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Supply worries weigh on crude

Jul 21, 2016 12:58:46 PM EST

After a mixed bag of economic data, crude is charging lower, with a hangover from yesterday's inventory report and on ongoing concerns of bloated inventories. Hark, here are five things to consider in the oil market today. 

1) Mexico has launched its second round of oil auctions, offering a total of 15 exploration and/or production blocks in shallow waters off the coast of Veracruz, Tabasco and Campeche states. This follows three auctions last year - the first of which did not see great participation (um, at all). Several of the blocks involved in the latest auction were ones previously offered but not awarded.

The goal of the auction is to boost waning Mexican oil and gas production. We can see from our ClipperData that exports have dropped by nearly 9 percent through the first half of the year compared to year-ago levels.

While flows to the U.S. are down by 18 percent over this period, exports to East Asia (think: South Korea, Japan and China) have more than doubled, while exports to Southern Europe (think: Italy, Spain) are up over 8 percent. Although production and exports are continuing to drop, Mexico continues to try and diversify its customer base away from the U.S.

mexico exports

2) Yesterday we discussed how crude inventories were over 55 million barrels higher than year-ago levels; the chart below illustrates that total crude and product inventories are up to 1.384 billion barrels, some 111 million barrels higher than year-ago levels. Half of this increase is from the rise in crude inventories, while the rest is made up of products.
total invs
3) The chart below (via @JavierBlas2) gives little comfort that the current gasoline glut is going to be absorbed by higher demand. Total vehicle miles traveled increased by 2.0 percent in May, but dropped on the prior month by 0.5 billion vehicle miles down to 279.4 billion vehicle miles.

While the West saw the biggest YoY increase, up 4.0 percent to 61.9 billion miles, the North-East actually contracted by 0.5 percent to 39.4 billion.
vmt percentage

4) As gasoline inventories rise in a counter-seasonal fashion, and as gasoline demand comes in much more underwhelming than expected, weaker fundamentals are being reflected in softness in the rbob crack spread. While last year we were kicking around $30/bbl as refiners gobbled up cheap crude, the gasoline glut has come home to roost, and profitability is now less than half that seen last summer.
gasoline crack spread5) Finally, the PdVSA-operated Isla oil refinery in Curacao is looking to expand to become an LNG import and trans-shipment terminal by 2021. Not only would the project supply gas to domestic and neighboring markets such as Panama, the Dominican Republic and Jamacia, but to the 335,000 bpd refinery at Willemstad also.

The chart below goes a long way to explaining the attractive nature of LNG; regional natural gas prices across the globe have tanked over the last few years, with European, U.S., and Asian benchmarks all mired below $5/MMbtu.

Singapore Spot LNG prices

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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