Phil Flynn's Energy Report at 9AM ET
Big draws and Big Drops
The Biggest crude oil draw since 2016 was not enough to stop oil from a major drop in price. A slew of oil supply side stories such as the resumption of Libyan crude exports, an increase in Saudi Arabia crude output, possible waivers on U.S. sanctions on Iranian oil and reports that oil is on the agenda when President Trump and Russian President Putin meet next month. You also had the dollar soar and commodities tank on the fact that the Trump administration announced new tariffs on China.
Yet, the world looks more bullish today on reports of new China and U.S. trade talks and a new commitment by NATO to raise their spending commitment to fund their fair share of NATO spending. And a report by the International Energy Agency that spare oil production capacity could be ‘stretched to the limit’ by OPEC’s supply boost. In other words, down to fumes.
Let us start with the highlights from the Energy Information Administration. From a pure supply and demand aspect it was very supportive. The EIA reported a 12.633 million barrel drop in crude supply, the biggest decrease since August of 2016. U.S. crude exports dipped, but stayed near record highs. U.S. gasoline exports hit a record as our supply was sent to Europe and Africa. Supplies of gasoline fell by 694,000 barrels as refiners upped gasoline production. Refiners overall operated at 96.7% of their operable capacity last week. Gasoline production increased last week, averaging 10.7 million barrels per day. Distillate fuel production decreased last week, averaging 5.4 million barrels per day. Distillate saw a big jump in supply rising by 4.125 million barrels. US Crude imports fell hard by 1.624 million barrels a day.
Bottom line, the EIA report is showing a very strong U.S. and global oil market signaling that growth is still running above par, except for weaker distillate demand. Yet, that did not matter for the moment as the market dealt with a slew of bearish interpreted developments. MarketWatch laid out 7 reasons for the drop.
1) Libya exports set to resume
Libya’s state-run National Oil Corp. lifted force majeure on eastern oil ports on Wednesday after the ports were handed back from an armed faction, paving the way for a resumption of full production. Bjornar Tonhaugen, vice president for oil markets at consultancy Rystad Energy AS, estimated that around 700,000 barrels of oil a day would eventually be returned to the global market from Libya.
2) Possible waivers for U.S. sanctions on Iranian oil
Recent News reports, citing an interview with Sky News Arabia, said U.S. Secretary of State Mike Pompeo suggested he will issue waivers for U.S. sanctions on Iranian oil.
3) U.S.-China trade dispute
The White House said it would assess 10% tariffs on a further $200 billion in Chinese goods, deepening the dispute with Beijing, fueling further concerns that worsening tensions between the U.S. and China will hurt the global economy, and demand for oil.
4) U.S. dollar strength
The U.S. dollar strengthened Wednesday as Trump’s protectionist trade stance lured investors to the perceived safety of the greenback. The ICE U.S. Dollar Index DXY, was up 0.6% at 94.71, trading at a more than one-week high. As oil is pegged to the dollar, a stronger greenback usually doesn’t bode well for oil buyers using other currencies.
5) Saudi Arabia was raising output before the OPEC meeting
Saudi Arabia’s crude-oil production rose to 10.42 million barrels a day in June, up 405,400 barrels a day from May, according to a monthly report from the Organization of the Petroleum Exporting Countries released Wednesday.
6) EIA sees U.S. crude output nearing 12 million barrels a day next year
U.S. crude-oil production is set to average 11.8 million barrels a day in 2019, the EIA said in its monthly short-term report published Tuesday. That would top the previous record of 9.6 million barrels a day set in 1970.
7) Speculation that the U.S. will pressure Russia to lift production
There are reports that President Donald Trump will “hammer Russia” on raising oil production, said Phil Flynn, senior market analyst at Price Futures Group. The U.S. and Russia are scheduled to hold a summit on July 16 in Helsinki.
Andrew Weissman of ECB Analytics sees Libyan production as basically making the difference between market being severely short for the balance of the year or balanced - possibly even slightly over supplied. He says that while supply could be disrupted again at any time he would expect the market to initially shrug that off on the assumption, given today’s experience, that would likely to be short lived. Also, he worries about expectation that 60-70% of Syncrude production will be restored in August and weak distillate demand during the last 4 weeks. All of this having been said, once prices bottom out, could be a strong rebound sometime in September.
