The Crude Oil Market Is in a Funk

September 30, 2020 08:03 AM
Market is ignoring tightening supplies and supportive API data
A significant 3.42 million barrel drop in distillate supply
A weakened arctic blast hurts natural gas
Energy Report

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The Phil Flynn Energy Report 

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The best way to explain the market action in the energy complex is to compare it to last night's presidential debate—kind of a mess with a lot of data that does not seem to match the current reality. Market action, to say the least, has been lousy. Every supportive data from the API seems to inspire this market that seems to be fixated on another potential wave of Covid-19 and an increase in Libyan crude oil exports. Forget about reports of tightening crude supply in the U.S. and Japan overnight, the market has denigrated into kind of a brawl that made last night's debate look almost dignified.

The API reported that the U.S. crude supply fell by 831,000 barrel despite a 1.610 barrel increase at the Cushing, Oklahoma delivery point. The surprise draws in crude, if confirmed, should lend credence to the threat for Saudi Arabia that the global oil market is much tighter than people think. The mood is still very negative as we are deep in the maintenance season and fears about Covid-19.

Another surprise was the significant 3.42 million barrel drop in distillate supply. The distillate is the most gluttonous part of the sector. A draw is a good sign that the market is finding a way to work down some of those supplies.

Gasoline supplies did rise by 1.623 million barrels, and they needed to because those supplies are just about 1% above average for this time of year. Still, the U.S. has been more dependent on European gasoline imports, which fell to a 5-week low. There’s talk about a surge in gasoline imports from Asia. To be honest, we need it. Japan's inventories of oil are also down and lower than expected.

Yet the market is worried about how they will absorb oil from a return of Libya's oil production. Libya's Sarir oilfield has restarted production at the Sarir oil field, producing more than 300,000 barrels per day last year before the shutdown. Libya could add about a million barrels to global production in short order.
We need to get out of September to get the crude oil market out of its funk. It would help if we get a fiscal relief package today.   

Natural gas got hammered on reports that the Arctic blast that will come across a big part of the Northern States might not be as cold as anticipated. Reuters reported that, "U.S. natural gas futures for the most active month fell over 8% on Tuesday on forecasts for less demand over the next 2 weeks than previously expected and a rise in output. For the front-month, however, the contract was up over 21% to a 3-week high due to the roll of the less expensive October future into the much more costly November. That is the biggest 1-day percentage gain for the front-month since 2009, when similar October to November contract roll caused it to jump 31%.” 

On its first day as the front-month, Henry Hub Natural Gas futures for November delivery fell 23.4 cents, or 8.4%, from where the November contract traded on Monday to settle at $2.561 per million British thermal units, their highest since Sept. 4.

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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.