Overcoming Incredible Builds
Oil prices are trying to overcome major historic product build based on optimism that the U.S.-China Trade Phase One deal will be another key turning point in the U.S. energy export revolution. Shale producers are looking at the deal with cautious optimism with the commitment to buy 50 billion in energy products over the next two years. While the breakdown of exactly what they are going to buy is unclear, it is welcome news for U.S. shale producers that have been fighting an uphill battle producing more but making less or losing money.
Still, the fact the U.S., according to the Energy Information Administration (EIA), hit 13 million barrels a day, another record for crude production shows that they still believe there will be a market. Still, stunning increases in gasoline and distillates kept oil bulls off balance.
Patrick DeHaan, head of petroleum analysis at GasBuddy, told MarketWatch that, "total U.S. gasoline stockpiles have never been this high so early in the year (258.3 million barrels), already 3 million barrels ahead of last year and far ahead of the10-year average of ~239 million barrels for the 2nd week of Jan.”
Distillates also had a blow-out increase of 8.2 million barrels last week but even with that historic increase, we are still 3% below the five-year average for this time of year. That is lowering the fear factor surrounding the IMO rules for diesel, but still, we are not out of the woods. The EIA report in their Short Term Energy Outlook that January 1, 2020, the International Maritime Organization (IMO) enacted Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL Convention), which lowers the maximum sulfur content of marine fuel oil used in ocean-going vessels from 3.5% of weight to 0.5%.
The EIA expects this regulation will encourage global refiners to increase refinery runs and maximize upgrading of high-sulfur heavy fuel oil into low-sulfur distillate fuel to create compliant bunker fuels. EIA forecasts that U.S. refinery runs will rise by 3% from 2019 to a record level of 17.5 million b/d in 2020, resulting in refinery utilization rates that average 93% in 2020. The EIA expects one of the most significant effects of the regulation will be on wholesale diesel margins, which will rise from an average of 43 cents per gallon (gal) in 2019 to a forecast peak of 53 cents/gal in March 2020 and an annual average of 50 cents/gal in 2020. EIA expects diesel margins to decline to 49 cents/gal in 2021. Rotten refining margins are also weighing on sentiment. Still, we think that crude is still in an uptrend and we are in a correction phase.
Natural gas got hit on warm weather forecasts. The EIA reported that dry natural gas production set a new record in 2019, averaging 92.0 billion cubic feet per day (Bcf/d). EIA forecasts dry natural gas production will rise to 94.7 Bcf/d in 2020 and then decline to 94.1 Bcf/d in 2021. Production in the Appalachian region drives the forecast as it shifts from growth in 2020 to declining production in 2021. EIA forecasts that Henry Hub natural gas spot prices will average $2.33 per million British thermal units (MMBtu) in 2020, down from $2.57/MMBtu in 2019. EIA expects that natural gas prices will then increase in 2021, reaching an annual average of $2.54/MMBtu.