Crude: Saudis go for the save

Saudi Arabia is trying to talk up the markets saying an output extension is all but done after yesterday’s supportive oil supply report failed to get us to the next level. There was a 1.0 million barrel drawdown in oil inventory overall and in Cushing, Oklahoma the inability of the market to move higher started a cavalcade of selling. At first, the movement was modest but an hour after the report, a big spike in volume started the market of its downward trek.Part of the selling was perhaps due to the May Crude contract at the NYMEX is expiring but also due to a spike in computer related sell signals. The mood seemed to get darker as the macroeconomic picture became worrisome with some disappointing earnings and a speech by Speaker Paul Ryan saying that it was unlikely that tax reform would be done by this summer.

Some point to the fact that gasoline inventory increased by 1.5 million barrels but that should have been offset somewhat by the much larger than expected 2.0 million barrel drop in distillate supply. U.S. crude production did rise by 170,000 barrels a day but that should have been expected. Refinery runs were bullish as crude oil refinery inputs averaged over 16.9 million barrels as refiners ran at 92.9% of capacity. Regardless, the mood of the market turned negative when we failed to move higher.

This morning we are seeing a bit of a rebound. After falling over 3% the market is now up over 1%. The reason is because Saudi Ariba is jawboning the market higher trying to remove any doubt that the OPEC and non-OPEC producers are on track to extend the historic production cut. Saudi minister of energy and industry Khalid A. Al-Falih said that “though there is a high level of commitment [to cuts], we haven’t reached our goal, which is to {get supply}to reach the five-year average. There is an initial agreement that we might be obligated to extend to get to our target.” 

U.S. gasoline production decreased last week, averaging 9.8 million barrels per day. Distillate fuel production increased last week, averaging just about 5.2 million barrels per day. This has week over week demand for gasoline dipped. Total products supplied over the last four-week period averaged over 19.7 million barrels per day, down by 0.8% from the same period last year as we are seeing a year over year deficit for the first time in a couple of years.

Demand for gas came in at 9.3 million barrels per day, down by 0.7% from the same period last year. Distillate fuel product supplied averaged 4.3 million barrels per day over the last four weeks, up by 9.9% from the same period last year.

Reuters is reporting that in China, signs emerged that refiners were using record crude imports to produce more fuel such as gasoline and diesel than the country can absorb. China's March gasoline output rose 2.5% year-on-year to 11.24 million tons, the highest level since at least April 2014, China's National Bureau of Statistics said, adding fuel into an Asian market that is already well supplied. This will be interesting to watch. China is building product like we did a few months ago. Despite the washout, long term nothing has changed. We continue to see a brewing supply deficit and sell-offs like yesterday will only tighten supply more in the long run. Yet in the short-term technical damage was done so we must be adept at position and repositioning. It is not clear that the sell-off is done despite the rebound. Be cautious and be long and look for weakness to put on bullish option plays.

Today we get the EIA natural gas report and we should see a 46 injection into storage. Natural gas has been acting strong as concerns about the scope of supply and production is enough to meet growing demand. Utility drive reports that the U.S. Energy Information Administration says that natural gas will retake the top spot from coal when it comes to power generation this summer.  Total generation will be lower this June, July and August, compared with last summer, but EIA believes gas' share will be about 34%, and coal's about 32%.    While natural gas took over from coal the top spot in generation last year, the trend reversed itself during the winter. But as the weather warms up, federal officials expect that to change again. Milder weather this summer, however, is expected to keep generation 2.4% lower than last summer.