Oil prices soared and broke on concerns of tropical storms and a major hurricane, but sold off after a downgrade of Hurricane Florence. Still, the market must come to grips with more tropical storms as well as contradictions when it comes to supply and demand. We have a storm that may cause more demand destruction than risk to supply and oil rallied. The Energy Information Administration (EIA) reported that U.S. oil supplies fell by 5.296 million barrels, hitting the lowest level since February of 2015, below the 400 million barrels mark, yet the International Energy Agency (IEA) said global oil production hit a record 100 million barrels a day in August. It seems that increased OPEC production offset declines in Venezuela, Iran and the U.S. shale patch. The U.S. is now the world biggest oil producer and the IEA says that they are counting on "relentless growth led by record output from the U.S.A’s shale patch to raise NON-OPEC output after the EIA is reducing its forecast for U.S. shale due to bottlenecks. There are warnings from some that demand for oil is waning yet refining demand for oil is at record highs. Is your head spinning faster than the Hurricanes? That’s ok, because if you’re a long-term trader, just set it and forget it with a long-term bullish position.
The IEA is counting on shale to increase Non-OPEC production by 2 million bpd in 2018 and 1.8 million bpd in in 2019 but is that making you comfortable? John Kemp at Reuters wrote that “ U.S. oil production is running into capacity constraints, which are starting to have a material impact on the global availability of crude, causing the market to tighten and putting upward pressure on prices. He writes that the biggest problem is the lack of enough pipeline capacity to move oil from shale wells in western Texas and eastern New Mexico to refineries in the Midwest and export terminals on the Gulf Coast. He also says that production in the Permian Basin has also been constrained by shortages of labor, equipment and materials, which have pushed drilling, pressure pumping and completion costs sharply higher.
What Mr. Kemp is writing about is something the Energy Report has been warning about for some time. While today global supply versus demand is in a delicate balance, we feel that we are headed towards a deficit maybe as early as next year. While our target on oil for this year remains at $84 a barrel in 2019 you should be able to add $10 a barrel to that price.
Meanwhile back in the U.S., refiners are doing everything they can to get distillates supplies out of the hole. They smoked as crude oil refinery inputs averaged a near record 17.9 million barrels per day during this week, more than 210,000 barrels per day more than the previous, operating at 97.6% of capacity. That lead to a 6.2 million barrels increase for distillate supply but still about 3% below the five-year average for this time of year. Gasoline production increased last week, averaging 10.4 million barrels per day. Distillate fuel production increased last week, averaging 5.5 million barrels per day. The Refiners are amazing!
U.S. oil exports surged by 320k bpd to 1.8M bpd, a number that should continue to grow as the Brent Crude premium. Hurricane Gordon shut in at least 100k bpd of Gulf Of Mexico production last week and now with more storms impacting the area US output may not bounce back for a while.