Without Geopolitical Risk Oil Prices Fall On Supply Glut

Oil – Fundamental Analysis

Absent any new geopolitical risk premium, crude markets this week focused on supply-side concerns resulting in a steady stair-step lower. This was a continuation of the downtrend that started in the prior week on the Trump threat of 100% tariff increases on Chinese imports. Also, a large drop in US refinery utilization led to another weekly crude inventory gain. Prices would fall below $60/bl. and continue lower towards the week’s end. The US grade started the week as high as $60.17/bl. on Monday but never returned to above the critical $60.00/bl. mark. The low mark of $56.60/bl. was on Friday. The downturn continued to widen the technical area of 2-Standard Deviations from the 2-day Moving Average with the daily Lows straddling the lower limits. Brent followed a similar pattern, hitting its high of $63.95/bl. on Monday and its weekly low of $60.15 on Friday. Both grades settled much lower week-on-week. The WTI/Brent spread has tightened to ($4.05).  WTI prices haven’t been this low since May 1^st.

The continuing trade dispute between the US and China has added a dim outlook for global economic growth and, in turn, the outlook for future energy demand. However, market sentiment changes daily and the leaders of the two countries are expected to meet at the end of the month. But even that event seems doubtful should both sides maintain their hardline stances on trade. The US government shut-down is also negatively impacting the economy each day it continues and as the Trump Administration looks to furlough thousands. Additionally, layoffs in the thousands have been announced by oil majors due to the current unsustainable price levels.

A Trump-proposed meeting with Putin in another attempt to bring an end to the Ukraine war has added bearish sentiment given the increased Russian output that could occur. And, despite a few “cracks”, the Israel/Hamas cease-fire is holding thus far which signals less geopolitical risk in oil markets. Meanwhile, data from the IEA in Paris only managed to further propel prices lower as the agency now sees oil supply growth of +3.0 million bld. for this year and +2.4 million bld. for next year compared to their last forecast calling for +2.7 million bld. and +2.1 million bld., respectively. Demand is expected to increase but not even be close to the projected supply growth.

The Energy Information Administration’s Weekly Petroleum Status Report (still released despite the government shut-down) indicated that commercial crude oil inventories for last week increased by +3.5 million bl. to a total of 424 bl. million and -4% below the 5-year average. The API forecasted a -3.5 million bl. drop while market analysts forecasted a -1.1 million decrease. US refinery utilization dropped significantly from 92.4% to 85.7%, representing a -1.2 million bpd. change in inputs to 15.1 million bpd. Total motor gasoline stocks fell -0.270 million bl. to 218.8 million bl. and are now slightly above the 5-year average. Gasoline demand was -465k bpd to 8.46 million bpd. vs. 8.5 the week prior and 8.6 a year ago. Distillates decreased -4.5 million bl. to 117 million Bbl. and are now at -7% below the 5-year average. Inventory at the key Cushing, OK hub changed -700k Bbl. to 22.0 million Bbl. or 30% of capacity. The SPR was +76k bbl. to 407.7 million bbl. Imports of crude oil were -980k bpd. to 5.5 million Bbld. vs. 6.4 the prior week while exports were 4.5 million bpd. vs. 3.6 the prior week. Exports of petroleum products were 7.0 million bpd. last week vs. 6.8 the prior week. Total US oil production was 13.6 million bld. vs. 13.5 last year at this time. The US rig count was +1 last week to 548 with oil flat and natural gas +1. There are (37) fewer rigs operating than a year ago at this time.

AAA’s average US retail gasoline prices at the pump were most recently reported at $3.05/gal.,

 -$0.05/gal. vs. last week, -0.15 /gal. from last month and -$0.145/gal. less than a year ago.

Regional banking lenders reported loan losses Thursday with one large commercial loan allegedly granted to a fraudulent borrower, sparking concerns over other possible “hidden risks” in bank loan portfolios. Auto parts maker First Brands’ bankruptcy also hinted at problems with large C&I lending. And Trump’s fickle approach to tariffs, specifically with regards to China, has the stock market in a rollercoaster pattern of late. All (3) major US stock indexes are higher week-on-week after last Friday’s huge drop on Trump’s Chinese tariff increase threat. The USD is also up this week, which tends to suppress oil prices as well.