Crude oil retraces ahead of likely inventory build

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gnOne hundred and twenty-nine years after Everett Horton patented the telescopic fishing rod, and the recent oil rally is looking overextended. Let’s go on a wander through energyland™,  to assess nine factors influencing energy today.

1) China’s export data was horrendous. February exports were down 25.4% YoY, which is the biggest drop since the belly of the great recession – May 2009. While the timing of the Lunar New Year last month can explain away some of the weakness, the poor data is indicative of broad-based soft export data seen in other countries in the region, such as Taiwan and South Korea. Taiwan has seen exports drop for 13 consecutive months, while South Korean exports have fallen for 14.

2) We here at the good ship ClipperData have been banging the drum about how Chinese waterborne crude imports have been crazy-high in February, led by a 75% increase from Saudi Arabia on the prior month. It was therefore great to see this affirmed by the Chinese General Administration of Customs, who confirmed that total crude imports reached a record high last month – just as we saw in our data.

China crude imports

Despite strong crude flows, total Chinese imports came in below expectations, down 13.8% in February on the prior month, versus the expectation of a lesser drop of -10%.

3) Yesterday we discussed the unfortunate timing of US LNG exports, which are just getting started as US natural gas prices are testing 17-year lows. Australia also has equally poor timing, with the $54 billion Gorgon LNG project set to ship its first LNG cargo next week.

The Gorgon project, which is a joint venture primarily between Chevron (47.3%), Royal Dutch Shell (25%) and Exxon Mobil (25%), has export capacity of 2.1 Bcf/d, and will help Australia surpass Qatar as the largest LNG exporter in 2018, with 10 projects providing the possibility of 11.5 Bcf/d of LNG exports.

The US currently has 10.62 Bcf/d of LNG export capacity under construction, which would make it the third largest exporter in the world by the end of the decade. The graphic below shows the timeline for Australia’s quest to become the largest global exporter of LNG, and the massive sums of money involved:

Australia LNG projects

noaa 0308164) Oh happy days, my friends, for Spring is here. Daylight savings time arrives on Sunday, and we accordingly spring forward an hour. For the corresponding week last year, we saw a withdrawal of 174 Bcf from storage; this time around we look set for a withdrawal less than a quarter of that size. With the weather outlook for next week pointing to further stymieing of late-season heating demand, we are set to continue extending the 46% surplus to last year’s storage level.

5) Yet while a mild winter may be getting the credit for the huge surplus that has been built up in natural gas storage levels, the supply side of the picture has been particularly robust. This has not only been highlighted in record total production levels from the latest monthly EIA data, but also in the production growth seen at key US shale plays.

Yesterday’s monthly EIA drilling productivity report showed a huge upward revision to natural gas production from the Marcellus shale, which was revised up 11% – or nearly 2 Bcf/d higher – than the report from the prior month. The revisions are described as ‘a testament to producers’ ability to “choke” the flow of gas from existing wells in response to changes in the market’ said Jozef Lieskovsky, a senior analyst at the EIA, as pipeline capacity is built out.


6) We’ve had a number of economic data releases out overnight; German industrial production rebounded nicely, up 3.3% last month after a couple of months of dropping. Eurozone Q4 GDP rose 0.3% versus the prior quarter as expected, equating to a 1.6% increase YoY. Nothing to write home about, but we’ll take it.

7) Not only do we get the EIA’s monthly Short Term Energy Outlook today, but we also get the weekly API inventory report. After the API’s 9.9 million barrel build last week – and +10.4 mn bbls from the EIA – the market is bracing itself for another solid addition to oil inventories.

From a ClipperData perspective, it is difficult to refute the likelihood of a decent build, given we saw such an influx of cargoes last week (10 million barrels from Saudi, 4 mn bbls of Basrah Light, 2 mn bbls from Kuwait, 2 mn bbls from Angola, over 11 mn bbls from Central and Latin America…) amid the ongoing backlog of floating storage in the US Gulf. All the while, we are in the full swing of spring refinery maintenance.

8) While it is still to early to say that the lows are in for crude oil prices, it is fair to say we have probably seen the low point for retail gasoline prices – at least until much later in the year. As we move through spring refinery maintenance season (less supply), and as driving season appears on the horizon (more demand), we are likely to see prices gravitating away from their recent lows.

We’re already up to $1.81/gallon on the national average, with last week seeing the biggest weekly jump so far this year. Panic ye not, though; the EIA still projects prices to average under $2/gallon for this year – happy days for the consumer.

9) Finally, Kuwait is helping to put the brakes on oil prices today, after it said it would only commit to a production freeze if major producers – including Iran – agreed to take part. Hum dee dum.