Demand Fears Stronger Than Supply Fears
Demand fears appear to be stronger than supply fears this week as energy prices stagnate even though it appears that the Iranian military has been placing bombs on oil tankers near the world’s most important shipping lane. The 2nd week of each month brings a data deluge as various global agencies publish their monthly reports, and this week’s theme was that oil demand is softening, and that appears to have kept buyers on the sidelines despite the drama playing out in the Gulf of Oman.
The battle of words between the US & Iran appears to be staying just that, which is a great relief for many – not just energy consumers – even as video evidence suggests a clear link to Iranian forces and yesterday’s tanker attacks. That lack of escalation – coupled with ongoing demand worries – tempered the market reaction to the attacks, with the big 4 petroleum contracts all still holding losses for the week. I would not be surprised to see a price rally this afternoon however as traders tend not to like being short heading into a weekend with this type of geopolitical tension looming.
The IEA’s monthly oil report was the third this week to note the negative effects of various trade issues on global oil demand. The report that demand growth in the first quarter grew at the slowest rate since the financial crisis, offsetting ongoing supply issues in Iran, Venezuela, Libya etc. While global demand continues to grow, OECD nations are seeing a decline in oil demand, with a petrochemical slowdown in Europe and “tepid” gasoline & diesel demand in the US both cited. The other particularly relevant point made in the monthly report was that the benefit of OPEC supply cuts is that it also increases the world’s spare production capacity.
With US production capabilities soaring, the total global spare oil production capacity may be at levels we haven’t seen in decades, and certainly appears to be acting as a speed bump for prices considering how they’ve barely moved even though the world’s most strategic waterway has hosted numerous ship attacks in the past 2 months.
The EIA reported yesterday that US crude imports from OPEC members dropped to a 30-year low in March.
The Dallas FED’s June energy indicator report showed that support activities for mining operations in Texas have fallen sharply as rig counts have dropped in the past few months. Like the monthly reports from the EIA, OPEC and IEA, this report also noted a slowdown in oil consumption across developed nations.
While petroleum prices are stagnating, corn and ethanol prices have reached multi-year highs this week as more heavy rain is forecast across the mid-continent, threatening to take this year’s crop progress from bad to worse.
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Energy Prices Fluctuate: Chinese Imports Surge, Saudi Arabia Cuts Output and Buys Golf
Energy prices continue their back-and-forth trading, starting Wednesday’s session with modest gains, after a round of selling Tuesday wiped out the Saudi output cut bounce.
A surge in China’s imports of crude oil and natural gas seem to be the catalyst for the early move higher, even though weak export activity from the world’s largest fuel buyer suggests the global economy is still struggling.
New tactic? Saudi Arabia’s plan to voluntarily cut oil production by another 1 million barrels/day failed to sustain a rally in oil prices to start the week, so they bought the PGA tour.
The EIA’s monthly Short Term Energy Outlook raised its price forecast for oil, citing the Saudi cuts, and OPEC’s commitment to extend current production restrictions through 2024. The increase in prices comes despite reducing the forecast for US fuel consumption, as GDP growth projections continue to decline from previous estimates.
The report included a special article on diesel consumption, and its changing relationship with economic activity that does a good job of explaining why diesel prices are $2/gallon cheaper today than they were a year ago.
The API reported healthy builds in refined product inventories last week, with distillates up 4.5 million barrels while gasoline stocks were up 2.4 million barrels in the wake of Memorial Day. Crude inventories declined by 1.7 million barrels on the week. The DOE’s weekly report is due out at its normal time this morning.
We’re still waiting on the EPA’s final ruling on the Renewable Fuel Standard for the next few years, which is due a week from today, but another Reuters article suggests that eRINs will not be included in this round of making up the rules.
Click here to download a PDF of today's TACenergy Market Talk.
Week 23 - US DOE Inventory Recap
Energy Prices Retreat, Global Demand Concerns Loom
So much for that rally. Energy prices have given back all of the gains made following Saudi Arabia’s announcement that it would voluntarily withhold another 1 million barrels/day of oil production starting in July. The pullback appears to be rooted in the ongoing concerns over global demand after a soft PMI report for May while markets start to focus on what the FED will do at its FOMC meeting next week.
The lack of follow through to the upside leaves petroleum futures stuck in neutral technical territory, and since the top end of the recent trading range didn’t break, it seems likely we could see another test of the lower end of the range in the near future.
RIN prices have dropped sharply in the past few sessions, with traders apparently not waiting on the EPA’s final RFS ruling – due in a week – to liquidate positions. D6 values dropped to their lowest levels in a year Monday, while D4 values hit a 15-month low. In unrelated news, the DOE’s attempt to turn seaweed into biofuels has run into a whale problem.
Valero reported a process leak at its Three Rivers TX refinery that lasted a fully 24 hours. That’s the latest in a string of upsets for south Texas refineries over the past month that have kept supplies from San Antonio, Austin and DFW tighter than normal. Citgo Corpus Christi also reported an upset over the weekend at a sulfur recovery unit. Several Corpus facilities have been reporting issues since widespread power outages knocked all of the local plants offline last month.
Meanwhile, the Marathon Galveston Bay (FKA Texas City) refinery had another issue over the weekend as an oil movement line was found to be leaking underground but does not appear to have impacted refining operations at the facility. Gulf Coast traders don’t seem concerned by any of the latest refinery issues, with basis values holding steady to start the week.
Click here to download a PDF of today's TACenergy Market Talk.