Oil prices start in a risk-off mode as oil inventories rise, but gasoline supply plummets. Yet early reports that Yemen’s Houthis have launched a drone and missile attack on the Saudi Arabian capital may lend some support. It is too early to tell if there is any significant damage from the attack as repeated attacks on Riyadh have not amounted to much.

The American Petroleum Institute (API) reported that U.S. crude supply bounced back by 2.608 million barrels as imports picked up after hurricane Laura. Still, the build-in crude does not suggest that the overall trend of tightening the U.S. oil supply is over. As I have said before, hurricanes can cause wide fluctuations in data, and you have to account for that as you try to discern a trend.

Gasoline supplies tanked 6.892 million barrels as the refiners shut down, and demand reportedly was pretty good. Still, there are lingering concerns about overall demand, and a standard seasonal drop is exasperating those fears that we get this time of year. S&P Global Platts reported that, “Gasoline imports from Europe [to the U.S.] have fallen dramatically – by 43.2% – in 2020, according to Kpler. The data company estimated volumes at 45.05 Mb, compared with 79.37 Mb for the same eight months in 2019.”

Yet reports that big traders are booking tankers to store oil and products and broader concerns about the Saudi oil price cut, is keeping the weak demand story alive. Such is the curse of the September shoulder season. The FT reports that Saudi Arabia is not in favor of a more massive production cut in the future.

Yet after shoulder season, a cut may not be necessary as OPEC cheaters are finally getting in line. Compliance among the 19 countries participating in the OPEC-plus oil production cut rose to 103% in August, according to Energy Intelligence assessments. They say that, “However, the seven percentage point increase in compliance versus July is misleading as an indicator of global oil supply. That’s because the targeted production cuts were scaled back by 1.9 million barrels per day at the beginning of August to 7.7 million b/d, in line with the agreement announced by the Opec-plus alliance in April (IOD Apr.14’20).

The alliance’s combined output rose by 1.3 million b/d in August. Still, with oil prices drifting lower in recent days, some are now asking if OPEC-plus may have underestimated the enduring impact of the Covid-19 pandemic on global oil demand. Recent cuts in official selling prices by Saudi Arabia and the United Arab Emirates indicate that key producers are aware that some form of action is needed to narrow the gap between supply and demand.

The distillate supply also rose by 2.293 million barrels. Demand should pick up as harvest gets in gear, and more flights are starting to happen, but weak diesel demand is still the biggest problem for the complex and refineries.

For the overall trend in oil, it is being driven by fear sometimes over facts. The Wall Street Journal reports that, “An options-based gauge of how far traders anticipate oil prices will swing over the next 30 days, known as implied volatility, has jumped to its highest level since late June. It hit an annualized level of 51% Tuesday, according to option-pricing tool QuikStrike, before edging lower Wednesday. That is still well below the peak of 345% in April, when lockdowns and shelter-in-place restrictions threw energy markets into turmoil, and the major U.S. oil benchmark fell below $0 a barrel for the first time. But it is 21 percentage points higher than the average level of implied volatility in the final three months of 2019, the last full quarter before the pandemic.”

Yet for U.S. crude oil, the news is positive. Reuters reports that, “Early indications of U.S. crude oil exports to China show a surge in interest this month, putting September on track to be one of the strongest months recorded for Chinese purchases of American oil. Tentative U.S. crude cargo departures towards China currently sits at 840,000 barrels per day for the month, the second-highest volume on record, according to data intelligence firm Kpler, as cheap oil prices and the Washington-Beijing trade deal incentivizes purchases.

Yet demand in India is still struggling. SBC Global plats report that some refineries in Asia-Pacific, including India, Indonesia, Thailand, are reducing throughput on reimposed lockdowns or poor economics, but others gradually raise runs.

The natural gas market is looking more reliable as some weather-related demand should lend support. Janice Dean of Fox News reports that dry conditions and warm temperatures will be the ongoing situation across the West, although winds will calm down a bit. Smoke from the fires is spreading across the Central U.S.. Today marks the peak Hurricane season in the Atlantic with no imminent threats to the U.S..
Thanks,
Phil Flynn

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