As oil continued its price plunge in a President Donald Trump engineered sell-off, it appears that some members of OPEC feel like they have been hoodwinked. Apparently, Saudi Arabia and other OPEC members feel like President Trump misled them into raising oil production to create a short term over supplied market. President Trump signaled that he was going to have no mercy on Iran and told Saudi Arabia and OPEC that he was committed to get Iranian oil exports down to zero. Even some U.S. pipeline and oil producers were probably caught by surprise when the President granted waivers to 8 countries and did not follow through on his promise to get Iranian oil exports to zero. Many of these firms rushed completions of pipelines and tried to raise output to try to make up for the Iranian shortfall.
This comes as the market is finally starting to wake up to the fact that we could be facing a global distillate shortfall as those prices soared and kept oil from a total collapse. Yet, while the market seems a little concerned about an oversupplied market right now, oil futures in the backend of the curve rallied hard as the longer-term outlook for oil remains very tight. This comes as the Energy Information Agency (EIA) makes upward revision to U.S. oil production, putting the number at a new record high, which will be needed as refiners are going to have to produce record amounts of distillate to meet demand in a globally undersupplied market.
Hell hath no fury like an OPEC scorned. Based on some reports, Saudi Arabia is livid at the president for helping create this oil price crash. While Saudi Arabia is in no position to express its anger out in public, they may do so by cutting production very shortly. There are reports that the Saudi are going to start raising prices on Saudi crude and at the emergency OPEC meeting this weekend will lay the groundwork for production cuts in the area of 1.4 million barrels. Russia’s TASS news agency said that Russia and Saudi Arabia had started bilateral discussions over possible curbs to output in 2019. Reuters reported that separately, a top OPEC official from Iran, which has been angered by higher production in Saudi Arabia and Russia in response to Trump’s calls, said Riyadh and Moscow needed to cut output by 1 million barrels per day. “There is no other way for Saudi Arabia and Russia,” Hossein Kazempour Ardebili, who represents Iran on OPEC’s board of governors, told Reuters when asked whether producers needed to trim output in 2019.” This might provide some cover as the Saudis want to reverse the Trump price drop as it has cost the cartel billions of dollars.
Yet despite the drop in the front end, the backend of crude rallied. They are now signaling that a production cut next year will leave us undersupplied. Besides, as I wrote yesterday, crude oil may have led the oil products down, but the distillate market will lead us back up. The EIA reported that distillate fuel inventories decreased by 3.5 million barrels last week falling 6% below the five-year average yet demand was up 6.1% above a year ago. Javier Blass at Bloomberg wrote that: the diesel (or middle distillates markets) is on fire around the world. The chart is nearby time-spread for European gasoil, jumping to levels rarely seen in 10 years. The diesel-gasoline spread in the US is also on, or maybe you can say it's going bananas.
So, what about a slowdown in demand! Well I guess you can call it fake news. Despite talk of a slowdown in demand, it is flourishing. Reuters reported that - China’s crude oil imports in October rose to 40.80 million tons, data from the General Administration of Customs showed on Thursday. That is equal to 9.61 million barrels per day, an all-time high based on Reuters calculations using the data. The record volumes were a result of strong imports from China’s private refiners, known as teapots, who bought 8.22 million tons of crude during the month, the highest monthly amount since Beijing started issuing import quotas to the refiners in 2015, according to Emma Li, an analyst with Thomson Reuters Oil Research and Forecasts. So much for a China demand slowdown.
US demand as well is rocking. The EIA reported yesterday that total products supplied over the last four- week s in the US averaged 20.7 million barrels per day, up by 4.0% from the same period last year. The EIA reported that U.S. crude oil refinery inputs averaged 16.4 million barrels per day during the week which was 9,000 barrels per day less than the previous week’s average. Refineries operated at 90.0% of their operable capacity last week. Gasoline production decreased last week, averaging 9.7 million barrels per day. Distillate fuel production decreased last week, averaging 5.0 million barrels per day.
Oil in the front end is still weak but we should be bottoming soon. Users of diesel, please get hedged just in case. The potential is real for a major price spike especially if we get a cold winter.
The EIA working gas in storage was 3,143 Bcf as of Friday, October 26, 2018, according to EIA estimates. This represents a net increase of 48 Bcf from the previous week. Stocks were 623 Bcf less than last year at this time and 638 Bcf below the five-year average of 3,781 Bcf. At 3,143 Bcf, total working gas is below the five-year historical range.
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