The oil market got caught up in the mid-cycle blues. While the Fed did everything the market was expecting it to, the reality is that the way the market reacted after Federal Reserve Chairman Jerome Powell spoke, it seems it wanted more. The Fed Chair’s comments about this rate cut just being “essentially in the nature of a mid-cycle adjustment to policy” disappointed some who were thinking that the Fed was in an aggressive rate cutting posture. I don’t know how they got that idea, except from a slew of Fed speakers that seemed very concerned about stock market gyrations and a softening of a global economy. Now with U.S. economic data coming in solid, the Fed can try to reframe the mood as just a mid-cycle adjustment.

Yet after the market tanked after his statement on Mid cycle adjustment, Powell got blasted by President Trump as well as traders that wanted the fed to signal big cuts. Yet is poor Jerome really to blame? Maybe we should blame the investors that kept juicing up rate cut hopes or maybe we should just blame the calendar. It is very possible that the market’s reaction was more about the old “buy the rumor sell the fact” mentality. Stock hedge funds that were long had big profits and wanted to protect them so they could get paid their performance fee at the end of the month. When Mr. Powell did not sound like he was going rate cutting crazy, traders started to book profits and lock in winners for the month.

The Fed stock market sell off then impacted oil that had a solid close, only to fall in the aftermarket as traders reduced their month end portfolios. This happened despite very bullish data from the Energy Information Administration (EIA). Crude supply fell by a whopping 8.5 million barrels putting supply back to 436.5 million, right at the five-year average. Gasoline supply also fell by 1.8 million barrels and distillates by 900,000 barrels. Total commercial petroleum inventories also decreased last week by 10.1 million barrels.

This reflected very strong demand. Total products supplied over the last four-week period averaged 21.1 million barrels per day, up by 1.2% from the same period last year. Gasoline demand on a 4-week average came in at 9.6 million barrels a day, down 1.3% from a year ago and impacted by the tropical storm. Distillate fuel product supplied averaged 3.8 million barrels per day over the past four weeks, down by 2.9% from the same period last year. Jet fuel product supplied was up 3.3% compared with the same four-week period last year.

The EIA also put out an optimistic forecast for U.S. energy production, but also admits that their previous outlook may have been too high. The EIA says that crude oil production in each of the first five months of 2019 showed increases over their 2018 levels, with April 2019 establishing a new monthly record. Production grew the most in the Permian region and the U.S. Federal Gulf of Mexico (GOM). The U.S. Energy Information Administration (EIA) initially expected the decline in crude oil prices between October and December 2018 to slow U.S. crude oil production growth for the first half of 2019. However, several factors have contributed to increases in the U.S. production forecast. First, crude oil prices began rising in early 2019, partially offsetting the price drop seen at the end of 2018.

In addition, crude oil prices in Midland, Texas (which reflect crude oil prices in the Permian region), rose faster than the U.S. benchmark West Texas Intermediate (WTI), which is priced in Cushing, Oklahoma (a major storage and distribution hub). As a result, the price spread between Midland and Cushing narrowed, allowing producers in the Permian region to receive relatively better prices. Several projects have also come online in the GOM this year, boosting production. EIA forecasts U.S. production will grow through 2020 but anticipates growth will slow in 2020 as crude oil prices flatten. U.S. crude oil production averaged nearly 12.2 million barrels per day (b/d) in April 2019, an increase of 1.7 million b/d compared with April 2018.

Our base case for oil is that the low is in. We don’t fear the fed. A quarter point cut will juice up demand. The biggest known threat to the call is some type of waivers to buyers of Iranian crude. The U.S. did impose financial sanctions on Foreign Minister Mohammad Javad Zarif on Wednesday in an effort to further pressure Iran to end its belligerent activities in the Persian Gulf region, according to Fox News. Yet at the same time there are still back door talks and even some suggestion that the U.S. might work with the EU to ease some sanctions on Iran to keep Iran from violating the old nuclear pact. Iran sanction are taking a toll on Iranian oil exports. Reuters reports that Iran’s exports were down to as little as 100,000 barrels per day (bpd) in July, not even enough to fill two very large crude carriers (VLCCs), which carry around 2 million barrels each, according to an industry source who tracks oil flows. Refinitiv – which monitors shipments based on vessel-tracking, port and other data – also estimates Iran exported about 120,000 bpd in July, if shipments of condensate, a type of light crude are included. If these numbers are accurate, it would represent a major drop from at least 400,000 bpd exported in June, and an even more dramatic plunge from the 910,000 bpd Iran exported in April, the month before the U.S. waivers expired. Iran is capable of shipping far more, with the 2.6 million bpd it exported in April 2018, the month before U.S. President Donald Trump withdrew the United States from the multi-lateral deal with Tehran to limit its nuclear program indicative of the nation’s potential. The problem is that there are also numerous industry sources who believe Iran’s exports are substantially higher than what can be seen by ship-tracking data or confirmed by port officials.

Libya is having issues as well. Bloomberg reported that Libya’s oil production dropped to about 950,000 barrels a day, its lowest in five months, after an unidentified group closed a valve on a pipeline linking the country’s largest oil field to an export terminal on the Mediterranean. The Sharara field started shutting down at 10 p.m. on Tuesday, with Libya’s National Oil Corp. subsequently declaring force majeure on loading of the crude at Zawiya port. The deposit, which can pump about 300,000 barrels daily, is operated by a joint venture between the NOC and Total SA, Repsol SA, OMV AG and Equinor ASA. Staff has tried to reopen the valve but are being prevented by armed men, the NOC said in a statement. Negotiations are underway “in an effort to restart production as soon as possible,” it said. Force majeure is a legal status protecting a party from liability if it can’t fulfill a contract for reasons beyond its control. Sharara, which is in southwestern Libya, briefly stopped production about 11 days ago when a group shut a valve. The country’s current reduced output figure was confirmed by a person with knowledge of the situation who lacked authorization to speak to media and asked not to be identified.

Fox News reported that an explosion and fire at an Exxon Mobil oil refinery outside of Houston Wednesday left 37 people with minor burns, plant officials said. Exxon Mobil Baytown Area said a unit processing propane and propylene burst into flames late Wednesday morning at the Olefins plant, forcing the city to issue a shelter-in-place order, according to Fox 26. Black smoke from the fire could be seen for miles. The explosion happened shortly after 11 a.m. and was contained by the afternoon.  “Our first priority remains the safety of people, including our employees, contractors and the community,” Exxon Mobil Baytown Area said in a statement. “As a precaution, our industrial hygiene staff is conducting air quality monitoring at the site and at the fence line, and we are cooperating with regulatory agencies.”

Natural gas had its day in the sun. It was finally oversold enough to the point where it looked attractive to buy. Yet if we don’t see follow through, then we may fall back again. We also are on Tropical Storm watch again. Two disturbances in the Atlantic could create a tropical storm next week. It’s too early to tell if it will have an impact on production and early models have us pointing to another hit on demand.

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Thanks,
Phil Flynn

Headin’ up to San Francisco for the August Day Money Show, I’ve got my hushpuppies on, I guess I never was meant for Glitter rock and roll. And traders I do know, shouldn’t be missing this show. Come Monday it time to sign up for my Master’s Class! Also, will see you at the opening ceremonies and at the CME Group Show. 

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