Resilient
Oil prices are proving to be resilient after wiping out a 2% loss to close over 2% higher. Not even a reported 4.7 million increase in crude supply and reports that President Obama has the votes to overcome a veto on his deal to lift sanction on Iran was not enough to keep this market down. A rebound in the U.S. stock market and data showing that U.S. demand will stay strong helped fuel the rally. There was also a story about China sending military ships off the coast of Alaska to perhaps send a subtle message to President Obama on his trip to the state. All and all the reliance on oil is going to make the bear oil traders more nervous.
Let's start with inventory. I was not surprised to see a big build in crude-oil supply. Last week imports into the Gulf of Mexico were way down due to tropical storm activity. This week they bounced back, rising 2.57 million barrels. So, if you look at last week's 5.5 million draw and compare it to this weeks 4.7 million barrel draw you actually saw supply fall over the last 3 weeks.
Oil traders also put into perspective a larger than expected drop in refinery runs because they realized that most of it was on the West Coast due to refinery problems and not a sign that refining demand is slowing. Gasoline supply fell slightly by 300,000 barrels and distillates increased by 100,000 barrels. In the all-important delivery hub in Cushing Oklahoma supply fell 388,000 barrels.
President Obama now has the votes to overcome any overriding of his veto on his Iranian Nuclear deal. The news many bears thought should have sent oil lower but the truth is that the return of Iranian oil is already mostly priced in. It might be overpriced in in my opinion. Sell the rumor buy the fact?
Oil also got a boost after a report from the Pentagon that they were monitoring 5 Chinese war vessels in the Bering Sea off of the Alaskan coast where President Obama is talking about climate change but also touting the buildup of Ice breakers to help the U.S. Coast Guard control an area that Russia and China want for its potential navigation route as well as access to its oil and gas reserves which could amount to 40% of the global supply. While China today is trying to sound like they are waving an olive branch by reducing the size of their military and talking peace at their military parade but their actions in the Bering Sea is sending another message.
The Wall Street Journal reported "Five Chinese navy ships are currently operating in the Bering Sea off the coast of Alaska, Pentagon officials said Wednesday, marking the first time the U.S. military has seen them in the area. The officials have been tracking the movements in recent days of three Chinese combat ships, a replenishment vessel and an amphibious landing ship after observing them moving toward the Aleutian Islands, which are split between U.S. and Russian control". "This would be a first in the vicinity of the Aleutian Islands," one defense official said of the Chinese ships, which have been operating in international waters. "I don't think we'd characterize anything they're doing as threatening," the official said." Let's hope so. Just the same it's good the U.S. has some ships of their own in the region!
Gas Party! This Labor day drivers should be paying the lowest gas price in almost a decade. They put the current regular unleaded gasoline price at $2.46 a dollar less than last year and the lowest on Labor Day since 2004. That's almost a whole dollar less than the average price last Labor Day. AAA is also predicting that 35 million Americans will travel at least 50 miles from their homes for the long weekend, the most since 2008! Plus airline tickets are also falling with airfares are down 11% on average this year compared with 2014.
Bloomberg is reporting that -- It's crunch time on asset sales for Canada's struggling oil producers. Starting in earnest after Labor Day, oil and natural gas companies will begin the twice-yearly pilgrimage to their banks to discuss funding. It's not going to be easy, with companies from Penn West Petroleum (NYSE:PWE) to Athabasca Oil Corp (TO:ATH) under pressure to sell assets to keep the money flowing.
With no relief from the price of oil, which has tumbled under $50 a barrel, companies are cutting more staff, reducing dividends and even selling hedging positions on commodities and currencies to boost cash flow. Banks will next likely force some producers to sell their best assets to avert bankruptcy, said Rafi Tahmazian, senior portfolio manager at Canoe Financial LP in Calgary.
"The banks are going to tell these guys to sell their coveted assets," said Tahmazian, who helps manage about C$1 billion ($750 million) in energy funds. "That means the strong companies get to lick their chops."
The oil slump has already made victims out of many of Canada's fossil fuel producers which have cut thousands of jobs, most of them in Calgary. Banks approached struggling producers in the spring and told them to do what they could to strengthen their balance sheets and find ways to raise funds, Tahmazian said. "This time, they won't be so friendly," he said.