Summer Rumors

Oil prices were just struggling to find direction as rumors whirled about either a major drop or a major increase in oil inventory, depending on what whispers you wanted to believe. There also seemed to be a bit of a letdown after the U.S. Mexican trade deal, as the focus immediately shifted as to whether our neighbors to the North were willing to jump on board. Then you have a bank holiday in Europe yesterday, as well as the upcoming Labor Day weekend in the U.S., and it is the perfect environment for wild speculation about a major increase or decrease in supply.

Yet, despite the rumors of something big is about to happen, the American Petroleum Institute (API) report was a bit of a letdown. The API reported that U.S. crude supply increased by a measly 38,000 barrels and the average guess was for a draw of 500,000 barrels, based on a curve the difference may have been a rounding error.

Besides, the API reported that supplies in Cushing Oklahoma increased by 130,000 barrels, much less than the 500,000 to 750,000 barrels that was being bandied about. Even the gasoline supply number was anticlimactic, increasing by 21,000 barrels. Distillates also saw an increase of 928,000 barrels, a bit bearish but overall a very mixed report.

Now if you put that against a backdrop where consumer confidence is at an 18-year high, and stock markets breaking records, the numbers don’t look all that bearish. But at the same time, they are not really all that bullish either. So, bring on the Energy Information Administration report and put these rumors to rest.

You are also going to have to be prepared for the impact of lost oil from Iran. The Wall Street Journal reports that “Iran oil shipments are declining at a faster-than-expected pace ahead of U.S. sanctions set to begin in November. Iran expects crude exports to fall by a third in September, according to people familiar with purchasing plans, potentially posing an unforeseen supply risk to markets. Officials at the state-run National Iranian Oil Co. provisionally expect crude shipments to drop to about 1.5 million barrels a day next month, down from about 2.3 million barrels a day in June, say people familiar with the country’s ports loading program. Many experts had expected oil shipments to decline by about 1 million barrels by year's end. Now some of them say that fall may have already happened. Iran hasn’t yet announced its exports this month or its forecast for next month.”

Dan Graber, at the UPI, reported that India will pass China as an oil consumer by the middle of the next decade. Graber cites Woods Mackenzie that says that India demand is growing so fast that their refineries can't keep up. Wood Mackenzie, says that India will pass China as the country with the largest demand for oil by 2024, accounting for about 30 percent of total oil demand growth. For domestic capacity, that growth is a problem. Refining capacity would need to maybe double to keep up with the demand for transport fuels alone.

That, of course, opens opportunities for U.S. refineries that are already running at record rates and will be more than happy to supply India with fuels, as the breakneck pace of growth continues. The growth in India’s oil demand is another reason why oil is in a multiyear bull market. When we said oil hit a generational low in 2015 and 2016, many were talking about lower for longer. Now despite the August respite from the rally, we are going to have to remember the big picture suggests we are structurally undersupplied. Week to week and season to season we will have our peaks and valleys, yet every month that passes the supply and demand balance continues to tighten.

Natural gas, on the other hand, may be structurally oversupplied. The Wall Street Journal today talks about the flaring that is going on as record production overwhelms infrastructure and the LNG market is a few years away from helping get enough gas out into the world. While the supercycle in oil is already underway, the natural gas market is stuck in an oversupplied situation for at least a few years.  Andrew Weissman, of EBW Analytics, says that natural gas turned lower over the past week, with an abrupt halt to upward momentum as near-term weather forecasts stopped trending in a bullish direction and production reached a new all-time high. He points to the fact that New Appalachian natural gas takeaway capacity is likely to bring further rapid output growth soon, weighing on NYMEX futures. At the same time, falling weather-driven demand, moderating storage deficits, and likelihood for bearish fall weather may accelerate declines.

He does warn that the markets comfort with low gas inventories entering the heating season, however, remains untested—and may spark a rebound if cold weather materializes. Yet, he says that power sector natural gas demand could fall by 7.5 Bcf/d between now and the last week of September as cooling demand falls sharply, despite early data showing gas generation increasing by 15,000 GWh/month in 1H2018.