Crazy Contradictions

We live in a world of crazy contradictions, and no I am not talking about the James Comey testimony. I am talking about the stark differences we saw in the weekly storage data from the American Petroleum Institute (API) and the Energy Information Administration (EIA). The EIA, instead of reporting what was expected to be the ninth straight drop in US crude oil inventory, reported a 3.3-million-barrel increase in supply. Yet what was more disturbing perhaps, to the market, was a drop in implied demand for U.S. petroleum products across the board, raising concerns about the momentum of the U.S. economy.

Let's focus on crude supply first. Why did the API report that crude supply fell almost 5.0 million barrels and the EIA reported an increase? Part of the reason is a drop in refinery runs and the reclassification of some supply released again from the Strategic Petroleum Reserve. The EIA reported that 1. 6 million barrels of oil was added to commercial inventories and it is possible that the API did not have that reported into their equation. And just a week after touting record U.S. crude oil exports that exceeded 1.0 million barrels of oil a day, we saw the biggest one week drop in U.S. export history falling by 750,000 barrel a day.

That sharp drop in exports seems to suggest that there were some issues on the export side even as the price advantage to export crude dried up a bit. Still, that type of drop week over week seems to be a little suspect. We saw a large drop in Cushing, Oklahoma stocks which also may raise questions about the EIA data.

Yet one factor that should be noted: in the report there was a drop in U.S. crude oil production which fell for the first time in 8 months by 20,000 barrels, which may be a sign that we are getting close to a U.S. production plateau. While rig counts continue to rise, well completions are falling and with the rapid decline rate of some shale wells, it means that we will struggle to keep production rising at the recent rates.

Still, the EIA reports that the United States remained the world's top producer of petroleum and natural gas hydrocarbons in 2016 for the fifth straight year despite production declines for both petroleum and natural gas relative to their 2015 levels.

The EIA also reported increases in gasoline and distillate supplies at a time when gasoline inventories normally fall because of, what the IEA reports, was a drop in total oil demand. U.S. oil demand fell by 1.4 million barrel a day to 19.34 million barrel a day. Export demand fell by 370,00 barrels a day and total overall demand fell by 1.8 million barrels a day.  Gasoline demand was down 591,000 barrels a day, down from the expected record and we may have seen a drop due to crummy weather in the Northeast for the Memorial Day weekend.

Yet the differences in the API and EIA raises more questions than answers. While crude supply has fallen over the last few weeks, products have risen. The glut of oil is easing but with a glut of product, will we see demand pick-up. Bottom line is, I believe that we will see upward demand revisions in the coming weeks. As for oil, we should soon be bottoming for a rebound. The trade and computer algos or algorithm have been focused on technical and we are close to this oversold market getting ready to turn. We may see some weakness but like in early May when we saw a similar sharp break, it was a buying opportunity for a decent snap back.

On top of that, the geo-political risks are rising. Iran is trying to place some blame on Saudi Arabia for the ISIS attack in their capitol. Fox News reports that, “An attacker threw an explosive device over the fence of the U.S. Embassy in Kiev that detonated in the early hours on Thursday, Reuters reported. There were no injuries, according to the report. Authorities called the incident a terrorist act. Authorities in Kiev said in a statement that the incident occurred at 12:05 a.m. local time, and occurred at the U.S. Embassy compound in the Shevchenko district. "It was determined that an unknown assailant threw an unidentified explosive device onto the grounds of the diplomatic mission. Criminal proceedings have been initiated under Art. 258 (Terrorist Act) of the Criminal Code of Ukraine," the statement read, according to The Mirror. The U.S. Department of State issued a travel warning in 2016 for U.S. citizens in Ukraine. The statement read, “The situation in Ukraine is unpredictable and could change quickly.”

Crude oil and natural gas moves could change quickly as well. The EIA releases its natural gas report and the expectation is for a 98 bcf increase. This might be the biggest injection this summer. Cool temperatures last week may be offset by expectations of warmer temps this week and month.