Trade Fears Trump Output Cuts
Trade fears are trumping output cuts to start the week, as oil prices retreat following a strong Friday rally. Customs data showing Chinese exports declined for a 4th straight month is getting credit for the early sell-off, erasing much of the post-OPEC gains that pushed prices near 2 month highs.
After OPEC uncertainty had oil prices selling off to start Friday’s session, a much more precise proclamation on output cuts in the official press release spurred on a buying spree mid-morning. By noting that the Saudi’s would continue their own voluntary output reductions, in addition to the group’s agreed-upon output cuts, should mean that around ½ million barrels/day (roughly ½ of 1% of total global supply) will be taken offline to start 2020. One thing the official announcement did not mention was if condensate would get different treatment than traditional crude grades, which could potentially leave a loop hole for Russia to export more barrels.
It’s a big week for markets globally as both the FOMC and ECB will hold their last meetings of the year, and another tariff deadline with China comes on Sunday. After Friday’s strong jobs report helped propel US stocks back near all-time highs, equities seem to be taking a wait-and-see approach to start this week with these major issues looming.
The CME’s Fedwatch tool shows a 99% probability of no interest rate action by the FED at this meeting and low odds of any action in the front half of 2020.
5 more oil rigs were taken off-line last week, according to Baker Hughes’ latest report. That’s the 7th consecutive weekly decline, and marks a 25% reduction in the total US count so far in 2019.
Money managers do not appear to have enjoyed the Black Friday selloff in energy contracts, and reduced their net-long holdings (bets on higher prices) across the board last week. Since that report’s data is compiled as of Tuesday, those that bailed out look like they missed the recovery rally in the back half of the week. RBOB contracts saw the largest reductions, perhaps an acknowledgement of the upcoming winter doldrums for gasoline demand.
From the OPEC Press Release Friday:
“The 7th OPEC and non-OPEC Ministerial Meeting, hereby decided for an additional adjustment of 500 tb/d to the adjustment levels as agreed at the 175th Meeting of the OPEC Conference and 5th OPEC and non-OPEC Ministerial Meeting. These would lead to total adjustments of 1.7 mb/d. In addition, several participating countries, mainly Saudi Arabia, will continue their additional voluntary contributions, leading to adjustments of more than 2.1 mb. This additional adjustment would be effective as of 1 January 2020 and is subject to full conformity by every country participating in the DoC.”
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Energy Prices Up Over 2% Across The Board This Morning
Refined product futures traded in an 8-10 cent range yesterday with prompt heating oil settling up ~6 cents and RBOB ending up about flat. Oil prices clawed back some of the losses taken in the first two full trading days of the week, putting the price per barrel for US crude back over the $70 mark. Prices are up just over 2% across the board this morning, signifying confidence after the Senate passed the bipartisan debt ceiling bill last night.
The EIA reported crude oil inventories up 4.5 million barrels last week, aided by above-average imports, weakened demand, and a sizeable increase to their adjustment factor. The Strategic Petroleum Reserve continues to release weekly through June and the 355 million barrels remaining in the SPR is now at a low not seen since September 1983. Exports increased again on the week and continue to run well above last year’s record-setting levels through the front half of the year. Refinery runs and utilization rates have increased to their highest points this year, both sitting just above year-ago rates.
Diesel stocks continue to hover around the low end of the 5-year range set in 2022, reporting a build of about half of what yesterday’s API data showed. Most PADDs saw modest increases last week but all are sitting far below average levels. Distillate imports show 3 weeks of growth trending along the seasonal average line, while 3.7 million barrels leaving the US last week made it the largest increase in exports for the year. Gasoline inventories reported a small decline on the week, also being affected by the largest jump in exports this year, leaving it under the 5-year range for the 11th consecutive week. Demand for both products dwindled last week; however, gas is still comfortably above average despite the drop.
The sentiment surrounding OPEC+’s upcoming meeting is they’re not likely to extend oil supply cuts, despite prices falling early in the week. OPEC+ is responsible for a significant portion of global crude oil production and its policy decisions can have a major impact on prices. Some members of OPEC+ have voluntarily cut production since April due to a waning economic outlook, but the group is not expected to take further action next week.
Click here to download a PDF of today's TACenergy Market Talk
Prices Are Mixed This Morning As The Potential Halt In U.S. Interest Rate Hikes
Bearish headlines pushed refined products and crude futures down again yesterday. Prompt RBOB closed the month at $2.5599 and HO at $2.2596 with WTI dropping another $1.37 to $68.09 and Brent losing 88 cents. Prices are mixed this morning as the potential halt in U.S. interest rate hikes and the House passing of the US debt ceiling bill balanced the impact of rising inventories and mixed demand signals from China.
The American Petroleum Institute reported crude builds of 5.2 million barrels countering expectations of a draw. Likewise, refined product inventories missed expectations and were also reported to be up last week with gasoline adding 1.891 million barrels and diesel stocks rising 1.849 million barrels. The market briefly attempted a push higher but ultimately settled with losses following the reported supply increases implying weaker than anticipated demand. The EIA will publish its report at 10am this morning.
LyondellBasell announced plans yesterday to delay closing of their Houston refinery, originally scheduled to shut operations by the end of this year, through Q1 2025. The company “remains committed to ceasing operation of its oil refining business” but the 289,000 b/d facility remaining online longer than expected will likely have market watchers adjusting this capacity back into their balance estimates.
Side note: there is still an ongoing war between Russia and Ukraine. Two oil refineries located east of Russia's major oil export terminals were targeted by drone attacks. The Afipsky refinery’s 37,000 b/d crude distillation unit was struck yesterday, igniting a massive fire that was later extinguished while the other facility avoided any damage. The attacks are part of a series of intensified drone strikes on Russian oil pipelines. Refineries in Russia have been frequently targeted by drones since the start of the military operation in Ukraine in February 2022.