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Matt Smith

Matt Smith

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

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Oil Prices Continue To Rally As U.S. Crude Inventories Shrink

One hundred and eighteen years after the birth of Enzo Ferrari, and the current rally in the crude complex apparently has more gas left in the tank. While markets are still getting higher on the fumes of hope from OPEC rhetoric of a production freeze, a surprise draw from last night’s API report has thrown more fuel on the fire for a rally.

Expectations from today’s EIA report prior to the API release was for a ~4 million barrel build to crude stocks; this is now being tempered somewhat. Although we at ClipperData called for a surprise draw last week as we saw adverse weather impacting waterborne crude imports, we are not expecting a reprise of this scenario today, looking for a minor build instead. Related: How Far Will The U.S. Go If Turkey Invades Syria?

Retail gasoline prices appear to be bottoming out around $1.70/gal as oil prices level off; the seasonal trend should lend support as we hop on into spring. While today’s inventory report should yield another build to gasoline, we should see inventory levels rolling over in the next month or so, ahead of the switch to summer blend gasoline. Retail diesel prices maintain their status in one dollardom, with prices on the national average at $1.98/gal. Expectations are for the price gap to close betwixt gasoline and diesel this year, moving them closer to parity with each other.

The first export of U.S. LNG from Cheniere’s Sabine Pass facility is happening at a terrifically torrid time for the industry. The expectation of the first export next week comes amid news that Japan – the world’s largest LNG consumer – saw January imports drop by the most in over six years, as warm weather and nuclear restarts stymie demand. South Korea, the second largest LNG consumer, cut imports by 13 percent last year.

Japanese LNG purchases fell last year for the first time since 2009, as electricity consumption dropped to its lowest level since 1998 amid a shrinking population and increasing energy efficiency (with a sprinkle of weak economic conditions). Japanese LNG demand could drop by as much as 30 percent by 2030, as nuclear reactors come back online; 3 of 46 have now returned. Related: Oil Production Rumor Mill Continues To Turn As Iran Hints At Freeze

The chart below highlights how the glut of LNG is set to persist – reminiscent of the gluts already seen in other commodities from crude to copper. While global demand will continue to rise over the longer term, ongoing supply growth will vastly outpace it, leading to a lack of demand for U.S. LNG exports. Exports which were initially pegged to go to Asia – or dumped in Europe if Asian demand was lacking – are now needing to find a new home. This is exemplified by the likelihood of the first U.S. LNG export cargo heading to South America.

(Click to enlarge) Related: Supreme Court Vacancy Leaves Energy Industry In Limbo

In terms of economic data, Chinese inflation continues to remain subdued, coming in at +1.8 percent year-on-year – below consensus of 1.9 percent. On to Europe, and the Eurozone current account was higher than expected, showing healthier than expected trade. As for Uncle Sam, we have seen weekly jobless claims come in much better than expected at 262.000 (versus 275.000 expected), a three-month low, while the Philly Fed regional manufacturing index showed worsening conditions, but not as bad as expected.

Finally, we have had contrasting news about U.S. oil production, as the State regulator said oil production in North Dakota dropped by nearly 3 percent in December, its biggest drop in nearly a year. To counter this downbeat assessment is news from the EIA that oil production in the Gulf of Mexico is projected to reach a record high in 2017, as projects come to fruition to lift output to 1.91 million bpd:

(Click to enlarge)

By Matt Smith

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