Math Problem

Oil rallied strong yesterday after someone started to do math. Maybe, just maybe with near record demand in the U.S. and China, and OPEC’s 800,000 barrel a day production cut, along with 400,000 barrels from Russia, 325,000 barrels from Canada and a force majeure on exports from the 315,000-barrels-per-day oilfield in Libya, perhaps they are starting to figure out that the market globally will soon be undersupplied. The catalyst that had traders put pen to paper was a report that Saudi Arabia was getting ready to stick it to the USA, severely cutting supplies to major U.S. refineries. Bloomberg News reported that sources said that Saudi crude shipments to the U.S. next month could even test the 30-year low set in late 2017 of 582,000 barrels a day, down about 40 percent from the most recent three-month average, the same people said, asking not to be named as the information isn’t public. This is not a surprise to people that have been watching the situation carefully. Tanker trackers, like independent analyst Patrick Bourque, have already reported sharp drops in Saudi exports. Patrick says the real reason for the cuts is the Saudis desire to get back at President Trump for backtracking on Iranian oil sanctions.

Bloomberg says the export curbs, if fully implemented, will affect big U.S. refiners such as Valero Energy Corp., Phillips 66, Chevron Corp., Exxon Mobil Corp., and Marathon Petroleum Corp. forcing them to buy similar crude elsewhere, such as Mexico, Canada or Venezuela. They could also hit Motiva Enterprises LLC, the Saudi-owned company that operates the largest refinery in the U.S. Most of these refineries need the heavy Saudi oil that their refiners are set up to refine and need to rebuild supplies of distillate which are still about 8% below the five-year average. There is a real need to build products in January and the heavy oil that they need may be harder to find.

Venezuela can’t really rise to the occasion and Mexico has its own problems. Canada might have been able to help but because everyone is fighting against pipelines, they have had a hard time getting the oil out. This led to Alberta cutting production of heavy oil that we could use right now.  Since Canada announced a cut, the spot price of Western Canada Select crude surged more than 70 per cent. The grade’s discount to the U.S. WTI has been cut in half to around $13 a barrel, the narrowest in more than a year. Other blends, including Edmonton Mixed Sweet and Syncrude, also are surging according to the Financial Post. So, remind me, why were they against the Keystone XL pipeline?  I guess it was because they must like it when the Saudis decided to raise our gas and diesel prices. It sure did yesterday and both RBOB and Diesel futures rocked.

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