Trade Fears Trump Output Cuts

Trade fears are trumping output cuts to start the week, as oil prices retreat following a strong Friday rally. Customs data showing Chinese exports declined for a 4th straight month is getting credit for the early sell-off, erasing much of the post-OPEC gains that pushed prices near 2 month highs.
After OPEC uncertainty had oil prices selling off to start Friday’s session, a much more precise proclamation on output cuts in the official press release spurred on a buying spree mid-morning. By noting that the Saudi’s would continue their own voluntary output reductions, in addition to the group’s agreed-upon output cuts, should mean that around ½ million barrels/day (roughly ½ of 1% of total global supply) will be taken offline to start 2020. One thing the official announcement did not mention was if condensate would get different treatment than traditional crude grades, which could potentially leave a loop hole for Russia to export more barrels.
It’s a big week for markets globally as both the FOMC and ECB will hold their last meetings of the year, and another tariff deadline with China comes on Sunday. After Friday’s strong jobs report helped propel US stocks back near all-time highs, equities seem to be taking a wait-and-see approach to start this week with these major issues looming.
The CME’s Fedwatch tool shows a 99% probability of no interest rate action by the FED at this meeting and low odds of any action in the front half of 2020.
5 more oil rigs were taken off-line last week, according to Baker Hughes’ latest report. That’s the 7th consecutive weekly decline, and marks a 25% reduction in the total US count so far in 2019.
Money managers do not appear to have enjoyed the Black Friday selloff in energy contracts, and reduced their net-long holdings (bets on higher prices) across the board last week. Since that report’s data is compiled as of Tuesday, those that bailed out look like they missed the recovery rally in the back half of the week. RBOB contracts saw the largest reductions, perhaps an acknowledgement of the upcoming winter doldrums for gasoline demand.
From the OPEC Press Release Friday:
“The 7th OPEC and non-OPEC Ministerial Meeting, hereby decided for an additional adjustment of 500 tb/d to the adjustment levels as agreed at the 175th Meeting of the OPEC Conference and 5th OPEC and non-OPEC Ministerial Meeting. These would lead to total adjustments of 1.7 mb/d. In addition, several participating countries, mainly Saudi Arabia, will continue their additional voluntary contributions, leading to adjustments of more than 2.1 mb. This additional adjustment would be effective as of 1 January 2020 and is subject to full conformity by every country participating in the DoC.”
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Refined Products Are Moving Lower For A 2nd Day After Coming Under Heavy Selling Pressure In Wednesday’s Session
Refined products are moving lower for a 2nd day after coming under heavy selling pressure in Wednesday’s session. Rapidly increasing refinery runs and sluggish diesel demand both seemed to weigh heavily on product prices, while crude oil is still benefitting from the disruption of exports from Iraq. Prices remain range-bound, so expect more choppy back and forth action in the weeks ahead.
US oil inventories saw a large decline last week, despite another 13-million barrels of oil being found in the weekly adjustment figure, as imports dropped to a 2-year low, and refinery runs cranked up in most regions as many facilities return from spring maintenance.
The refining utilization percentage jumped to its highest level of the year but remains overstated since the new 250,000 barrels/day of output from Exxon’s Beaumont facility still isn’t being counted in the official capacity figures. If you’re shocked that the government report could have such a glaring omission, then you haven’t been paying attention to the Crude Adjustment figure this year, and the artificially inflated petroleum demand estimates that have come with it.
Speaking of which, we’re now just a couple of months away from WTI Midland crude oil being included in the Dated Brent index, and given the uncertainty in the US over what should be classified as oil vs condensate, expect some confusion once those barrels start being included in the international benchmark as well.
Diesel demand continues to hover near the lowest levels we’ve seen for the first quarter in the past 20+ years, dropping sharply again last week after 2 straight weeks of increases had some markets hoping that the worst was behind us. Now that we’re moving out of the heating season, we’ll soon get more clarity on how on road and industrial demand is holding up on its own in the weekly figures that have been heavily influenced by the winter that wasn’t across large parts of the country.
Speaking of which, the EIA offered another mea culpa of sorts Wednesday by comparing its October Winter Fuels outlook to the current reality, which shows a huge reduction in heating demand vs expectations just 6-months ago.
It’s not just domestic consumption of diesel that’s under pressure, exports have fallen below their 5-year average as buyers in South America are buying more Russian barrels, and European nations are getting more from new facilities in the Middle East.
Take a look at the spike in PADD 5 gasoline imports last week to get a feel for how the region may soon be forced to adjust to rapidly increasing refining capacity in Asia, while domestic facilities come under pressure.

Crude Oil Prices Are Trying To Lead Another Rally In Energy Futures This Morning
Crude oil prices are trying to lead another rally in energy futures this morning, while ULSD prices are resisting the pull higher. Stocks are pointed higher in the early going as no news is seen as good news in the banking crisis.
WTI prices have rallied by $10/barrel in the past 7 trading days, even with a $5 pullback last Thursday and Friday. The recovery puts WTI back in the top half of its March trading range but there’s still another $7 to go before the highs of the month are threatened.
Yesterday’s API report seems to be aiding the continued strength in crude, with a 6 million barrel inventory decline estimated by the industry group last week. That report also showed a decline of 5.9 million barrels of gasoline which is consistent with the spring pattern of drawdowns as we move through the RVP transition, while distillates saw a build of 550k barrels. The DOE’s weekly report is due out at its normal time this morning.
Diesel prices seems to be reacting both to the small build in inventories – which is yet another data point of the weak demand so far this year for distillates – and on the back of crumbling natural gas prices that settled at their lowest levels in 2.5 years yesterday and fell below $2/million BTU this morning.
While diesel futures are soft, rack markets across the Southwestern US remain unusually tight, with spreads vs spot markets approaching $1/gallon in several cases as local refiners go through maintenance and pipeline capacity for resupply remains limited. The tightest supply in the region however remains the Phoenix CBG boutique gasoline grade which is going for $1.20/gallon over spots as several of the few refineries that can make that product are having to perform maintenance at the same time.
French refinery strikes continue for a 4th week and are estimated to be keeping close to 1 million barrels/day of fuel production offline, which is roughly 90% of French capacity and almost 1% of total global capacity. That disruption is having numerous ripple effects on crude oil markets in the Atlantic basin, while the impact on refined product supplies and prices remains much more contained than it was when this happened just 5 months ago.
Click here to download a PDF of today's TACenergy Market Talk.
