The petroleum complex traded sharply lower as trade tensions and an unexpected build in crude and product inventories touched off active long liquidation and encouraged renewed selling interest. The flight to quality continued as pressure on global equity markets heightened fears of a global recession and likewise raising the specter of further revisions downward in oil demand growth at a time when inventories particularly of gasoline are at high levels.
The DOE report showed crude oil inventories rose by 2.8 mb compared to expectations for a 2.8 mb decline. .Although import levels fell short of last year’s levels of 7.9 mb at 7.2 mb, exports totaled 1.9 mb compared to 2.6 mb in the prior week. . Domestic production also continued to recover reaching 12.3 mb in the current week. In products the news was particularly disheartening as stocks of gasoline rose by 4.4 mb to 235.2 mb compared with expectations of a draw of .7. This puts gasoline inventories at the highest level for this time of year despite gasoline product supplied running .3 percent below year ago levels for the year so far as greater fuel efficiency has an impact. Distillate inventories were reported up 1.5 mb with stocks at 137.5 mb or 10 mb above year ago levels. Refinery utilization at 96.4 percent surged from 93.0 percent the previous week with the increase well above expectations.
The failure to respond to additional disruptions to shipping in the Straits of Hormuz this week remains a source of disappointment for the market given that it reflects what looks to be an adequate supply situation that is helping ease any risk premium. Reports of more aggressive pricing by the Saudis in Asia for September cargoes reflects growing competition for more markets. In addition, given the trade row and the positive relationship of China, speculation might build that a more concerted effort will be made to bring in Iranian crude oil and skirt the sanctions.
Although demand concerns remain a limiting influence on the upside, the expansion in output outside of OPEC remains of utmost concern. With growth likely to be maintained by non-OPEC producers at a time when OPEC is producing well below capacity, the potential that shut-in production will eventually be available to the market at a time when growth in demand will likely continue to be sluggish has the potential to be a source of long-term weakness.
Today’s breakdown set up a potential move back toward the 47.00-48.00 area basis Sept particularly if evidence grows that the economy on a global basis is slowing and pressure remains on equity values. The breakdown in the Oct RBOB Crack should potentially lead to a test of the 10.00 area and potentially 7.00 given the high stock levels.
The Nat gas market continued to struggle as the market responds to moderate weather conditions and lower LNG exports the past few days following the shutdown of LNG units by Cherniere for maintenance. In addition, some pressure on values might have reflected ideas that the weaker economy will impact industrial demand. For tomorrow the focus will likely be on the EIA report with expectations indicating a 55 bcf injection compared to the average for this time of year at 43. Overall the market is looking for fresh impetus but looks poised to hold near the 2.00 level on the appearance the bulk of bearish news appears to have been discounted.
Charts Courtesy of DTN Prophet X
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