The Pause Before The Storm

It took a weak industrial output number out of China to slowdown the crude market that is breaking out to the upside. The concern after China showed a much slower than expected 5.3% increase along with weaker than expected housing and jobs data, is that China’s record-breaking oil demand might slow if the Chinese economy continues to falter.

That is not a U.S. problem as oil demand here is robust and supplies are tightening. Crude futures posted new highs for the year and is being driven by a big 3.862-million-barrel draw in crude supply, according to the Energy Information Administration (EIA)  and signs that U.S. oil production may be faltering. The EIA reported that U.S. production fell by 100,000 barrels a day to 12 million, reflecting the trend of falling oil rigs and after reports from the EIA that lowered their oil production estimates for this year and next.

You also have the collapsing socialist state in Venezuela who can’t seem to keep the lights on and U.S. sanctions on Iran, where according to Reuters, want to cut Iran’s crude exports by about 20 percent to below 1 million barrels per day (bpd) from May. In Venezuela, China is offering the Maduro regime help with the lights, but Secretary of State Mike Pompeo asked India to halt all crude imports from Nicolas Maduro's regime, which the United States does not recognize. In response, India’s largest private oil refiner Reliance Industries said it has capped crude imports from Venezuela.

This, of course, is raising the possibility that we could be on the verge of a substantial oil and product price spike if we continue to see supplies get cut. We know that OPEC is not raising output at this point and there seems to be not enough drills in the shale patch to offset the potential losses in global supply.

The demand side of oil is also strong. Not only was the 3.862 drop in crude supply almost 6 million barrels more than the estimate, we saw gasoline supply fall by a whopping 4.624 million barrels as gasoline demand rose for the second straight week. Distillate supply rose modestly by a more than expected 383,000 barrels. That gave the seasonal long RBOB versus Short Ultra Low distillate spread a big boost. Because of supply concerns, we are also seeing buying in the front end of crude and selling in the back end. The market is realizing the possibility of a sharp price increase is real and it is being reflected in the spreads.

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