Oil prices hit another seven-year high and based on economic data and geopolitical events, are still itching to go higher. Traders, expecting a sell-off after the Energy Information Administration (EIA) Petroleum Status report and a potential profit-taking plunge into the November crude expiration, had to reverse course.
The report showed that gasoline demand and distillate demand was strong while supplies fell dramatically especially in the Cushing, OK delivery point. We also saw dramatic drops in both gasoline and distillate supply and with refinery runs being low, the expectations are that there will be an incredible demand for oil when refiners come out of maintenance.
EIA reported that US crude supplies fell by 400,000 barrels. That drop would have been more if it weren’t for the fact that there was another release from the strategic petroleum reserve to the tune of 1.7 million barrels. The biggest crude oil story is the turnaround in the Cushing, Oklahoma delivery point. Remember at the height of the pandemic fallout for crude, the biggest concern was that Cushing, OK was out of storage space.
The US had to open up the strategic petroleum reserve to put the oil away to make sure that it had someplace to go. Yet now we have an incredible change of fortunes as rootstocks in Cushing fell yesterday by 2.3 million barrels which is the lowest level since October 2018. The big incentive to store crude oil at Cushing is gone as global demand is skyrocketing and the price of oil being at a 7-year high, it is encouraging to keep oil around for any extended period.
Another very bullish aspect of this report was the demand for gasoline and distillate. The EIA reported gasoline demand surged to 9.634 million barrels a day, up an incredible 449,000 barrels week over week. Distillate demand hit 4.278 million barrels a day and that was up an incredible 346,000 barrels a day from last week. What this shows at least at this point is that demand destruction, because of higher gas and diesel prices, has not set in yet or it may be because there’s such a push to deliver goods. We are trying to catch up the supply chain and it also shows that the farmers are consuming a lot of diesel getting their crops out of the fields. What it also signals is that we’re going to see a very tight market and refiners are going to have to ramp up production to meet this demand and that means we’re going to need a lot of crude oil and crude oil inventories are very, very low.
US crude supplies are 6% below the five year average for this time of year. Globally, commercial crude stocks in OECD countries are 162 million barrels below the pre-covid 5 year average in the EU, US, Japan and Europe. Land inventories fell by a whopping 23 million barrels in September. That is one of the biggest drops we have seen in inventories in about 8 years.
Because of the energy crisis that we’re having in Europe, expectations are that we will see the demand for oil rise even further. As we reported yesterday, Saudi Arabia’s Minister of Energy Prince Abdulaziz bin Salman said users switching from gas to oil could account for the demand of 500,000-600,000 barrels per day (bpd). Please suggest that the world is just waking up to the lack of investment in the fossil fuel sector. Give credit where credit is due. The Saudi oil minister warned repeatedly a long time ago that there was a lack of investment in fossil fuels but no one seemed to pay attention especially not in Europe. Hopefully we will wake up here at home.
Propane/propylene is a big problem and a threat. While they did increase by 1.9 million barrels last week, we are about 17% below the five-year average for this time of year. Total commercial petroleum inventories decreased by 9.8 million barrels last week.
The green energy transition is not going very well. There are reports overnight that countries are trying to push back against some of the stricter requirements from the UN and are urging and lobbying the UN to back off on some of their dire predictions of climate change. Wealthy countries don’t want to pay poorer countries for climate change fossil fuel lobbyist and its impact on climate change. It is kind of funny because we don’t hear a lot about the green energy lobbyist who seemed to be winning the lobbying war as their companies should expect to see trillions of dollars of taxpayer money in the next few years. There is an abundance of the sky is falling talk of send us your tax dollars before it’s too late if you want to save the world.
Crude oil is in a little bit of a risk-off mood today along with natural gas that has taken a bit of a hit but looks like it’s bottomed out. The weather fundamentals for natural gas right now are bearish. The long term fundamentals are still bullish. Use this opportunity to buy some calls or put or some bullish option strategies. Crude oil does look a little bit overbought but with the consolidation in this market. If the market doesn’t break down today, there is a significant risk of a big upward move next week.