Clear the Air
The American Petroleum Institute (API) cleared the air on petroleum inventories or at the very least shows that the air in the Houston Shipping Channel is clear and the shipping lanes are open. Now the market can see the impact of strong crude demand and the growing impact from OPEC production cuts as well as the mounting supply losses from Venezuela. The API reported that crude supply fell by 3.096 million barrels as well as another sizable 3.561 million barrels drop in gasoline supply. The string of weekly losses in gasoline supply comes as refiners are struggling to meet summertime like demand while still being in maintenance and getting rid of winter blends of gasoline. Distillate stocks increased by 2.330 million barrels. This comes as we see reports by the Energy Information Administration (EIA) that confirms that the United States in 2018 consumed more energy than ever before last year and increasing demand expectations from China after they posted a better than expected 6.4 percent growth number in the first quarter of 2019. So, you have lower than expected supply and better than expected demand so is it any wonder why we see prices moving higher?
How about that U.S. energy demand breaking records? Time to celebrate as the record is reflective of a solid U.S. economy, where all of the engines of growth and engines of all kinds were reviving. The EIA reported that primary energy consumption reached a record high of 101.3 quadrillion British thermal units (Btu) in 2018, up 4% from 2017 and 0.3% above the previous record set in 2007. The increase in 2018 was the largest increase in energy consumption, in both absolute and percentage terms, since 2010. In 2010 we were coming off depressed levels as the markets were just recovering from the financial crisis. So, this increase is even more impressive because it comes after a year of very strong growth.
Consumption of fossil fuels—petroleum, natural gas, and coal—grew by 4% in 2018 and accounted for 80% of U.S. total energy consumption. Natural gas consumption reached a record high, rising by 10% from 2017. This increase in natural gas, along with relatively smaller increases in the consumption of petroleum fuels, renewable energy, and nuclear electric power, more than offset a 4% decline in coal consumption. That is great news for the environment as cleaner fuels are replacing coal demand allowing the economy to grow faster with less of a negative impact from greenhouse gas emissions.
The oil market is still waiting on President Trump’s decision as to whether or not he will grant waivers to buyers of Iranian crude, yet mother nature may be already lowering Iran’s oil production. Reuters is reporting that Iran has shut around a dozen oil wells in its oil-rich southwestern Khuzestan province because of massive floods, the semi-official Mehr news agency reported on Wednesday, leading to a drop of up to 20,000 barrels per day in crude production. Iran’s worst flooding in 70 years, which started on March 19, has killed at least 76 people, forced more than 220,000 into emergency shelters and caused an estimated $2.5 billion in damage to roads, bridges, homes and farmland.
This means that gasoline prices are on the rise. Rising crude costs near record gasoline demand, along with ethanol disruptions along with refinery outages, has caused $4.00 in gas in California and has assured the rest of the country that we will see $3.00 a gallon gas this summer. Diesel prices are also poised to move higher so don’t get fooled by the increase in stockpiles. Hopefully, hedgers heeded our earlier calls to get hedged.
The rising expectation for U.S. natural gas production is keeping the pressure on natural gas. Andrew Weissman of EWB Analytics says that a bearish weekend weather shift slashed 27 Bcf of demand for natural gas, triggering a downturn for the May NYMEX gas contract and setting a two-month low for the front-month. Falling weather-driven demand for gas compounds last week’s 50-Bcf loss of demand from the delay of the Sur de Texas-Tupan export pipeline project to Mexico and exacerbates the seasonal nadir in spot market natural gas support—building downward price pressure. The year-over-year natural gas storage deficit currently sits at 183 Bcf but may flip to a storage surplus within the next two EIA Weekly Storage Reports, potentially prompting renewed downward pressure from bears. Technical support for gas just above $2.50/MMBtu has remained resolute in recent years and may continue to hold in the near-term absent an additional significant bearish catalyst.