Potential drivers include: - Continued declines in Cushing stocks. Lowest in the past several years was 18 million and even that was before most of the pipelines to the Gulf were built. We may be close to the point where stocks fall below minimum operating needs of refiners. When this occurs, steep price increases are possible. About the same time, growth in Permian production in the Permian Basin is likely to come to an abrupt halt due to all the pipeline takeaway capacity reaching full utilization. This also is a huge potential catalyst, which I don’t think the market is currently considering adequately. Finally, I expect sanction waivers to be relatively small. Over the next few months, price swings could startle the market.
The International Energy Agency is warning about tight supply and no spare capacity. The large number of disruptions reminds us of the pressure on global oil supply," the IEA said." This will become an even bigger issue as rising production from the Middle East Gulf countries and Russia, welcome though it is, comes at the expense of the world's spare capacity cushion, which might be stretched to the limit." The IEA said U.S. sanctions could reduce Iranian oil exports by significantly more than the 1.2 million barrels a day seen in the previous round of sanctions. In June, Tehran crude exports fell back by about 230,000 barrels a day, as European purchases dropped by nearly 50%.
There is nowhere to run, nowhere to hide. We warned about the massive drop in cap x years ago and now we are feeling the impact, Good news on that front. BlackRock Inc (NYSE:BLK). raised $1.5 billion for its most recent energy and power infrastructure fund, pushing the world’s largest asset manager further into illiquid assets, according to Bloomberg. Now we only have a trillion dollars to go to get to where we need to be.
Oil Price - July 12
Oil Price - July 12
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Price - July 12
John Kemp at Reuters explains what happened to Brent on Wednesday. The selloff of Brent is what kick started the big drop in WTI.
By John Kemp
LONDON, July 12 (Reuters) - Brent crude prices registered their largest one-day fall in more than two years on Wednesday, in what was probably an indication hedge fund managers and other traders are realising profits after a year-long rally.
Front-month futures LCOc1 slumped by $5.46 per barrel, or just under 7 percent, a daily price move more than three standard deviations away from the mean, and the largest one-day decline since February 2016.
The market has suffered a larger percentage decline on only 44 days since the start of 1990, and it comes after a long period in which price volatility has been very low by historical standards.
Traders and analysts have blamed the sudden drop on a cocktail of factors, including the reopening of oil export terminals in Libya and the worsening trade dispute between the United States and China.
There have also been hints the United States will grant at least some waivers for countries to continue importing Iranian crude, easing fears of an extreme supply crunch after sanctions are reimposed in November.
Saudi Arabia also sharply increased exports in June and is expected to raise them further in July, helping relieve fears about future shortages.
The most likely explanation is a combination of all these factors, coupled with stretched market positioning and a lack of liquidity.
Brent has shown signs of topping out for some time, even as prices remain close to their highest since 2014 (https://tmsnrt.rs/2LbhIwR).
Buoyant flat prices have concealed signs of weakness elsewhere in the calendar spreads as well as hedge fund positioning.
Brent spreads, which cycle between contango and backwardation as the oil market alternates between over- and under-supply, have been softening for more than a month.
The six-month futures spread peaked in a backwardation of $3.50 per barrel in late April, and had slipped to just $1.76 on Tuesday, before plunging to 63 cents on Wednesday.
Hedge funds and other money managers have cut their bullish position in Brent futures and options from 632 million barrels in early April to just 457 million barrels by July 3.
Portfolio managers hold just over eight bullish long positions in Brent for every bearish short position, but the ratio has come down from 20:1 in April.
At the same time, fund managers have been gradually working down their bullish positions in refined fuels such as gasoline, heating oil and gasoil, contributing to downward pressure on crude.
Overall, the fund community remains bullish on oil, anticipating that strong consumption growth and further disruptions in production will tighten the market even further in 2018 and 2019.
But they are less bullish following the 75 percent run-up in Brent prices over the last 12 months and the market’s failure to break through the previous highs set in May.
Fears about future supply disruptions have failed to push prices higher and cast doubt on the potential for further short-term gains.
The resulting profit-taking has gradually sapped the momentum from the rally and probably contributed to the lack of liquidity behind Wednesday’s price move.
The sharpest price drops were concentrated in near-dated futures contracts, which are where many hedge fund positions are held.
