Power Sharing
Crude oil prices are conflicted after a potential Libyan deal to share power from rival factions drove prices close to yearly lows against some strong signs that U.S. oil and petroleum supplies may have peaked out. Petro market prices came into session yesterday in a weak technical position as talk of more supply out of Libya and a report that seemed to suggest a drop in OPEC compliance last month drove the bearish market mood. Weak gasoline and distillate demand fears intensified as rainy weather kept drivers home and farmers out of their fields.
Reuters News reported that while OPEC total production in April fell, the overall compliance rate fell to 90% as Algeria and the UAE raised oil output. The Reuters survey said OPEC April production averaged 31.97 million bpd, about 220,000 bpd above its supply target adjusted to remove Indonesia. Reuters has consistently given the OPEC cartel the weakest grades on compliance but with talk of an increase in Libyan oil output, it added to the downside pressure.
Yet what really accelerated the downside move was a report that rival factions in Libya agreed to work together to try bringing stability to the country. Bloomberg News reported that Libyan Prime Minister Fayez al-Serra and rival eastern commander Khalifa Haftar agreed to set up a power sharing Presidential Council, Arabiya television reported. The parties pledged to dismantle armed militias and work together to fight ISIS terror groups and to hold elections in 6 months.
The markets seemed to welcome the deal raising hopes that recent increases in Libyan oil production and imports can be maintained and possibly expanded. Of course power sharing agreements are easier made than carried out so based on past performance and the instability in the region, the deal should be viewed with a bit of skepticism and caution.
But crude oil may mount a comeback as it bounced off some key support and received some bullish data from the American Petroleum Institute (API). The API reported a 4.2 million barrel drop in U.S. crude oil supply. The number came in at our target but was a much bigger drop than the street was looking for. It may signal a top in U.S. oil supply that should start feeling the drop in falling global oil output and rising demand.
The oil products also fell catching the trade by surprise. The API data showed a drop of 1.9 million barrels in gasoline supplies while inventories of distillates were down 436,000 barrels. That offset concerns of weak product demand. If confirmed by the Energy Information Administration at 9.30 am central time today, it will make a strong case for potential market bottom across the entire petroleum sector.
The natural gas market was weak due to shoulder season and temperature forecasts offsetting strong current demand. Andrew Weissman ECB Analytics showed a 50 Bcf increase in near term weather driven demand this week. Looking forward, the fundamental outlook suggests the front month contract may be poised for significant gains in the 30-45-day period. Weissman says that:
The natural gas inventory surplus vs. the five-year average is likely to decline steadily in the weeks ahead and traders could increasingly focus on weather vendors calling for moderately above normal summer heat. Further, potential draw-downs in salt storage facilities this summer may slim national injections, adding to upside price risk.
EIA’s February production figures suggest higher than consensus natural gas supply growth due to a surge in associated gas production. Prices could reach the mid-$3.60s/MMBtu this summer in our most-likely scenario—12% above the current NYMEX strip. Above-normal cooling demand could push summer electricity prices higher.