Crude oil inventories were battered last week in the wake of Hurricane Hermine. At one point 22% of Gulf oil production was shut down and imports slowed, leading to a hurricane sized 12.1-million-barrel drawdown according to the American Petroleum Institute, the biggest weekly drawdown since 1985. But it was not just the hurricanes that impacted supply as a reported 703,000 barrel drop in Cushing, Oklahoma helped reduce supply as well. We know that supply will rebound in the coming weeks and the number is supportive but the drawdown in Cushing, Oklahoma is supportive as well. The API also reported a 2.34 million barrel drop in gasoline supply as well as a 944,000 barrel increase in distillate stocks.
Oil prices are also getting support from the latest China oil import number that showed Chinese imports hit a record high for this year. According to the General Administration of Customs, China imported 32.85 million tons of oil in August, equivalent to 7.8 million barrels a day. That is up 7% from last year and is a reminder that the death of Chinese oil demand has been greatly exaggerated. Many have thought that Chinese imports would fall because they have supposedly filled up their oil reserves and their slowing economy, and they have been proven wrong. Now with Chinese oil production falling, they will see imports stay on the high side. Chinese stimulus also is helping keep oil demand rocking in the country.
The Energy Information Administration (EIA) in their “Short Term Energy Outlook" gave oil a bounce before the API was released when they reported that, “drawdowns in global oil inventories are expected to start in mid-2017, which will contribute to higher oil prices in the second quarter of next year.” The reasom why this is bullish is because EIA is normally conservative with their forecasts. If they say we will see global drawdowns in Mid-2017, traders will be thinking that it will happen sooner.The EIA says does say that, “builds are expected in global oil inventories during the second half of 2016. However, the pace of builds will be slower than in 2015 and early 2016, but this should still limit upward pressure on oil prices in the months ahead.”
As for gas prices, the EIA is predicting good things in the months ahead. The EIA says that U.S. retail gasoline prices are expected to continue falling through the end of 2016, even though gasoline demand this year is expected to be the highest ever.” “The average pump price for December is on track to be the lowest for the month in eight years.” “Gasoline retail prices are down this year because of a combination of modest crude-oil prices and abundant supplies of gasoline from high levels of refinery production.”
Are you ready for your “Peak Oil” update? Do you remember “peak oil”? Peak oil, the M. King Hubbert’s famous theory, that when the globe reaches the point in time when the maximum rate of the extraction of oil is reached, after which it will enter into terminal decline. That theory of course was one of the reasons we saw panic buying in oil in 2008 because some thought the globe had reached that point. But in reality, oil was running away from the financial crisis as the Fed was was cutting rates and Europe was pulling them in. While the “Peak Oil” theory seemed to be correct at times, the reality is the power of the markets trumped it. Innovation caused by high prices helped lead us to fracking and more efficiencies.
In fact just yesterday The Wall Street Journal reported about one of the biggest oil finds in a decade. And where else but right here in Texas! That’s Right Texas. One would have thought that every nook and cranny of Texas has been searched for oil. The Wall Street Journal wrote, "Apache Corp. (NYSE:APA). said it has discovered the equivalent of at least two billion barrels of oil in a new West Texas field that has the promise to become one of the biggest energy finds of the past decade. The discovery, which Apache is calling “Alpine High,” is in an area near the Davis Mountains that had been overlooked by geologists and engineers, who believed it would be a poor fit for hydraulic fracturing. It could be worth $8 billion by conservative estimates, or even 10 times more, according to the company. Shares rose by as much as 13% after U.S. markets opened Wednesday.”
We also get the natural gas report along with the EIA today due to the holiday. We think for natural gas we should see an injection of 33bcf. That is below the market forecast but like oil we should see the impact of shut Gulf production that should lower that number by more than people think.
Oil may have seen its low for the year. With the Fed ahead and a deal to limit output in the works, we should see more shorts start to throw in the towel.