Energy Market Ignores a Bullish EIA Report

September 24, 2020 07:39 AM
A cloudy economic outlook
Gasoline demand increased and a surge in distillate demand
FTI International bankruptcy
Energy Report

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The Phil Flynn Energy Report 

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Oil prices need a shot of something. The Federal Reserve wants it to be another shot of stimulus and perhaps a shot of a Covid-19 vaccine. Perhaps it’s another shot of compliance by the OPEC+ cartel, or maybe it just needs to get past September where hurricanes and storms impacted both supply and demand.

Multiple warnings by Fed officials that the economic outlook is at best cloudy, and they agree they need Washington to do their part to help small businesses and regular folks struggling from government-mandated shutdowns. Senate Democrats put politics ahead of help and blocked a $300 billion coronavirus stimulus package, hoping that a lousy economy could sweep Vice President Joe Biden into the White House.

Yet behind all of the adverse macroeconomic worries, the oil market had what usually would have been a very bullish EIA report. Yes, the numbers were impacted by the storms but showed a nice uptick in demand. Total demand on the U.S. system was up 2.4 million barrels a day (bpd). Gasoline demand increased 277,000  bpd, and a surge in distillate demand increased 1,066 million barrels along with a significant drop in refinery runs set the stage for some substantial product draws.

The EIA reported U.S. commercial crude oil inventories decreased by 1.6 million barrels from the previous week. At 494.4 million barrels, U.S. crude oil inventories are about 13% above the five year average for this time of year. Total motor gasoline inventories decreased by 4million barrels last week and are about 1% above the 5-year average for this time of year. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories fell by 3.4 million barrels last week and are about 21% above the 5-year average for this time of year. Total commercial petroleum inventories decreased by 7.5 million.

The continued drop in U.S. oil supply and refinery challenges suggests a balancing of supply. It also indicates that we should see oil bottom and rally as we head into winter and out of the maintenance season. Despite gridlock in Washington, oil demand should recover, and we face a balanced market globally that will add higher prices. The risk to this forecast is a massive Covid-19 shutdown. Barring that, the market is going to tighten significantly as it already has in the U.S. over the last couple of months.

Long term, production is still struggling. The Wall Street Journal reported that, “Fracking-services company FTS International Inc. filed for bankruptcy protection Tuesday after reaching an agreement with creditors on a debt-for-equity swap following a downturn in the energy sector and lower demand for its services. The Fort Worth, Texas, company filed a prepackaged plan that erases nearly $440 million in debt from its balance sheet in U.S. Bankruptcy Court in Houston with the backing of more than 87% of its term lenders and senior bondholders.”

Under that plan, which requires bankruptcy court approval, lenders and bondholders would swap their debt for a roughly 90% equity stake in the company about $31 million in cash. Current shareholders would retain close to 10% of the equity. FTS operates across the central U.S. shale basins and counts big energy producers such as Diamondback Energy Inc. and Occidental Petroleum Corp.’s Anadarko Petroleum Corp. among its customers.

Keep an eye on this. Reuters reported ”Some 324 Norwegian offshore oil workers plan to go on strike from September 30 if annual pay negotiations with employers fail, trade unions Safe, Industri Energi and Lederne said on Wednesday.

Natural gas prices continued its bottoming action. We get the EIA report today and are looking for a 76 injection. MarketWatch reported, “Natural-gas futures rallied Wednesday, to settle at their highest in a week. Prices found support amid production slowdowns tied to recent storms as well as facility maintenance, and as flooding along the coast of the Gulf of Mexico that reportedly led to disruptions at export facilities, analysts said. The flow of natural gas to major hubs Sabine Pass and the Freeport LNG export facilities in Texas remains “greatly reduced” as Tropical Storm Beta unleashed flooding in the Houston area and inched toward Louisiana, said Christin Redmond, commodity analyst at Schneider Electric, in a daily note Wednesday.

Deliveries of feedgas, which is natural gas that comes from field production, has seen a significant decline in recent days, Natural Gas Intelligence reported on Tuesday. It also said the Cameron, Corpus Christi, Freeport and Sabine Pass export terminals were in Beta’s path as the storm neared land.

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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.