The Phil Flynn Energy Report
The Morning After
Markets are a bit hungover even as the party master, Jerome Powell, swears he will keep the party going. The Fed Chairman promised he will do whatever it takes, yet traders in search of that next high seem to want even more somehow. Traders have been drunk on moves in stocks, gold, silver, and to a lesser extent oil. Now after weeks of celebrating, it appears the trade wants to chill out. The Fed Chairman also pointed to Congress saying that the Federal Reserve needs more help, but Democrats and Republicans are far apart in a new stimulus bill. That isn’t helping oil even after what was a bullish crude oil draw of 10.6 million barrels, the largest of the year and new reports that Iraq is still cheating on oil output.
Reuters news reports that, “Iraq’s crude oil exports have increased so far in July, shipping data showed and industry sources said, suggesting OPEC’s second-largest producer is still undershooting its production cut target under an OPEC-led deal. Exports from Basra and other southern Iraq terminals to July 29 averaged 2.75 million bpd, based on figures from Refinitiv Eikon and an industry source. That is up 50,000 bpd from June’s official figure for southern Iraq exports. “No massive change, Basra is still 2.7-2.8 million bpd,” the industry source said, referring to the change in exports seen since the first 20 days of July.
The market was counting on Iraq to not only comply with their agreed-upon production cuts, but also to make up for past cheating. Now the market has to worry about how Saudi Arabia and Russia might respond to Iraq’s blatant dishonesty. The July figures imply Iraq is still some way from fulfilling its pledges and is exporting far more than the number July indicated. Could this put the entire OPEC+ deal at risk? I doubt it, but one must be concerned about what may come next.
The EIA reported that, to no one’s surprise, energy demand in the U.S. fell to the lowest level in 30 years because of the Covid-19 shutdowns. According to the agency’s most recent Monthly Energy Review, the United States consumed 6.5 quadrillion British thermal units of energy in April 2020, the lowest monthly energy consumption since September 1989.
Energy consumption in April 2020 was 14% lower than in April 2019, the largest year-over-year decrease in EIA’s monthly total energy consumption, a data series that dates back to 1973. Before April 2020, the largest year-over-year change in U.S. total energy consumption occurred between December 2000 and December 2001, when consumption decreased by about 10% because of economic and weather-related factors. The 3rd largest decrease was between March 2019 and March 2020. April is a month with relatively low energy consumption: in 14 of the past 20 years, April has been the month with the most moderate total energy consumption in the year. April’s typically mild temperatures reduce energy demand for heating and cooling. In 2020, April was the height of stay-at-home measures enacted to mitigate the spread of Covid-19, which caused a significant drop in transportation, industrial, and commercial sector energy consumption.
The EIA reported that 10.6 million barrel crude draws came as refiner demand improved, and imports dropped. U.S. crude oil refinery inputs averaged 14.6 million barrels per day (bpd) during the week ending July 24, 2020, which was 389,000 bpd more than the previous week’s average. Refineries operated at 79.5% of their operable capacity last week. Gasoline production increased last week, averaging 9.2 million bpd. Distillate fuel production increased last week, averaging 4.8 million bpd.
U.S. crude oil imports averaged 5.1 million bpd last week, decreased by 0.8 million bpd from the previous week. Over the past 4 weeks, crude oil imports averaged about 6.0 million barrels per day, 13.6% less than the same 4-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 924,000 bpd, and distillate fuel imports averaged 148,000 bpd.
As for products, total motor gasoline inventories increased by 0.7 million barrels last week and are about 8% above the 5-year average for this time of year. Finished gasoline and blending components inventories both increased last week. Distillate fuel inventories increased by 0.5 million barrels last week and are about 26% above the 5-year average for this time of year. Propane/propylene inventories increased by 2.0 million barrels last week and are about 12% above the 5-year average for this time of year. Total commercial petroleum inventories decreased last week by 6.5 million barrels.
Oil bulls are still in control but need to be patient as we are in this hungover post-Fed trading range. If we get progress on the U.S. relief bill, oil will rebound nicely. Despite all of the macro madness, the data at some point will matter. Data is bullish.
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