The oil market is struggling as the whisper number on weekly oil inventories are seeming to get bigger. Tonight we get the American Petroleum Institute report, which was delayed by the holiday and now is expected to show, according to whispers, a massive increase in supply.
The base case for this build is the fact that U.S. refinery runs are still at an extremely low rate and U.S. imports and an expected release from the Strategic Petroleum Reserves has some estimates of the builds being as high as 11.0 million barrels. While that may not happen, hedge funds that are carrying a heavy short position into inventories better hope they are right because if they are not, we should get a huge short covering rally. There is also November crude oil option expiration and the skew is reportedly leaning heavily on the short side which also could flip if the supply number does not live up to whispering expectations. Yet regardless of whether the talk in the whispering winds comes through, the reality is that even if crude oil drops, it may only have a dollar or 2 to go. We should start to then focus on depleted distillate fuels and the fact that refiners will not stay down for ever. This week’s expected big build should soon be a distant memory as we look out ahead, the crude draws should be equally massive. Faltering U.S. Permian production along with falling output from OPEC should signal that U.S. inventories should peak today for the year.
Slowing global economic concerns has OPEC already planning an additional production cut. According to Bloomberg News they may have to. They point out that,
”The IMF also cut its forecast for economic growth next year, cutting it to 3.4% from 3.5%. Oil demand growth estimates for 2020 are already following the pattern set by this year’s figures. The IEA, EIA and OPEC now all see weaker oil demand growth next year than they did in the summer.”
Bloomberg also is pointing out that,
“Oil tanker rates have gone into reverse for the first time since late last month as refiners hold off on spot purchases and consider run cuts due to the surge in transport costs. The pain from skyrocketing costs for oil supertankers may be shifting to American shale drillers as refiners begin to reduce operations.”
That means that there may be even bigger draws on U.S. crude supply. Not only will U.S. refiners want more, but buyers that need lighter grades of crude will be more dependent on the U.S. as Saudi grades on exports are also getting heavier due to oil processing issues.
Lost in all of the macro-economic fear trade is the fact that geo-political risk remains high. Iran’s President Hassan Rouhani is threatening to retaliate against the country. Not the individual that was responsible for a missile attack on its oil tanker. Who that is, they are not saying.
Another concern is China. Reuters is reporting that, "the White House is warning Chinese shipping companies against turning off their ships’ transponders to hide Iranian oil shipments in violation of U.S. sanctions, two senior administration officials said." Reuters reports, “On Sept. 25, the U.S. imposed sanctions on five Chinese individuals and two Chinese COSCO Shipping Corp subsidiaries, saying they had shipped Iranian crude oil in violation of the sanctions. “
What does California and South Africa have in common? Rolling blackouts! The FT reports that the power utility Eskom struggles to deal with plant breakdowns and debt crisis. Sound familiar?
A chilling outlook for natural gas. Andrew Weisman reports that a cooler weather outlook is adding 15 gHDDs and 28 Bcf of demand and prompted the November natural gas contract to stage a 12.5¢ rally early this week. Amid speculator net short positioning, bullish surprises can elicit short-covering and sustain upward momentum. The well-timed weather forecast shift also confirmed support at $2.19/MMBtu and has aligned technical to carry prices higher. While the November gas contract rally could continue near term, a surging year-over-year storage surplus and the first surplus vs. the five-year average in two years may yield declines within the 30-45 day window. Notably, LNG exports reached a new record high on Monday, eclipsing 7.0 Bcf/d.