stimulus front could create not only demand but also some currency-related support. The large move up in the euro currency is reminiscent of the movement that we saw during the 2009 version of global quantitative easing and economic juice. It caused the market to not just focus on the day to day weak economic ups and downs but the broader trend that was being backed by the full faith and credit of governments around the globe. We saw more stimulus talk around the globe as Bank of England's Jonathan Haskel. He is concerned about the U.K. economy getting stuck and recovering slowly and undershooting the inflation target.

Fears of a significant backlash from the U.S. closing of the Chinese Consulate-General in Houston has eased a bit, and fears that a full-blown trade war will break-out are put on the backburner.  Yet reports that parties in the European Parliament may not approve the coronavirus bill could shake up markets. 

Still, the EIA status report wasn’t all that oil bulls had hoped for. Instead of lowering weekly oil production figures after being stagnant for weeks, they raised it. The data showed that U.S. crude oil production increased by 104,000 barrels per day (bpd) for the week ending July 17.  That is still way down from the pre-coronavirus record high of 13.1 million bpd for the week ending Feb. 28. This level of production is unlikely to be maintained as rig counts fall and the drilled but uncompleted wells may not continue to come online without money and employees. 

Commercial crude oil inventories in the U.S. rose by 4.9 million barrels, or 0.9%, to 536.6 million barrels for the week ending July 17, the data showed. While higher than expected, it wasn’t as large as the reported build from the API. The market was looking for a decline of 2.1 million barrels.  Last week we had the opposite situation where inventories decreased by 7.5 million barrels. So imports in the Gulf Coast surged. They shouldn’t continue as OPEC plus cuts will start to take its toll on imports in the weeks to come.  The EIA data also showed crude stocks at the Cushing, Oklahoma storage hub rose by 1.4 million barrels. Gasoline demand stalled, but despite that, inventories did fall by 1.8 million barrels, or 0.7%, to 246.7 million barrels over that period. The market expectation was a decline of 1.4 million barrels. Last week saw gasoline stocks decline by 3.1 million barrels, so the trend is still falling. Distillate stockpiles climbed by 1.1 million barrels ending the streak of surprise oil builds.

Reports that Russia is now going to start hedging oil raised some eyebrows. Like Mexico, Russian Vladimir Putin has approved Russia's s hedging of oil that Mexico has done for years. The Russian hedge, when implemented, will move markets as Russia is a much larger producer than Mexico. If you need help with that Vlad, give me a call! Wait, if my phone does ring, does that mean I will be colluding with the Russians?

Hurricane season is heating up, and it may impact U.S. energy operations. Tropical depression number 8 and Tropical Storm Gonzola, will cause problems in the Gulf of Mexico. Fox News reports that, "Tropical Storm Gonzalo is expected to develop into the first hurricane of the 2020 season Thursday morning as it continues its westbound journey. Gonzalo, moving at 12 mph, is about 970 miles east of the southern Windward Islands with maximum sustained winds of 65 mph, according to the National Hurricane Center. While Gonzalo is developing quickly and is expected to gain strength over the next couple of days, meteorologists aren't expecting it to remain in the Atlantic for very long as it trudges through areas of dry air and high wind shear on Saturday. Global models show this thing actually diminishing to nothing as it gets into the central Caribbean. It'll be facing increased wind shear and dry air that's out there right now from Africa. That might be the silver bullet for Gonzalo," King said. Gonzalo is expected to drop back to tropical storm strength with winds of 70 mph by Saturday. Depression 8 forms in the Gulf of Mexico. It's forecast to become Tropical Storm Hanna before making landfall along the Texas Coast

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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.