Hurry Up And Slow Down

A slowdown in Chinese manufacturing and a breakdown of the U.S.-North Korea talks has caused a pause in oil after yesterday’s impressive rally. The catalysts for yesterday’s upward move was a very bullish Energy Information Administration (EIA) inventory report that for the second time showed the U.S. a net exporter of petroleum products and the fact that OPEC dismissed President Trump’s tweet pressuring the cartel to raise oil production.

OPEC production cuts are more of a concern because if you look at yesterday’s 8.6-million-barrel crude supply decline, it is clear that OPEC production cuts are already taking a toll on U.S. oil supply. Sure, the number was perhaps enhanced by weather issues down in the Gulf of Mexico, but the fact is that OPEC cuts and sanctions on Venezuelan oil will start to be a challenge for U.S. refiners going forward.

Speaking of U.S. refiners, they showed a surprise increase in runs even as we are in the heart of refinery maintenance season. Refineries operated at 87.1% of their operable capacity last week, increasing runs averaging 15.9 million barrels per day. Yet despite these efforts, petroleum products fell. Gasoline inventories decreased by 1.9 million barrels last week and are about 3% above the five-year average for this time of year. Distillate fuel inventories decreased by 0.3 million barrels last week and are about 2% below the five-year average for this time of year.

Overall, the EIA reported petroleum demand at 20.8 million barrels per day, up by 2.1% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 8.9 million barrels per day, down by 1.5% from the same period last year. Distillate fuel product supplied averaged 4.2 million barrels per day over the past four weeks, up by 4.5% from the same period last year. 

The EIA also showed that U.S. oil production hit a new record of 12.1 million barrels a day last week. Yet despite that effort, U.S. inventories dropped. We may see more of that after the Houston shipping channel shut yet again. While at some point we may get some of that crude back, ultimately the U.S. is on a path to lower supply and higher prices.

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