Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Oil rallied strong yesterday after someone started to do math. Maybe, just maybe with near record demand in the U.S. and China, and OPEC’s 800,000 barrel a day production cut, along with 400,000 barrels from Russia, 325,000 barrels from Canada and a force majeure on exports from the 315,000-barrels-per-day oilfield in Libya, perhaps they are starting to figure out that the market globally will soon be undersupplied. The catalyst that had traders put pen to paper was a report that Saudi Arabia was getting ready to stick it to the USA, severely cutting supplies to major U.S. refineries. Bloomberg News reported that sources said that Saudi crude shipments to the U.S. next month could even test the 30-year low set in late 2017 of 582,000 barrels a day, down about 40 percent from the most recent three-month average, the same people said, asking not to be named as the information isn’t public. This is not a surprise to people who have been watching the situation carefully. Tanker trackers, like independent analyst Patrick Bourque, have already reported sharp drops in Saudi exports. Patrick say the real reason for the cuts is the Saudis desire to get back at President Trump for back tracking on Iranian oil sanctions.
Bloomberg says the export curbs, if fully implemented, will affect big U.S. refiners such as Valero Energy Corp., Phillips 66, Chevron Corp., Exxon Mobil Corp., and Marathon Petroleum Corp. forcing them to buy similar crude elsewhere, such as Mexico, Canada or Venezuela. They could also hit Motiva Enterprises LLC, the Saudi-owned company that operates the largest refinery in the U.S. Most of these refineries need the heavy Saudi oil that their refiners are set up to refine and need to rebuild supplies of distillate which are still about 8% below the five-year average. There is a real need to build products in January and the heavy oil that they need may be harder to find.
Venezuela can’t really rise to the occasion and Mexico has its own problems. Canada might have been able to help but because everyone is fighting against pipelines, they have had a hard time getting the oil out. This led to Alberta cutting production of heavy oil that we could use right now. Since Canada announced a cut, the spot price of Western Canada Select crude surged more than 70 per cent. The grade’s discount to the U.S. WTI has been cut in half to around $13 a barrel, the narrowest in more than a year. Other blends, including Edmonton Mixed Sweet and Syncrude, also are surging according to the Financial Post. So, remind me, why were they against the Keystone XL pipeline? I guess it was because they must like it when the Saudis decided to raise our gas and diesel prices. It sure did yesterday and both RBOB and Diesel futures rocked.
In Libya, the outrages continue. Reuters reports that Libya’s state-owned National Oil Corp said it was against paying a ransom to an armed group that halted crude production at El Shahara, the North African country’s largest oilfield. “Any attempt to pay a ransom to the armed militia, which shut down El Sharara, would set a dangerous precedent that would threaten the recovery of the Libyan economy,” NOC Chairman Mustafa Sanalla said in a statement on the company’s website. NOC, on Monday, declared force majeure on exports from the 315,000-barrels-per-day oilfield located in the south of the country. The field was seized over the weekend by a local militia group. So, if you add it all up the reduction in supply is significant and is very bullish unless you think that somehow the record demand will somehow evaporate.
And some do. Trade war and recession fears are becoming part of our daily market swings. Oil gave back some of yesterday’s gains after it was reported that China’s economy slowed as measured by retail sales and industrial production. The Chinese government reported that industrial production growth fell to 5.4 percent, below estimates. Retail sales also posted the weakest performance since May 2003, rising 8.1 percent from a year earlier. Yet, it is likely that this data may nudge China closer to a trade deal with the US. It also opens the door for more economic stimulus from China which will only add to their record oil import demand.
Natural gas is looking for a warm up. Market Watch reports that the Energy Information Administration reported Thursday that domestic supplies of natural gas fell by 77 billion cubic feet for the week ended Dec. 7. Analysts polled by S&P Global Platt’s had forecast a decline of 79 billion cubic feet, on average. Total stocks now stand at 2.914 trillion cubic feet, down 722 billion cubic feet from a year ago, and 723 billion below the five-year average, the government said. January natural gas NGF19, -4.41% traded at $4.225 per million British thermal units, up 8.8 cents, or 2.1%, from Wednesday’s settlement. It was trading at $4.276 before the supply data.
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