Close but No Cigar!
Oil prices tried to bottom after the Energy Information Administration but missed a key turnaround point by just a bit. As I told MarketWatch yesterday that, “market momentum remains bearish and that it would likely take a close above $41.00 a barrel to inspire further short covering and encourage a further bounce. Failure to hold $40.00 a barrel, however, could inspire a run toward $38.00.” Well we just missed closing at $40.83. So despite a big drop in crude supply in Cushing, Oklahoma and a big drop in gasoline supply, crude oil may have to go back down and test the low or reverse and close above $41.00 to confirm that we have finally hit bottom.
U.S. oil production fell due to a drop in Alaska. Oil production in the lower 48 states was steady despite the recent rebound in oil rigs. It seems we may have to add more rigs in the shale patch to offset the decline rate in the older rigs.
While the headline crude oil number showed that U.S. crude inventories rose 1.41 million barrels to 522.5 million barrels, the highest seasonal level in decades, traders focused on the Cushing, Oklahoma delivery hub number that fell by 1.12 million barrels to 64.1 million.
Oil also got some back door support from gasoline that showed a surprise drop of 3.3 million barrels in a sign that refiners may cut back on gasoline production. Refineries operated at 93.3% of their operable capacity last week. Gasoline production decreased last week, averaging 10.0 million barrels per day. Gasoline demand averaged about 9.8 million barrels per day, up by 2.2% from a year ago.
Still, is oil ready to bottom as the economic outlook is murky and we are facing seasonal weakness. We are getting close so watch the charts. The $41.00 area is still the key number that we need to close above today. With the Bank of England cutting interest rates for the first time in 7-year post Brexit and resuming QE, it is possible that we could see demand expectations rise assuming the U.S. dollar does not get too strong.
Today may be a historic point in the U.S. natural gas market. For the first time since the Katrina summer of 2006, we may actually drawdown on gas supply. We have record power burns of gas at electricity plants and U.S. production that is stagnant and falling at a time when demand is rising. Today’s number, if we see a drop in inventory, should be a warning sign about what we believe to be adequate storage. We went into summer with supply 54% above the five-year average. Last week that was cut to under 19%. And that number should fall further! If we continue this trend, we could end the refill season below average and with the retirement of many coal plants, a cold winter could leave us vulnerable to big time winter price spikes if we get real cold weather. The way things are going, you better get out some sweaters because the era of low natural gas prices may be coming to an end. Make sure you ask for our special presentation on the state of natural gas.