Phil Flynn's take on API report - Aug 14

[dan_s]

Note that Phil sent this out before the EIA report which came out at 10:30AM ET. My comments in blue.

The Energy Report: Hint of Daylight
By Phil Flynn (Aug 14, 2019 09:25AM ET)

Crude Oil prices went on a wild ride as there are signs that there may be some light at the end of the tunnel when it comes to the U.S.-China trade war.

On Tuesday oil prices shot up in its biggest one day up move since early January on the hint that perhaps there may be some movement on the U.S.-China trade war front. First came a report that President Trump had a phone call with the Chinese saying that trade talks were still on. Then, President Trump delayed some tariffs so we could make sure we can fill Christmas stockings with goods that are temporarily exempted from tariffs. Yet after the close, some suspect and misreported data from the American Petroleum Institute (API), as well as bad economic data from Germany and China, are raising fears of global demand worries, at least until we get another tweet or maybe some more reports of progress on U.S.-China talks.

The API had mixed reports by people who re-report data. The API is a subscription service and is leaked out by subscribers after the data is released. The problem is that the re-reports are not always timely or accurate. No matter! It’s probably OK because most folks believe that the API report is not accurate anyway. First reports suggested that the API reported a 3.7 million crude oil build. Some dispute that and say it was a draw. Regardless, the API did show a big 2.5-million-barrel draw in Cushing, Oklahoma. < If this is confirmed, it adds support to my belief that U.S. oil production growth is flat and may be on decline. IMO crude oil inventory builds caused by more imports are just moving oil from one storage location (a tanker) to another (onshore Gulf Coast).

What is weird is that the API also reported the exact same 3.7-million-barrel increase in gasoline inventories that they did in crude oil inventories, raising even more eyebrows. < EIA reported this morning a decline in both gasoline and distillate inventories.

Distillate stocks were in line. Of course, the Energy Information Administration report could be and should be totally different. To be fair, both the EIA and API have been under a lot of scrutiny because of unexplained upward adjustments in inventory and just overall mixed data.

The API looks like it reports what it wants and then tries to get in line with the EIA. Of course, with the EIA admitting that they spent months under-reporting supply, it kind of looks like we have the blind chasing the blind. Still, the EIA should reverse the call from the API and show a draw, unless poof, they magically show more unexplained upward revisions.

The oil market is also not happy with overnight economic data. The trade war is taking its toll on what used to be Europe’s strongest economy. The scary part is that it probably is. A big drop in German exports slowed their gross domestic product (GDP), that fell by 0.1% compared with the previous quarter annual growth rate down to 0.4%. China did not fare any better in their overnight economic numbers, as China’s July industrial output rose 4.8%, slowest in 17 years.

Obviously, this is playing into the slowing oil demand fears, but the real question is whether this is a trend or as we saw yesterday, can be easily solved with a tweet or any progress on trade. Oil demand bears also must be careful that the worst is over for demand destruction. You cannot underestimate the power of global central banks’ ability to perk up demand with negative interest rates, money printing, as well as massive government spending. That is the risk for the oil bears.

Shale warning from Harold Hamm. Reuters is reporting that, “OPEC and U.S. shale producers should reduce crude shipments into an oversupplied market, Continental Resources Chief Executive Harold Hamm said on Tuesday, as Iran sanctions and the U.S.-China trade dispute has roiled the market. Hamm, who heads one of the largest U.S. shale companies, urged energy producers to curb spending and production, echoing his position two years ago when cuts by the Organization of the Petroleum Exporting Countries (OPEC) paved the way for greater U.S. shale output.” In comments that touched on oil demand, U.S. trade with China, and production hedging, Hamm said at the EnerCom energy conference in Denver, Colorado, that he expected OPEC and its allies to further cut output. U.S. shale producers “need to row our own boat,” he said. “We need to make sure we don’t oversupply the market.” < After reviewing dozens of upstream oil & gas company Q2 reports and conference call transcripts, it is clear to me that upstream CEOs "get it" and they are dialing back their drilling programs. I expect the U.S. active rig count to continue to decline.

U.S. shale producers have cut the number of active drilling rigs, but he said reductions “haven’t bottomed yet,” noting that, “we’re heading for 800” onshore rigs. The U.S. oil and gas land rig count were 909 as of last week, according to data from General Electric (NYSE:GE) Co’s Baker Hughes. That decline comes as investors have pushed oil companies to focus on boosting returns rather than expanding drilling when prices are low.

“Capital discipline is more important now than at any time I’ve seen it,” said Hamm. “We can oversupply the market, and we have,” he said, referring to production. Hamm, who has famously opted out of a hedging program, reiterated his position to investors, saying he believes it is “dangerous” to hedge a lot of oil today.” Maybe because it’s going higher?

The heat wave is giving natural gas traders a little bit of life. Call it life support. Use the strength to put on bearish longer-term positions. Mother Nature: don’t curse me now!