Despite predictions of new supply overwhelming a oversupplied market, the reality may actually be the opposite. New supply from the start of the Plains All American Pipeline’s Cactus II, a 670,000 barrel a day pipeline, connecting the Permian Basin to Corpus Christi, Texas, and from there to the world, has already been priced in with spreads and backwardation in the crude curve, suggesting a market that is tightening.

Demand numbers in the U.S. are stellar and if we keep this up, oil will rally, trade war or no trade war. In fact, U.S. oil supply, more than likely, will fall below the average range for this time of year as U.S. demand hangs around record highs. Despite all this talk of inverted yield curves and recession, global oil demand is defying the negativity. 

OPEC is predicting stronger than expected demand but because of their overachieving cuts, that they say are at 159% compliance, they now predict a drop in global oil inventories in the second half of the year. The Joint Ministerial Monitoring Committee (JMMC) of OPEC and non-OPEC said compliance to cuts increased by 22 percentage points higher than in June. The committee said, “This high level of overall conformity has offset uncertainty in the market due to ongoing economic growth worries.”

U.S. supply data seems to be backing their case. The American Petroleum Institute (API) reported a massive 11.1 million-barrel crude oil supply drop. If this is confirmed by the EIA, it will drive U.S. supply below average for this time of year. Even as we head into maintenance season, the outlook for U.S. supply looks to me to be on a steep downward trajectory. New supply from the Cactus pipeline will be needed as OPEC cuts take their toll.

Oil demand will exceed expectations because demand will get a bump from global economic stimulus. OPEC is already seeing it as they said they have seen, “ongoing healthy oil demand so far.” So, what happens when the world gets prepared for a demand drop that does not happen? Oil prices spike. The API also reported a 300K drop in gasoline supply and a very large 2.5M drop in distillate supply as farmers are getting started on harvest. Looks like OPEC cuts are starting to take their toll and predictions made by OPEC saying they expect big draws into the end of the year are coming true.

In fact, as we have said before, the yield curve inversions are bullish for oil, not bearish. The last few times there was a major yield curve inversion, it sent oil higher anywhere from 80% to 140%. U.S. demand will remain strong as consumers remain very confident, despite many trying to talk us into a recession. The oil market is actually predicting a strong market and tightening supply.

Natural gas is hanging on. Andy Weissman of EBW analytic group say that, “the expiring September natural gas contract rose 5.0¢ since Friday as record LNG feed gas demand, a deal to begin flows to Mexico on the stalled 2.6 Bcf/d Sur de Texas pipeline, and a bullish weather shift combined to lift futures.” He says that, “in the immediate term, the restoration of southbound flows on the TETCO pipeline and demand limits caused by the Labor Day holiday threaten price weakness. Further landmines await the market in September, including the Gulf Coast Express bolstering supply and questions over the strength of LNG exports. .Speculator net short positioning declined last week for the first time since early July. Weakening appetite to short natural gas may limit any declines.”

Once again, the U.S. must worry about a hurricane going into the Labor Day Holiday. Fox News reports that Puerto Rico prepares for tropical storm Dorian’s wrath. Puerto Rico is bracing for a possible direct hit from Tropical Storm Dorian on Wednesday as forecasters say it has shifted in its path and could strengthen into a hurricane. The storm is expected to pass over or near western and central Puerto Rico, with landslides, widespread flooding and power outages possible. President Trump declared an emergency Tuesday night and ordered federal assistance for local authorities.
Thanks,
Phil Flynn

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