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Page added on May 27, 2019

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Is The Oil Glut Coming Back?

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Oil had its worst week of the year, and the plunge in prices have renewed concerns about the global economy, oil demand and a stubborn crude oil surplus.

Oil fell along with everything else, as the gravity of the escalating U.S.-China trade war began to sink in.

But there are cracks specific to the oil market that are becoming increasingly visible. On Wednesday, the EIA reported a surprise jump in crude oil and gasoline inventories, while production also increased. “The latest Energy Information Administration (EIA) data is extremely bearish,” Standard Chartered wrote in a note to clients.

The investment bank has its own propriety “bull-bear index,” which offers a gauge on oil market sentiment and direction. The index read -100 this week, which indicates “the weakest data in the past six years.” The main reason why the EIA data was so negative was because inventories rose in all categories except residual fuel oil, resulting in a combined increase of 16.33 million barrels, Standard Chartered explained.

Why such a negative result? “[The latest release does raise the question as to whether (as in 2008-09) the extreme reading reflects an economy close to or past a tipping point, or if it reflects an oversupplied global market, or if it is simply down to data quality,” Standard Chartered wrote. “It is too early to be conclusive, but we think the latest data is so extreme as to raise issues in all three categories.”

Adding to the meltdown was likely a shift out of net-long positions by speculators. “This is a very flows-driven market right now,” Scott Shelton, a broker at ICAP PLC, told the Wall Street Journal. After a series of supply outages and tension in the Middle East, oil failed to break higher, likely leading to a shift in sentiment. “You just threw everything bullish you basically could at the market, and nothing happened.”

Not everyone is so down. The poor figures from the EIA have a lot to do with unique factors within the U.S., such as rising shale production at a time when pipeline bottlenecks persist, Commerzbank argued in a report. Moreover, the sudden bearish turn in the oil market likely increases the odds that OPEC+ rolls over the production cuts for the remainder of 2019. “[T]he further rising US stocks could make Saudi Arabia even more reluctant to step up production,” Commerzbank wrote. “We therefore see the current price weakness as temporary.”

The chief executive of ConocoPhillips framed the turmoil as the latest bust in a boom-bust cycle. “If we see $80 we kind of tell people: Be prepared, you might see $40 or $50 on the back end,” Conoco’s Ryan Lance told the Association of International Petroleum Negotiators, according to Bloomberg. “Cycles are getting shorter, the peaks and troughs are getting significant.”

But the fear is that the global economy is starting to deteriorate, which would drag down demand. Bloomberg reports that China’s teapot refiners are cutting back on processing as they suffer from a growing glut of gasoline. The buildup in inventories is likely the result of flagging demand, perhaps a sign that the trade war is hitting the Chinese economy.

The U.S. economy has held up better. GDP grew strongly in the first quarter and unemployment is at historic lows. But plenty of cracks are visible. Farmers are in crisis, with debt ballooning and prices for soybeans and corn at multi-year lows. Manufacturing data in May shows some of the weakest data in a decade.

In a speech this week, U.S. Federal Reserve Chair Jerome Powell expressed concerns about rising corporate debt. “[I]f a downturn were to arrive unexpectedly, some firms would face challenges. Not only is the volume of debt high, but recent growth has also been concentrated in the riskier forms of debt,” Powell said. He also said there are parallels to the subprime mortgage crisis from the 2000s although he went to lengths to argue why the current economy is stronger than it was a decade ago.

Nevertheless, weaker economic growth would almost certainly lead to lower crude oil demand. The IEA said this month that global oil demand grew by 640,000 bpd in the first quarter year-on-year, a sharp downward revision from its previous estimate of a 1-million-barrel-per-day increase. The lower-than-expected growth rate translated into a 0.7 mb/d surplus in the first quarter, a larger glut than expected.

The IEA only slightly lowered its full-year demand forecast, arguing that demand should pick up in the second half of the year. However, all of that now seems questionable, given the escalating trade war and the global selloff in equities, and clear signs of a slowdown.

By Nick Cunningham of Oilprice.com



5 Comments on "Is The Oil Glut Coming Back?"

  1. Outcast_Searcher on Mon, 27th May 2019 11:16 am 

    Wow, a rational article that discusses oil in context of global news and trends instead of hyperbole and religious belief in short term peak oil.

    Refreshing.

    And refreshingly honest. All one has to do is look at a long term oil price chart to see how difficult predicting prices over time is, given all the complexities to the global economy and their unpredictibility. (The threatened escalating trade war is just a current example).

  2. I AM THE MOB on Mon, 27th May 2019 12:11 pm 

    Outcast

    Yes, lets look at the oil price in the long term..During the entire 20th century the price of oil averaged around 20 dollars a barrel..And in the 21st century it has averaged around 62 dollars a barrel..

    Gee I wonder why? Scarcity, like all commodities..And first you go scarce and then you start to run short ie running out..

    You dumbass..

  3. Robert Inget on Mon, 27th May 2019 12:34 pm 

    https://www.cnn.com/2019/05/27/us/severe-weather-flood-watch-wxc/index.html

    Above sits not an unrelated ‘oil glut’ link.
    Sure it’s about AGW, but also, this breaking news
    has been a hundred years in the making. Some might say ‘500 year floods’ ain’t waiting 500′.

    Farmers that are able to plant will get decent prices for their grains. (Texas)
    Those that are still waiting
    may not get bank repayment funds in spite of those extra town jobs entire families take on.

    “Corn, knee high by Mother’s Day” ???

    https://www.upi.com/Top_News/US/2019/05/10/Midwest
    May 10, 2019 · If fields don’t dry enough to plant by the end of the month, farmers in many areas of the Midwest won’t be able to grow any corn this year. … May 31 is the final planting date for corn.

    Does it make sense to plant soy beans for export?
    (early too mid July is the deadline for one half normal yields) So, if we get a ‘normal’ June, beans it is.
    (the tell in that gamble), bovine virus spreading from China to Vietnam) Millions of pigs
    are being burned up daily. No cures or vaccines.

    Loses are running into the billion$. IOW’s, market for beans went south.

    22 Billion in Farm disaster relief needs to go far beyond soy-beans and corn.

    As long as a Republican Senate rejects climate science, allocates funds of Border Walls but Not Sea Walls, America’s fate is problematic.

    I watch this site for late AG prices;
    https://www.barchart.com/futures

    (climate, related to oil consumption like water is to tea)

    My advice, it’s too early to put in coffee
    plants or avocado trees in the Midwest.

  4. Robert Inget on Wed, 29th May 2019 12:21 pm 

    China apparent oil demand up 5.6%YOY…MSM scare tactics minimally affect Chinese oil buying:

    Alexander Stahel

    @BurggrabenH
    5h5 hours ago
    More
    China Crude Demand: holding up strong; front running waiver expiry? April demand reached 12.86 mb/d, up y/y 0.50 mb/d (4%) despite a weakening eco outlook. Actual demand was likely higher than data, at 13.06 mb/d, according to EA as refiners destock during maintenance.
    #OOTT

    This tweet sent oil higher.

  5. John on Thu, 30th May 2019 2:54 am 

    There is no oil glut.

    Ron Patterson of peakoilbarrel says peak oil is now in 2019. OK he also said peak oil was in 2018, 2017, 2016 and every year back to 2008. Surely he must be right this year?

    Seriously OPEC has reverted to their original policy of supporting the oil price with cuts when needed.
    Outside of OPEC global demand growth is currently balanced with production increases.
    This balance should last for a couple of years.
    Unless Ron says otherwise of course

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