The Long Road Back
Crude oil prices recovered after another shocking increase in oil inventory after traders started to focus on the fact that refiners are beginning the long road out of seasonal maintenance. The 5.0-million-barrel crude supply increase was driven by a huge 902,000-barrel increase in crude imports mainly from Canada of all places and a slight 20,000 barrel a day in U.S. oil production.
U.S. oil production hit 9.129 million barrels per day, slightly above one year ago but still down from the 9.422 million barrels a day we were pumping two years ago. Yet it was a much larger than forecast increase in refinery runs that brought oil back from the abyss as we start the long road back to the summer driving and refining season. On top of that, the odds for an OPEC production cut extension rose as Saudi Arabia’s credit rating fell.
Gasoline inventories fell for the fifth straight week and it was by a sizable 2.8 million barrels. While the drop was not nearly as large as the American Petroleum repot suggested, it still suggests that gas inventories will continue to fall in the coming weeks.
The industry must draw down winter grade by exports and discounting production. They then must get geared up for the summertime blend. The increase in refinery runs that put U.S. refiners back to 87.4% of capacity is leading to expectations that soon we will see U.S. oil inventories start to fall.
Supplies at Cushing, Oklahoma, the delivery point for WTI and the biggest U.S. oil-storage hub, rose 1.97 million barrel and while we did see a big slowdown in OPEC imports, we saw Canadian imports offset that by a big margin. Yet gasoline starts becoming the seasonal driver more so than crude supply and distillate. We should see more draws in the coming weeks and more increases in refinery runs.
Despite all the rumors of demand destruction in gasoline, the truth is that we should see demand snap back to record levels as an improving economy and better job picture will jack up those miles driven. This Memorial Day we could get close to a record for holiday driving and that should kick off a summer of record demand. Large trucks and large cars will dominate the road as low prices have the thoughts of fuel efficiency go to the back of the minds of drivers that will purchase record number of new vehicles. U.S. auto sales are expected to scale a record high of 17.6 million vehicles in 2017, according to JD Power.
Fitch downgraded Saudi Arabian credit rating by one notch to A+ with a stable outlook from AA- with a negative outlook. It said that:
In Fitch's view, the scale of the reform agenda risks overwhelming the government's administrative capacity.
The Saudis are lining up bankers for their big IPO of Saudi Aramco and need oil to get stronger to reverse their deteriorating financial condition. That is why the Saudis have cut more than their production quota to make sure that we will see a drawdown in global inventories. The Russians are desperate as well to get prices higher and if the Saudis continue, the Russians will follow at a slower pace. The downgrade almost assures an extension of the historic OPEC/non-OPEC pact.
Oil traders will watch the vote of the American health care act today and the fate of the bill may be an indicator of the ability of President Donald Trump to drive through his agenda on tax cuts and infrastructure spending. The so called Freedom Caucus was vowing to block the bill and we know that the stock market wants repeal and replace of Obama care and if left the way it is, will fall apart and bring the economy down with it. Republicans need 216 votes to pass the House. They can lose no more than 21. If they lose 22, there would likely be a 215 to 215 tie, which means the bill would fail. If it fails, then stocks drop and oil does to. If it passes get ready to rally.