Even after profit-taking in recent weeks, fund managers still held a historically high and lopsided bullish position in Brent futures, leaving them vulnerable to another bout of profit-taking.
U.S. crude futures prices have remained supported by the interruption of pipeline deliveries into the U.S. Midwest as a result of the shutdown at Canada’s Syncrude plant.
Hedge funds have actually been buying U.S. crude futures, adding 116 million barrels of net bullish positions in the last two weeks, even as they left Brent positions unchanged.
But Brent has had no such local factors to support the market and on Wednesday it finally seemed to succumb to a profit-taking plunge.
Markets exhibit strong cyclical behaviour. Once prices stop rising, they tend to fall, rather than hold at the peak.
And the sharpest price falls in a market come not straight after the peak, but normally when prices have been under gentle pressure for some time, and the initial trickle of selling finally turns into a torrent.
That is likely what happened on Wednesday.
By John Kemp
LONDON, July 12 (Reuters) - Brent crude prices registered their largest one-day fall in more than two years on Wednesday, in what was probably an indication hedge fund managers and other traders are realising profits after a year-long rally.
Front-month futures LCOc1 slumped by $5.46 per barrel, or just under 7 percent, a daily price move more than three standard deviations away from the mean, and the largest one-day decline since February 2016.
The market has suffered a larger percentage decline on only 44 days since the start of 1990, and it comes after a long period in which price volatility has been very low by historical standards.
Traders and analysts have blamed the sudden drop on a cocktail of factors, including the reopening of oil export terminals in Libya and the worsening trade dispute between the United States and China.
There have also been hints the United States will grant at least some waivers for countries to continue importing Iranian crude, easing fears of an extreme supply crunch after sanctions are reimposed in November.
Saudi Arabia also sharply increased exports in June and is expected to raise them further in July, helping relieve fears about future shortages.
The most likely explanation is a combination of all these factors, coupled with stretched market positioning and a lack of liquidity.
Brent has shown signs of topping out for some time, even as prices remain close to their highest since 2014 (https://tmsnrt.rs/2LbhIwR).
Buoyant flat prices have concealed signs of weakness elsewhere in the calendar spreads as well as hedge fund positioning.
Brent spreads, which cycle between contango and backwardation as the oil market alternates between over- and under-supply, have been softening for more than a month.
The six-month futures spread peaked in a backwardation of $3.50 per barrel in late April, and had slipped to just $1.76 on Tuesday, before plunging to 63 cents on Wednesday.
Hedge funds and other money managers have cut their bullish position in Brent futures and options from 632 million barrels in early April to just 457 million barrels by July 3.
Portfolio managers hold just over eight bullish long positions in Brent for every bearish short position, but the ratio has come down from 20:1 in April.
At the same time, fund managers have been gradually working down their bullish positions in refined fuels such as gasoline, heating oil and gasoil, contributing to downward pressure on crude.
Overall, the fund community remains bullish on oil, anticipating that strong consumption growth and further disruptions in production will tighten the market even further in 2018 and 2019.
But they are less bullish following the 75 percent run-up in Brent prices over the last 12 months and the market’s failure to break through the previous highs set in May.
Fears about future supply disruptions have failed to push prices higher and cast doubt on the potential for further short-term gains.
The resulting profit-taking has gradually sapped the momentum from the rally and probably contributed to the lack of liquidity behind Wednesday’s price move.
The sharpest price drops were concentrated in near-dated futures contracts, which are where many hedge fund positions are held.
Even after profit-taking in recent weeks, fund managers still held a historically high and lopsided bullish position in Brent futures, leaving them vulnerable to another bout of profit-taking.
U.S. crude futures prices have remained supported by the interruption of pipeline deliveries into the U.S. Midwest as a result of the shutdown at Canada’s Syncrude plant.
Hedge funds have actually been buying U.S. crude futures, adding 116 million barrels of net bullish positions in the last two weeks, even as they left Brent positions unchanged.
But Brent has had no such local factors to support the market and on Wednesday it finally seemed to succumb to a profit-taking plunge.
Markets exhibit strong cyclical behaviour. Once prices stop rising, they tend to fall, rather than hold at the peak.
And the sharpest price falls in a market come not straight after the peak, but normally when prices have been under gentle pressure for some time, and the initial trickle of selling finally turns into a torrent.
That is likely what happened on Wednesday.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group