Market Currents: Groundhog Day again for oil

Yes, it’s Groundhog Day again, and that dastardly Punxsutawney Phil has seen his shadow, predicting six more weeks of winter. Fortunately, he’s no good at forecasting (unlike the woolly worm), hence little attention should be paid.

The crude complex is also seemingly stuck in Groundhog Day, weighing up OPEC production cuts versus the renaissance of U.S. shale production. After yesterday’s rally, today we reverse. Hark, here are five things to consider in oil markets today.

1) The chart below highlights how the U.S. trade deficit with Latin America has moved to a surplus, as product exports ramp up to Latin America, while U.S. crude imports from countries such as Mexico drop off.

We highlighted here last week how U.S. imports of Mexican crude – which is predominantly heavy Maya – have dropped off on both an absolute and percentage basis. Imports of Mexican crude dropped by over a hundred thousand barrels per day in 2016 to 575,000 bpd, with the U.S. share of Mexican crude exports dropping from 60 percent to 48 percent.

US trade surplus with Latin America.jpg

In terms of product exports, the combination of gasoline and middle distillate exports are up 28 percent in 2016 versus the prior year, almost running neck-and-neck with crude export volumes.

Gasoline and middle distillate exports to Mexico.jpg2) Staying on the topic of gasoline, yesterday’s inventory report yielded a 3.9 million barrel build to gasoline inventories, lifting them to 257mn bbls, less than 2mn bbls away from their all-time record. As refinery runs continue to hold above last year’s levels, gasoline inventories continue to swell, amid seemingly stymied demand.

gasoline invs 013117.jpg

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3) While implied demand for gasoline rebounded in yesterday’s report, it has still been kicking close to January 2013’s low of 7.996mn bpd, in itself a 12-year low. We here at the good ship ClipperData (aharrrgh, me hearties!) have run our own projection using our import and export data; we believe the EIA is significantly underestimating demand.

This makes sense from a logical perspective: it seems counterintuitive that gasoline demand would be close to 16-year lows, when it has been a warm winter, gasoline prices are relatively low (hark, $2.28/gal on the national average), while the unemployment rate is close to 9-year lows.

This is further affirmed by the latest monthly data out from the EIA. As John Kemp (@JKempEnergy) highlights in the chart below, U.S. gasoline consumption averaged 9.2mn bpd in November, the highest for the time of year since 2006, up 1.4 percent YoY.

Implied gasoline consumption.png

4) Compared to gasoline inventories, oil stocks appear a million miles away from last year’s record high, but in reality, it is only about 17 million barrels away. Last year, we rose by double this amount over February and March, while in 2015 we rose over three times this number.

It would appear that even record refinery runs this spring cannot save us from uncharted territory on the crude inventory front, especially in conjunction with rising U.S. production.

US crude inventories 020117.jpg

5) The chart below highlights how reliant Iraq is on crude: it accounts for some 86 percent of its expected revenue this year. Hence, as a travel ban has been put on Iraqis to the U.S., fears of reciprocation have been stoked among the International Oil Companies (IOCs) that have international workers in Iraq.

With Iraqi production already on the move lower due to OPEC’s coordinated production cuts, operational issues due to worker issues could further cramp crude output.

iraq oil revenue.jpg

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