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Matt Smith

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Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Imported Oil Putting The Squeeze On Bakken Producers

As Ralph Macchio celebrates his 54th birthday (make you feel old? me neither, ahem…), the crude complex has tried to kick higher ahead of the weekly inventory report, but is losing the fight against a stronger dollar. While we continue to slowly exit U.S. maintenance season, builds to crude stocks are still underway. Last night’s API report yielded a +2.8 million barrel build, a little more than the consensus expected from today’s EIA report of +2.5 million. Draws are expected to the products again, while the potential for a third consecutive draw at Cushing is trying to provide some support for prices this morning.

Crude is also keeping an eye on supply disruptions in Brazil, where a labor strike by Petrobras workers is reducing production by the state-run oil producer by 8.5 percent (according to striking workers, it is much more). Meanwhile, oil shipments from the Zueitina port in Libya have been halted amid escalating tensions between the two ruling governments.

Onto the economic data front, and the Caixin Chinese Services PMI came in much better than expected, setting a more positive tone overnight for broader markets. This mood was somewhat endorsed by European Services data, which only missed consensus by the smallest of margins. Better-than-expected prints by Spain and France were offset by misses from Germany and Italy. For the combined manufacturing and services composite, the Eurozone saw a minor tick lower for last month, but a trend of ongoing stable growth is the key takeaway: Related: The Race To Develop The Ultimate Battery

(Click to enlarge)

Eurozone Composite PMI (source: investing.com)

Across the pond, and Brazil’s woes continue. Industrial production dropped 1.3 percent in September on the prior month, now down -10.9 percent year-on-year. The only saving grace is that expectations were for worse prints than those seen. Onto the U.S., and the trade deficit narrowed to -$40.8 billion in September. As we know all too well, all paths lead back to energy, hence the narrowing in the deficit from August’s -$48.02 billion was driven by petroleum imports dropping to their lowest level since May 2004.

The thunder-stealer from official U.S. unemployment data on Friday – the ADP report – has shown 182,000 jobs were created last month – pretty much in line with consensus. Endorsing expectations for a decent Nonfarm Friday was total vehicle sales, released yesterday afternoon. Sales hit a new multi-year high of 18.24 million (annualized), up from last month’s 18.17 million. Mo’ jobs = mo’ people buying cars: Related: OPEC Infighting Reaching Critical Levels

(Click to enlarge)

U.S. vehicle sales, millions annualized (source: investing.com)

Back to the crude complex, and despite fears of a torrid Q3 earnings season for the U.S. oil and gas industry, we are hearing some U.S. shale oil producers are revising up production forecasts, as efficiency gains are helping offset cost-cutting and lower oil prices. “We are delivering this incremental production growth with significantly lower costs” said Devon Energy’s CEO Dave Hager, while also confirming it will cut ~$1 billion from its budget by year end.

Finally, much is being made of rising crude imports into the U.S., with the assumption being made this is due to falling U.S. production. While we are seeing rising West African crude imports, these flows are finding their way to U.S. shores because of deep discounting (due to a building global glut), as well as improved economics versus Bakken crude. Related: Elon Musk’s Hyperloop Takes a Step Forward

This rise in volume is, however, marginal in the grand scheme of things (hark, below – less than 300,000 bpd), and not to be considered the result of falling U.S. production. These volumes are heading towards East coast refiners, where they are competing with Bakken crude by rail (and its higher transportation costs), and not to the Gulf Coast to compete with pipeline flows from Eagle Ford or with LLS pricing.

(Click to enlarge)

West African imports into the U.S. (source: ClipperData)

By Matt Smith

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