Crude: The drawdown derby

May 10, 2017 08:27 AM
Daily Energy Market Analysis

And they're off! Crude oil prices are trying to recover after the American Petroleum institute (API) reported a significant 5.79 million-barrel drop in U.S. crude oil supply--the biggest draw since December 2016. This comes after a reported a 4.2 million-barrel drop a week ago.

The Energy Information Administration (EIA) only reported a 999,000 barrel drop a week ago so it is possible that the EIA drop this week could be even a larger draw as it plays catch up to the API. If that is the case, a big drop in U.S. inventory may change the perception of an everlasting oil glut and be a strong sign that the market is indeed on the road to being in balance. Even as China economic worries weigh on the market, some Fed talk and a weaker dollar are helping the bull oil case as well as signs that OPEC and non-OPEC are committed to getting the oil market back in balance.

The Saudis are demonstrating that commitment this morning after Reuters reported that Saudi Arabia would cut crude supplies to Asia. This comes one day after Saudi Arabia's energy minister, Khalid al-Falih, said he would do whatever it takes to get this market in balance.

That may be harder if China goes into an economic hard landing. Traders, in general, are worried that China may see a slowdown in appetite for a cut in supply to Asia as a sign of confidence that the Kingdom does not fear losing market share to the United States or even Russia at this point.

This comes after the EIA boosted its outlook for U.S. oil production growth in its Short-Term Energy Outlook. The report states  that the "increased drilling rig activity is expected to boost U.S. crude oil production this year and next, with forecast production in 2018 averaging 10 million barrels per day.” “Higher oil production from the United States, along with rising oil output from Canada and Brazil, is expected to curb upward pressure on global oil prices through the end of 2018.” That is in contrast to the International Energy Agency that warns of tighter supply due to the lack of oil discoveries and under-investment.

The API did show a 3.17-million-barrel build in gasoline supply. That may weigh on bullish sentiment as we usually start to see drawdowns now at this time of year. Still, with the changing dynamic of the market, it may not be as ominous as some people would have you believe. Crummy weather is probably hurting demand and when we start to see signs of summer, we should see some pent-up demand kick in. Distillate inventory fell by 1.17 million barrels.

For gas and refined products, the EIA said, “The recent decline in crude oil prices and rising gasoline inventories are cutting into pump prices, lowering the average price U.S. drivers are expected to pay for gasoline this summer.” “U.S. gasoline inventories rose in April, a month when they normally fall.” “Because of higher overall pump prices this year, the average U.S. household is expected to spend about $150 more for gasoline during 2017 than last year." 

However, gasoline expenditures are still expected to be lower than the average for the previous five years. U.S. industrial production growth, rising rail traffic, and higher drilling rig activity are pushing up distillate fuel use.

More news from the EIA. The 12-month moving average domestic gas consumption, coupled with exports at the end of last year, began to outpace the average supply of US gas from production and imports, a trend EIA expects to continue through 2017. That trend, EIA said, will put "modest upward pressure on prices."

The agency, in its May Short-Term Energy Outlook, raised its forecast for second-quarter Henry Hub natural gas spot prices 12 cents to $3.16/MMBtu. The Q3 forecast also edged up to $3.21/MMBtu, 15 cents above EIA's April estimate.The agency put prices for full-year 2017 at an average $3.17/MMBtu, up 7 cents from the prior month's estimate.

Prices averaged $2.51/MMBtu in 2016. Natural Gas: “U.S. marketed natural gas production is expected to increase almost 5% next year.” Electricity: “U.S. electricity generation is expected to be flat this year and then increase in 2018, with natural gas-fired generating facilities accounting for the biggest share of electricity supplies during both years.”Coal: “U.S. coal production is expected to rise 5% this year and about 1% in 2018 on higher coal-fired electricity generation, which would be the first back-to-back annual increase in coal output since 2010-11.”Renewables:  “The amount of U.S. wind power generation capacity is expected to top 100 gigawatts by the end of next year when it would account for 9% of the electric power sector’s total generation capacity, and provide more than 6% of total electricity supplies.”  

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.