August 16, 2018 • Reprints
Crude oil prices got slammed on fears surrounding the Turkish economy, ongoing concerns about China, and a big build in crude supply, but really a lot of what is driving the bus is the strong dollar. Not just the traditional inverse relationship that oil has with the dollar, but how this massive up move is impacting oil supply and demand. That was clear in yesterday’s Energy Information Administration (EIA) supply report.
While some people look at that incredible 6.8-million-barrel increase in crude supply, they may be tempted to believe it is about a weakening demand outlook. While you could make a case for slowing demand, the reality is that demand, at least by oil refiners, has never been better.
In fact, last week U.S. oil refiners ran at an astounding 98.1% of their operable capacity, running a record 18 million barrels of oil per day. That blew away expectations as it was clear that U.S. refiners were working overtime to meet global demand for diesel, as those supplies are above average. So, if refiner demand is at a record, why did crude supply build? One simple word: Imports.
U.S. crude oil imports averaged 9.0 million barrels per day last week, up by incredible 1,083,000 million barrels per day. That surge in U.S. imports is happening because U.S. refiners are taking advantage of the strong dollar to buy crude oil cheaply, in dollar terms, and refine it and export it to energy-starved countries. Refiners can buy a lot of barrels of oil with that strong dollar and with its increased purchasing power.
In fact, the refiners are working overtime to try to get distillate stocks back to normal, as the market is rewarding them for producing it to replace supplies that globally are still well below average. The Heat crack spread is a strong, $22.90 a barrel, a number that along with a strong dollar is an incentive for refiners to stay cranked up. The EIA reported that distillate fuel production increased last week, averaging 5.3 million barrels per day. Distillate fuel inventories increased by 3.6 million barrels last week and are still about 8% below the five-year average for this time of year. If demand is average or above average we will see prices start to rebound.
Gasoline demand that had been sputtering did bounce back last week, perhaps in response to slightly lower prices at the pump. So, despite the fact that gasoline production increased last week, averaging 10.2 million barrels per day, supplies of gas fell by 0.7 million barrels last week and are about 5% above the five-year average for this time of year. U.S. crude oil inventories are about 1% above the five-year average for this time of year, thanks to this massive build. Still, what was weird about the crude build, it seemed that in the Gulf Coast you would have seen supplies rise the most but that was not the case.
Meanwhile, overnight, many markets are trying to come back on news of low-level trade talks between the United States and China, and the fact that Turkey got a 1.8-billion-dollar bailout from Qatar and maybe because that relies on that yesterday’s selloff was exasperated by the fact that it was the Feast of the Assumption of Mary that is a holiday in many European countries. We think summer doldrums and irrational fears are overextending these gains and we think for most markets this should cause a reversal. Do like the refiners are doing and take advantage of markets that are getting too extreme.
Copper in a bear market. Really? In fact, if we get a U.S.-China trade deal, we will probably see copper shortages in a couple of years.
There will be a Natural gas report today. The Wall Street Journal says that U.S. government data due Thursday are likely to show stockpiles of natural gas last week rose by 29 billion cubic feet of gas — less than average for this time of year. In fact, it should be a record low injection. Summer is ending and so are the natural gas glory days on the upside.