Oil Markets Are Rebalancing At Last

Friday September 15, 2017

In the latest edition of the Numbers Report, we'll take a look at some of the most interesting figures put out this week in the energy sector. Each week we'll dig into some data and provide a bit of explanation on what drives the numbers.

Let's take a look.

1. Whiplash for oil investors

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- As refineries started to go offline amid the historic hurricane that hit Texas at the end of August, hedge funds and other money managers scrambled to short WTI, betting that a huge disruption in refining capacity would lead to a buildup in crude supplies.
- They were right: some 4 mb/d of refining capacity was temporarily idled, although that figure is down to less than 2 mb/d at this point.
- In fact, refineries staged a comeback quicker than expected, leading hedge funds and other major investors to rapidly unwind those short bets, swapping them out for long bets, even as the destruction of Harvey was still being tallied.
- The positioning corresponded with a brief decline and then rebound in WTI prices.
- "You can afford, as a speculative investor, to get a little bit more bullish," Tamar Essner, an energy analyst at Nasdaq Inc., told Bloomberg. "The storm certainly was bearish for WTI, but not for the long term, so why not make a quick buck?"

2. China to phase out internal combustion engine

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- The world's largest auto market is considering a ban on fossil fuel vehicles by 2040, following in the footsteps of France and the UK.
- The policy could accelerate the transition to electric vehicles, a market that China hopes to dominate.
- But while individual bans in the UK and France make headlines, the move by China, if finalized, would be an absolute game changer. As the largest car market in the world, the phase out would force global automakers to prioritize electric vehicles over the long-term.
- China is pursuing the phase out of gasoline and diesel vehicles not just to clean up its air, but also to build up its EV manufacturers in an effort to dominate the export market.
- BYD, China's largest EV manufacturer, saw its share price jump by more than 7 percent on the news.

3. U.S. solar industry hits a slow patch

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- The U.S. solar industry is heading for its first annual decline in installations after years of steady, and sometimes extraordinary, growth.
- An estimated 2.4 gigawatts of new solar was added in the second quarter, according to GTM Research and the Solar Energy Industries Association, putting the industry on track for 12.4 GW of new installations for the full-year.
- That is a decline of 17 percent from 2016.
- Still, last year was an exceptional year, largely because developers rushed to install solar ahead of what they thought was an expiring tax credit (a tax credit that was ultimately extended for a few more years).
- There are looming problems for the industry, including state policies reaching their limits, plus a potential trade dispute case from the Trump administration, which could hit imported panels manufactured in China. If the Trump administration moves forward with the trade retaliation, it would significantly slow the solar industry.

4. Petrochem most important source of oil demand growth

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- EVs threaten to derail the oil market by destroying demand in the transportation sector, but the saving grace for the oil industry could be petrochemicals.
- The petrochemical industry is expected to be the largest source of oil demand growth between now and 2040. The sector is projected to result in an additional 4.9 mb/d of oil demand by that date.
- That means that nearly half of total oil demand growth through 2040 will come from petrochemicals, with aviation and freight coming in at second and third.
- But, as Bloomberg Gadfly notes, that projection could prove to be overly optimistic - a growing number of regulatory measures intended to reduce the use of plastic could eat into demand growth. Bans on plastic bags in Kenya and the Indian city of Delhi are two of the latest examples of the policy threat to the petrochemical industry.

5. Hurricane Harvey could swell oil inventories

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- The U.S. refining sector is still getting back on its feet after the destruction of Hurricane Harvey, with refining outages down below 2 million barrels per day after peaking at above 4 mb/d in the immediate aftermath of the storm.
- According to Goldman Sachs, the outages could lead to a spike in oil inventories in September. Harvey could add 900,000 bpd to inventories as oil producers have fewer destinations to send their product. But Harvey also hit oil producers in the Texas shale patch, knocking an estimated 300,000 bpd of crude production offline for September. So, on net, Harvey will add 600,000 bpd to inventories.
- Hurricane Irma hit Florida, where there are no refineries and no oil production. As such, Irma could result in an additional 300,000 bpd heading into inventories with only a minimal impact on upstream supplies, although Goldman admits that this projection is highly uncertain.
- The two storms together could add 600,000 bpd to inventories for the month of September.
- In the two weeks after the storm, the EIA estimates that U.S. inventories climbed by more than 10 million barrels per day, after months of drawdowns.

6. Refined product stocks nearing average levels

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- The IEA dismissed concerns about the hurricanes in the U.S., saying the impacts on the oil market will be "short-lived."
- In fact, the IEA pointed out that OECD total product stocks remained flat in August, a time when they typically build.
- Product stocks in OECD countries were only about 35 million barrels above the five-year average at the end of July.
- The IEA says that refined product stocks could fall below the five-year average by the end of the year.
- This is a strong sign that the market is making progress towards balance. Refineries will have to draw down more crude in order to keep up with product demand. In other words, the rebalancing of the product market could foreshadow faster drawdowns and tighter conditions for crude.

7. Gasoline demand soaring

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- Gasoline demand was "extremely strong in 2Q17" in the U.S., according to the IEA, "supported by good economic growth, high employment, increasing traffic, freight transportation and industrial activity."
- Gasoline demand in June jumped by 100,000 bpd, and consumption expanded by 1.1 percent year-on-year.
- The IEA revised up its forecast for total global oil demand for 2017, pushing it up to 1.6 mb/d for the year, up from the 1.5 mb/d estimate from last month.
- Robust demand combined with some supply outages in the U.S. and Libya have provided a jolt to the oil market, which looks quite a bit tighter than it did a few weeks ago.
- However, the market is not out of the woods yet. One of the key questions about whether oil prices will rise and fall over the next few quarters still comes down to what OPEC decides to do with their production cuts.

That's it for this week's Numbers Report. Thanks for reading, and we'll see you next week.