Betting Against It
Sometimes bookies come in handy. According to the bookies in London, the odds of the UK staying in the EU is over 80%. While the bets against a Brexit seem to be gaining momentum, the oil market is grappling with a surprise drop in supply and potentially more supply risk in Nigeria.
The American Petroleum Institute (API) reported a whopping 5.2-million-barrel drop in crude supply that may indicate that oil demand is rebounding or we may be seeing the delayed impact from the loss of crude supply due to the Canadian wildfires. As I have written before, the loss of Canadian oil supply would take some time to be felt. With the slow pipeline flow rate of Alberta oil at about 5 miles an hour, it takes weeks for that oil to find its way to the Midwest. If the flow is stopped, the loss of supply also won’t show up for weeks as well. It is very likely that is why we saw the big drop in supply. We also saw a big drop in supply at the all-important Cushing, Oklahoma delivery point where supply fell by a much more than expected 1.3 million barrels. The drop is more in line with I thought we would see last week.
Demand also looks strong based on the fact that the API reported gasoline supply fell by 1.5 million barrels and distillate stocks by 1.7 million barrels. There was some concern that the near record demand we have seen for gasoline might be moderating. Yet this draw seems to suggest that demand continues to be resilient.
What cease fire? Nigeria’s government is denying it has a cease fire deal with the Nigerian Delta Avengers. The Wall Street Journal reported that Nigerian officials on Tuesday said the government has clinched a deal for a 30-day truce with Niger Delta militants. Though a Twitter account for the most prominent armed group later denied it had agreed to stop attacking oil facilities. This comes as low oil prices are crushing the Nigerian economy. The Nigerian currency, the Naira, crashed when the Nigerian central bank ended its currency peg to the U.S. dollar. The central bank tied its currency to the dollar a few years ago to give it stability but in recent years has had to drain its reserve to keep the peg in place. With economic turmoil and 7 militants at the gate, a much needed rebound in Nigerian oil production is not likely to happen.
Saudi oil production is rising but so is demand. The Wall Street Journal reported that statistics just released by a Saudi agency show exports fell to 7.44 million barrels a day in April, the lowest since last October but production is a near-record 10.26 million barrels a day. The rest goes to fuel cars in one of the countries with the cheapest pump prices in the world, despite a recent cut in subsidies. That is no small feat given the fact that half the adult population isn’t allowed to drive. Oil is also used for generating electricity and with daytime temperatures soon to be consistently above 110 degrees Fahrenheit in Riyadh, that consumes a lot of barrels.
The long term bottom is still in place and you just have to be prepared to ride out corrections. Options are a good way to that. We still like the long side.
Natural gas is hanging higher on heat and concerns about year end storage. With the supply in storage set to decline against the five year average, injection seaon predictions have to be watched. On the production side, prices need to go higher to get drillers interested in natural gas and not oil. Outlook is still very bullish from a price standpoint.