The Phil Flynn Energy Report: March 05, 2020
THE SUSPENSE IS OVER
Yesterday, oil prices gave up gains as it appeared that talks between OPEC Plus and Russia had broken down over production cuts. The OPEC Joint Ministerial Monitoring Committee (JMMC) had recommended a production cut of 1.2 million barrels, but Russia was playing footsie. No, I am not talking about how they touched feet when meeting instead of shaking hands, but I am talking about the Russians saying they only wanted to agree to extend current production cuts. Yet when it seemed that no deal would be had, the Saudi Oil Minister, Khalid A. Al-Falih said that the group liked to keep us in suspense.
Well, according to reports, the suspense is over. Russia finally agreed to a cut. While it is not totally official, it is being reported that OPEC plus Russia and other co-conspirators, will cut production by a more than expected 1.5 million barrels a day. One million by OPEC and 500k by Russia. If reports are accurate and Russia plays ball, we should see positive action on oil.
Of course, the market reaction in the short term may be influenced by the stock market that has been whipsawing in the aftermath of the Fed Rate cut and coronavirus concerns. Lost in all the wild volatility was a report from the Energy Information Administration that generally would have been extremely bullish. U.S. oil production did hit a new all-time high of 13.1 million barrels. Yet there were also some very optimistic points on the demand side as well.
Total demand on the U.S. Petroleum System increased 1.9 million barrels per day (Mbpd )to set a record at 1.003 Mbpd. Domestic demand increased 1.39 Mbpd to 21.27 Mbpd, some 1.1 Mbpd below a record high. Export demand increased 0.5 Mbpd to 9.73 Mbpd to within 0.4 Mbpd of record highs.
U.S. crude oil exports set a new high for the year of 4.15 Mbpd, just shy of a record. A lot of that oil went to China. Reuters reported that “Chinese private refiner buys U.S. crude after Beijing allows tariff waivers: sources. “ A Chinese independent refinery has bought U.S. Mars crude for delivery in May, a sign that American crude exports to the world’s largest oil importer could pick up after the two countries closed a trade deal at the start of the year.
China has pledged to buy at least $52.4 billion worth of U.S. energy products over the next two years. That commitment can only be met through substantial increases in crude imports from the United States, the top global oil producer, according to traders and analysts. Beijing started granting tariff exemptions on U.S. goods from early March, while the U.S.-to-Asia arbitrage window has opened after freight rates dropped. This week, Panjin Haoye Chemical Co. bought Mars crude from Petro
China Co Ltd ADR (NYSE:PTR), three sources with knowledge of the matter said.
“Without the import tax waiver, the trade would have been impossible,” said one of the sources, adding that Petro
China is still marketing the rest of its 2-million-barrel Mars crude shipment. Calls to Panjin Haoye went unanswered. Petro
China did not immediately respond to a request seeking comment, according to Reuters.
Unless people start to stay home, gasoline supply is going to be tight. EIA reported another drop in gasoline supply, and it appears that the Long RBOB short Heat oil trade may be bottoming out. Strong gasoline demand and tight summertime supply should support the spread.
The EIA reported U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 800 thousand barrels from the previous week. At 444.1 million barrels, U.S. crude oil inventories are about 4% below the five-year average for this time of year. Total motor gasoline inventories decreased by 4.3 million barrels last week and are about 2% above the five year average for this time of year. Finished gasoline and blending components inventories both decreased last week. Distillate fuel inventories fell by 4.0 million barrels last week and are about 7% below the five year average for this time of year. Propane/propylene inventories decreased by 3.6 million barrels last week and are about 37% above the five year average for this time of year. Total commercial petroleum inventories fell last week by 11.9 million barrels.