Rebound Delayed
Oil prices are recovering after getting whacked from The International Energy Agency (IEA) report that lowered demand forecasts for the next two years. The reason we are rebounding is due in part to the American Petroleum Institute (API) who suggested that a rebound from the hurricane Hermine related drop may not happen as quickly as traders had hoped. After the API reported a 14-million-barrel crude supply drop last week, the rebound reported this week was only 1.44 million barrels. That small increase means there may be more than the storm that caused the drawdown in oil supply.
We do know that we saw another drop in Cushing, Oklahoma supply to the tune of 1.12 million barrels. We also saw gasoline supply fall by 2.39 million barrels that would suggest that record demand is still happening. The only bearish part of the report was a larger than expected 5.31-million-barrel build in distillates that is tempering the rebound.
We question the IEA demand forecast. In the past they have underestimated demand by a wide margin and we feel they are doing so again. From what we see, the market may achieve balance early next year and believe we will be in a supply deficit by the middle of the year. From the demand trend we see we are expecting that global demand is close to 97 million barrels a day according to the OECD and should exceed 100 million a day in 2018. In the meantime, OPEC output will stagnate and we will need more shale output to make up the difference. We are seeing a historic drop in oil investments and oil discoveries and that will make it difficult to meet demand. With demand rebounding in China, Europe and the United States, we will see the tide turn on inventories.
In the short term the drama continues in Libya. Former Libyan general Khalifa Haftar, has taken control of 4 major Libyan oil ports. The latest, Braga, was seized overnight giving the control of all of Libya’s northern oil ports to the former general. The UN backed Libyan government seems to have lost control and it is unclear whether they have the ability to regain control. For now, the former general has control of Libya’s most important oil ports. In a statement from the U.S., France, Germany, Italy, Spain and Britain saying the UN-brokered government based in the capital, Tripoli, is the "sole steward of these resources," adding that, "Libya's oil belongs to the Libyan people”.
Reuters is reporting that, "Colonial Pipeline days-long shutdown of the main line that moves gasoline to the Atlantic Coast from the U.S. Gulf Coast has had the unintended effect of starting to alleviate the glut of domestic gasoline supply, traders said." Colonial shut down Line 1 after a leak in Alabama on Friday, cutting off supplies and likely causing drawdowns in stockpiles. A full restart of Line 1 is expected to be completed by this weekend.
Our natural gas gets more bullish for winter. The key in the front end of the market is to take out $3.00. That may have happened if we fall short of the 55bcf injection into storage Thursday. If, like oil, we come in shy of 55, look for the natural gas bulls to come alive. Remember that we are now only single digits above average and that may evaporate further after Thursday’s report.