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June 1, 2019

EIA Oil Market Analysis – Bearish Fundamentals Emerging in Year Over Year Comps


By EconMatters


Introduction

In our past EIA reports this year, we referenced the fact that the inventory data wasn`t matching up to price expectations and the overall bullish sentiment conveyed by energy markets. We further stated that the data was going to have to improve or oil markets were headed for some repricing regarding bullish positioning. Subsequently after the last 6 weeks of EIA reports, and lack of a China Trade Deal, we are experiencing just that repricing in the oil markets. WTI has pulled back around 10 dollars a barrel over the last 5 weeks, with Brent pulling back almost 9 dollars per barrel. WTI is currently trading around $56.50 a barrel after the latest EIA report on Thursday and looking for support levels.

I might add that weak reports into June are not uncommon, but given the determined emphasis of OPEC and Saudi Arabia in reducing oil exports to the United States, we should have been experiencing much better EIA reports with increased drawdowns during this period if oil markets were as tight as market sentiment believed. Thus, we need to start having some large drawdowns in late June, July and August or the Oil market is going to experience continued weakness going forward. A couple of takeaways right now are that global oil demand isn`t as strong as anticipated from a global growth perspective, and the growth in US Shale production year over year, means that despite OPEC cuts, there is just too much oil sloshing around the world right now. Furthermore, the Oil Market covered by the EIA Petroleum Report is not in a net deficit for the first two quarters of 2019. If anything, the EIA Oil internals point to the Oil markets being in a surplus, as the most transparent oil market in the world, the focus of OPEC cuts, has noticeably worse internals year over year.

Oil Inventories

Let us look at the internals of the latest EIA Petroleum Report published on May 30th in which oil inventories fell 0.3 million barrels, basically flat after having previous reports coming in with larger than expected inventory builds. We currently stand at 477 million barrels in storage facilities in the United States and are in a definable uptrend for this metric. A year ago, we stood at 435 million barrels in storage, so this year we are over 9 percent higher in oil inventories. Most of the increase is occurring in the Midwest (PADD 2) and Gulf Coast (PADD 3) storage facilities. In the Midwest Cushing, Oklahoma is responsible for 13 million barrels of the nearly 19 million barrels surplus for the PADD 2 region. And along the Gulf Coast there is about 26 million more barrels in storage facilities year over year. Thus, this region which is responsible for oil production and refining and exporting of both oil and products through this logistics supply chain is literally backing up with excess oil so far this year. And I am sure the Trump Trade War with China isn`t helping this situation as well.

Oil Production

In checking out the Oil Production numbers, if we take the 4-week averages for data smoothing purposes we are hanging in there at a robust 12.2 million barrels per day over the last 6 weeks. By comparison this metric stood at 10.7 million barrels per day of oil production in the United States a year ago. Thus, despite the OPEC cuts, the increase in US production, seems to be the cause for the rising oil inventory levels here in the Midwest, and the export market isn`t robust enough currently to offset this increase in US oil production. The real question here is would this be different if a Trade Deal with China happened in early January regarding the export’s component.

Oil Imports & Refinery Inputs

If we examine the Oil Imports numbers, the 4-week averages are declining from 7.2 towards the 7.0 level over the last 3 EIA reports, and stood at 7.7 million barrels a year ago for this metric. Overall, we can see the effects of the OPEC cuts with about an 8 percent reduction in oil imports year over year. Thus, these Oil internals would look a lot worse if it wasn`t for OPEC reducing exports to the United States. In reference to the Refinery Inputs number we are slightly down based upon the 4-week averages at 16.6 million barrels per day, versus 16.7 a year ago.

Gasoline Inventories

Now let us look at the Gasoline metrics, overall gasoline inventories rose 2.2 million barrels for the week and stand at 231 million barrels in storage. This is around 3 million barrels less than last year currently and represents the strongest part of the energy market this year in terms of tightness. However, this metric has been coming in recently suggesting that even this market is softening right now. We stand around 2 percent tighter than a year ago in gasoline stocks, but were much tighter 6 weeks ago based upon the year over year comps, and overall gasoline sentiment by traders in the products market. The Gulf Coast (PADD 3) has about 6 million more barrels in storage versus a year ago, but the East Coast (PADD 1) is starting to build as well. Since this metric has been the strongest in the energy space this year, we will watch this carefully for signaling purposes going forward.

Gasoline Production & Demand

The Gasoline Production numbers are slightly down year over year, about 2 percent lower at 9.95 versus 10.2 million barrels per day in examining the 4-week averages for this metric. The Gasoline Demand number is softer as well coming in at 9.5 million barrels per day versus 9.7 a year ago based upon the 4-week averages for this metric. But overall, gasoline demand is basically in line from a fundamentals standpoint if we compare the trends of the seasonal pickup in demand over the last two years. Thus, we didn`t collapse into recessionary levels amid a China Trade War, and slowing macro-economic data points, but we also didn`t explode higher as a result of the robust 3.1 percent GDP for the first quarter of 2019. I think the Gasoline numbers looked a little better this year due to overall run rates, some export needs, and overall refining strategy more so than increased underlying demand fundamentals in the marketplace.

Distillates Inventories, Production & Demand

We now move to the Distillates Market where inventories declined by 1.6 million barrels for the week and stand at 125 million barrels in storage. This rounds to a 10 million barrels increase in inventories year over year and represents a 9 percent increase in overall supplies. We stood at a rounded 115 million barrels in storage this time last year, and currently we have 125 million barrels of Distillates in storage facilities in the United States. Total Distillate Production came in at 5.19 for the 4-week averages and is slightly higher than this time last year at 5.06, but the weekly Distillates production numbers for the last 3 weeks are right in line with last year. There is some variability with the data which is why I compare both the weekly and 4-week averages to examine whether some noticeable divergence is occurring in the comps. At this point the data is basically in line with year ago levels. In examining Distillate Demand we come in at 4.02 based upon the 4-week averages for this metric, and a year ago we stood at 4.12 for this number. In referencing both the 4-week averages and the weekly data for the last 3 reports Distillate Demand is coming in slightly lower than year ago levels, and points to some softness in the market. We will continue to follow this metric as the Trade flow data regarding Freight and container shipments has shown weakness, much of it attributed to the effects of the China Trade War.

Conclusion

It is worth noting that Bond Yields are falling on the long end as oil is breaking down signaling deflation concerns as a result of global macroeconomic weakness which could further effect oil demand in the future. There are still a lot of Geopolitical concerns regarding Iran, Venezuela and Libya and supply disruptions can come out of nowhere like the Canadian wildfires several years ago, but as the last 5 weeks has illustrated some of the bullish sentiment has been taken out of the market. We have had a decline in Oil Rigs but US Production has held firm so far, and a Trade Deal is still possible over the next 6 months, and there are reports that US Shale producers are struggling from a profitability standpoint, so as usual there are a lot of moving pieces to the oil market. But if Oil demand growth starts decelerating due to global macroeconomic weakness, and the Trade War intensifies with China this will put further pressure on the oil market. However, we are entering the strongest part of the oil market from a seasonal demand standpoint with an increase in refining utilization rates due to the robust summer driving season so much will be learned about the fundamentals over the next 4 months. But we need to start drawing down Oil Stocks over this 4-month period. Otherwise, things will get worse before they get better in the oil market.

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Item Reviewed: EIA Oil Market Analysis – Bearish Fundamentals Emerging in Year Over Year Comps Rating: 5 Reviewed By: EconMatters