March 14, 2018 • Reprints
Rex Tillerson out as secretary of state, inflation is stable and OPEC cuts will remain in place, a bullish American Petroleum Institute report… Crude oil prices had some wild swings yesterday as the market whipsawed from one headline to the other. Oil was modestly higher but plunged after a report that Iran was thinking to raise output to pay off some Chinese investors.
Reading that headline and remembering that there was some disagreement between Iran and Saudi Arabia as to how high they wanted to see oil prices would make one think that was the beginning of the end of the OPEC/Non-OPEC oil cut accord. The headline though was misleading. While Iran did say that, it was not going to happen right away but well after the Current OPEC /Non-OPEC accord expires. In fact, Iran was sending an early signal that they would need some leeway to payoff investors down the road and the cartel should be aware of it.
In fact, Reuters is reporting that OPEC may move the goalposts when it comes to reducing global oil inventories. Instead of getting supply back to the five- year average, they may want to go below that target. OPEC cuts took oil from a record 3.1 billion barrels in July 2016. OECD stocks dropped to 2.851 billion barrels in December, falling 216 million barrels during 2017 and now stand just 52 million barrels above the five-year average.
Reuters writes that “But as the OECD inventory target has shifted, so has thinking in Saudi Arabia, the world’s biggest oil exporter that worked with Russia to forge the global pact on cutting supplies. Saudi Energy Minister Khalid al Falih says OPEC and its partners should look at metrics such as non-OECD inventories, oil in floating storage and crude in transit as they consider the future of the pact that is due to expire at the end of 2018.”
Those measures, however, are more difficult to monitor. Non-OECD oil demand has outstripped OECD consumption since 2014. But inventories in non-OECD nations tend to be held as strategic, not commercial assets, making them less transparent and less likely to shift with changes to demand or supply, according to Reuters.
Oil did rally initially after a benign and almost weak Consumer Price Index (CPI), reducing fears of more aggressive rate hikes by the Fed. The CPI came in at 2.21%, up from 2.07% the previous month. Year-over-year Core CPI (ex Food and Energy) came in at 1.85%, up from the previous month’s 1.82%. Yet, the bounce was short lived as the market started to fret about the firing of Tillerson.
It is kind of funny. Critics of the Trump Administration thought that the hiring of Rex Tillerson as Secretary of State was a bad idea, but now they say it is terrible that he was fired. For oil traders, the obvious question comes to mind is how this firing will impact the 2015 nuclear deal struck between Iran and six world powers: the U.S., UK, Russia, France, China, and Germany. President Donald Trump is on record as saying that he thinks it was a bad deal, but Rex Tillerson said he wanted to keep the deal in place. Now the energy markets are left wondering. Oil initially took this as bullish but later feared what this uncertainty could do to the economy and potential demand. Yet, if the Iran deal gets dropped by the U.S., it will be bullish for oil.
The API was bullish and is raising more questions about shale’s ability to replace traditional oil supply and allow producers to produce products like distillate. Strong winter demand caused a very large 4.258 million barrel drop in distillate supply. Distillate supply is tight globally. Shale oil does not yield a lot of distillate and that is a problem.
Oil was also bullish as overall supply rose just 1.156 million barrels and despite expectations that Cushing, Okla., supplies would build, they fell by 156,000 barrels. Gasoline supply also fell by 1.262 million barrels.
It is clear that U.S. refiners have a shale problem. Shale condensate is not what refiners want. Yet, Exxon Mobil is going to try to make the best of it. Reuters is reporting that a top Exxon Mobil Corp official confirmed a multi-billion-dollar plan under consideration to double U.S. light crude oil refining capacity along the U.S. Gulf Coast to take advantage of the nation’s growing shale oil production.
Exxon’s proposed project, which has not received a final investment decision, would be the first major expansion of gasoline and motor fuels production in the nation in six years. Exxon’s Beaumont, Texas refinery could become the nation’s largest by capacity when the work is complete in the next decade.
Today we want to see if EIA confirms API. If it does we should bound back from the low 60’s which is proving to be the lower end of the recent trading range. We expect that to hold and once refiners start to come out of maintenance prices should start to rally. We still have to be aware that the SPR may sell more oil.