Getting Ready To Erupt
Gasoline prices hit the highest level since last January as supply continues to fall and demand continues to rise. While traders are fixated on the oil-supply glut and the resumption of Libya’s largest oil field, the global surplus is tightening. Bloomberg News reports that since mid February, between 10 million and 20 million barrels have left storage in the Caribbean, a sign that the global market is tightening. More important for drivers, the supply of gasoline in the U.S. is tightening at a frantic pace. Big oil investments have been cut back and according to the Wall Street Journal, they will be happy to break even. It is the calm before the bullish storm as the markets are in a comfort zone not realizing that the lack of investment and falling global inventories are setting the stage for a larger rally and a much more expensive summer driving season.
Jason Schenker, the President of Prestige Economics, LLC, agrees. In a Bloomberg op-ed piece he said, “Traders in the energy market are too focused of late on crude oil inventories. When oil inventories rose in last week’s Department of Energy report many zeroed in on the fact that they increased less than expected to explain a bump higher in the price of crude. Traders largely ignored recent trends showing sharp drops in gasoline and distillate inventories. Schenker points out that while crude inventories increased, “product inventories fell in last week’s DOE report by a combined 6.2 million barrels, bringing the total product inventory decline over the past six weeks to 36.5 million barrels." That's the biggest six-week drop in almost 11 years -- and the summer driving season doesn’t even start for another seven weeks.
That is being reflected in higher prices at the pump. AAA says that gas prices hit an average price of $2.33 per gallon for regular unleaded gasoline and is four cents more than a week ago, one cent more compared to one month ago and 27 cents more than the same date last year. National gas prices have increased six of the last seven days. AAA says that while the increase in prices has been moderate, it is possible this trend could continue as refinery maintenance wraps up, more expensive summer-blend gasoline becomes available and driving demand increases this spring.
Big oil is not so big. Sarah Kent of the Wall Street Journal writes, “The world’s biggest oil companies are struggling just to break even. Despite billions of dollars in spending cuts and a modest oil-price rebound, Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDSa), Chevron (NYSE:CVX) and BP (NYSE:BP) didn’t make enough money in 2016 to cover their costs, according to a Wall Street Journal analysis. The Journal writes, "To calculate each companies’ free cash flow—the excess cash remaining after costs—the Journal deducted the firm’s dividends and capital expenditures from its cash from operations. All four firms fell short of cash flow for the year, although Exxon said it broke even by its own metrics, which exclude dividends. The analysis also showed that the four companies ended last year with more debt than they began it.“ That lack of profitability by big oil means that they will not risk big money on higher yielding, more expensive energy projects. They will go with the low hanging fruit like shale that will leave the market very under supplied in the next few years.
While oil stalled at $55.00 a barrel as U.S. inventories stayed strong, it is probably reducing the long-term investment we will need for future demand. If you are fixated on the moment you may think we have plenty of supply. If you are a futures trader you must look to the future and realize that we are going to see a significant tightening of supply in the coming weeks and months and years. The gasoline and product tightening is the first phase and in a few weeks, it will be the oil. Imports to the U.S. are falling and the exports will be rising. Demand for gas and diesel are starting to heat up. Do not be surprised when the glut of oil is gone. The signs are all around.