Oil rallies on EIA draw, ignores OPEC inaction

Jun 2, 2016 2:50:47 PM EST

qeSixty-three years to the day after the coronation of Elizabeth as Queen of England at Westminster Abbey, OPEC once again tries to prove itself as kingpin of the oil market. With an acronymtastic day today, courtesy of the ECB, ADP - and OPEC too - here are five things to consider in oil markets:

1) Perhaps the most telling thing in today's OPEC-related news is an interview with new Saudi oil minister Khalid al-Falih. He affirms that the Kingdom's is continuing to target market share, saying 'Saudi Arabia is in it for the long-haul, and our long term direction remains the same'. He sees the market on its way to rebalancing, helped by shrinking supply, with demand boosted by moderate prices.

He also highlighted that the drop in oil investments over the last two years will increasingly impact higher-cost production going forward, saying 'it is natural that the marginal producers of expensive oil that were growing the fastest when prices were healthy are now declining the fastest'. He may also have just declared victory on U.S. shale, suggesting that the OPEC strategy that the kingdom pushed for in 2014 is working, 'and the long term will prove this'.

2) In addition to the presence of the new Saudi oil minister, two developments from the latest OPEC meeting is the appointment of a new secretary-general (Mohammed Barkindo from Nigeria), while Gabon has rejoined the cartel after leaving two decades ago.

Gabon is now OPEC's smallest producer (relieving Ecuador of its duty); the West African nation exported 185,000 bpd of oil last year, with China being the leading recipient (no shock there), accounting for ~20% of exports. Europe is the leading region for Gabon's exports, accounting for some 40% of its loadings.

ClipperData Gabon loadings

3) It is also Nonfarm Friday Eve, and we have had a couple of data points to give a guide to tomorrow's release. The ADP report was a smidge shy of consensus, seeing 173k jobs created last month (versus 175k), while jobless claims were a pinch better, coming in at 267k versus 270k. Tomorrow's consensus of 260k from the official employment remains well in play.

4) Even though it is seasonally expected that we should see a draw to crude stocks, this week's 1.4 million barrel drop seems somewhat counterintuitive, given that refinery runs ticked lower, and total imports rebounded strongly from the previous week; our ClipperData indicated an extremely firm level of PADD3 imports.

Gasoline demand continues to look robust, while distillate product supplied is now higher year-on-year on the four-week moving average. The balmy winter pushed distillate demand nearly 20% below year-ago levels, spending the winter subdued before rebounding rapidly of late:

distillate product supplied

 

5) Finally, since 2012, there have been more than a dozen fossil fuel projects cancelled in the U.S., with more in limbo. While five out of six export projects in the Pacific Northwest have been shelved, natural gas pipeline projects in the Northeast have also been delayed up to a year-and-a-half.

While nearly 14,000 miles of crude-oil pipelines have been built across the U.S. from 2009 to 2014, a 27% increase, natural gas pipeline mileage has fallen by 2%, or 6,640 miles, from 2009 to 2015.

fossil fuel cancellations

About the Author

Matt Smith

deciphers and distills what is most relevant across the energy complex into cohesive and pithy knowledge you can use. The belly laugh is a bonus.

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