The crude oil market crash impacted the mood across the spectrum shaking confidence yesterday about asset classes across the board. Oil crashed below $70.00 based on rising US production and slowing economic fears and the magnitude of the move negatively impacted commodities across the board from stocks, and grains to sugar and even metals
Yet data from the Energy Information Administration (EIA) that when you take it in its entirety, was not so bearish and while there is no doubt that demand is down, unless it stays that way, the global supply and demand balance is still way too tight. If OPEC Plus follows through with cuts and if the weekly drop in US oil production begins to trend, we still should face a supply versus demand deficit. The key question becomes: is the global oil demand drop entrenched or is it, to borrow a Fed-worn, transitory?
The other question is can OPEC comply as some producers fear losing market share. Saudi Arabia Prince Bin-Salman and Vladimir Putin meeting today tried to rally the OPEC troops. Putin and Saudi Arabia urge all OPEC+ powers to join oil cuts. Not exactly a vote of confidence.
The EIA shows that U.S. crude oil is about 1% below the five-year average for this time of year but of course would be much more than that if you included the SPR draw. Total motor gasoline is about 1% below the five-year average and distillate fuel inventories increased by 1.3 million barrels last week and are about 13% below the five-year average for this time of year. Yet demand is also down year over year based on a 4-week average of 2.1% from the same period last year.
We also saw a drop in Chinese oil imports that could signal weakening demand but also was impacted by a Chinese holiday and a drop in Venezuelan oil imports as the lifting of sanctions by the Biden administration diverted those heavy barrels of oil into the US.
And while the market structure is signaling more bearishness, contango has set in giving the perception that oil demand has crashed. Part of the contango might be explained as the market in Cushing, Oklahoma normalizing after being drained after SPR barrels that the market was addicted to stop.
John Kemp at Reuters pointed out that crude inventories at Cushing have risen for seven consecutive weeks by a total of +9 million barrels since October 13. Supply was -14 million barrels (-33% or -1.01 standard deviations) below the prior ten-year seasonal average on December 1 but the deficit had narrowed from -21 million barrels (-50% or -1.42 standard deviations) on October 27.
The progressive normalization of Cushing inventories has been accompanied by a sharp decline in calendar spreads for the NYMEX WTI futures contract with the three-month spread falling into a contango of 21 cents per barrel on December 1 down from a backwardation of more than $4 in late September and early October.
Oil Price reported that Chinese crude oil imports dropped by 9.2% year-over-year in November, marking the first annual decline in crude arrivals since April, and potentially signaling weakening demand. They wrote that China imported 10.33 million barrels per day (bpd) of crude oil last month, down from October’s imports by more than 1 million bpd, per data from the General Administration of Customs released on Thursday. The Chinese crude arrivals in November were the lowest since July this year and saw the first year-on-year decline since April.
Oil Price also reported that, “In October, stronger fuel demand due to a week-long holiday and a fresh batch of oil import quotas boosted China’s crude oil imports by 13.5% year-over-year. But in November, reduced imports from the independent refiners, the so-called ‘teapots’, and the struggling Chinese manufacturing and property sectors led to a decline in crude oil imports compared to both the previous month and the same month of last year, when Covid restrictions were still in place. China’s independent refiners, the biggest customers of Venezuela’s crude before the U.S. sanctions relief, are said to be holding back fresh purchases of oil from the Latin American country due to unpredictable discounts on cargoes after international majors returned to Venezuelan trades.
Oil and products are still looking ugly but should be found soon. As oil overshot on the upside it is now overshooting on the downside and we should be close to capitulation if we are not already there. After 5 days of selling the dead cat should bounce. Still, we better see demand pick up as we head out of shoulder season or if not, sit back and enjoy your recession.
Natural Gas is all dressed up but there is no place to go. Record-breaking US natural production with LNG export capacity increases a few years off if keeping a lid on prices. The EIA says that the record production is because associated gas production has tripled since 2018 in the top three Permian oil plays. The EIA says that production of associated-dissolved natural gas, or associated natural gas, which is natural gas produced from predominantly oil wells, has nearly tripled since 2018 in the three top-producing tight oil plays in the Permian region.
Associated natural gas from the Wolfcamp, Spraberry, and Bone Spring plays averaged a combined 13.7 billion cubic feet per day (Bcf/d) in the first seven months of 2023, up from an average of 4.7 Bcf/d in 2018, according to data from Enverus DrillingInfo. Associated natural gas production has grown due to increases in both crude oil production and the volume of natural gas per barrel of oil that a well produces, the gas-to-oil ratio (GOR), among the oil wells in these three plays.