Fra Oilprice.com
The EIA released fresh weekly data this week that solidified a trend underway in the US. Oil inventories posted their fourth weekly decline, falling by another 2.8 million barrels. The US has now burned through 10 million barrels of oil from storage in a month, indicating that the supply glut continues to ease, although at a very slow rate. At the same time, however, the EIA also revealed a shocking jump in weekly production. Crude output across the country jumped by 300,000 barrels per day, an eye-grabbing number considering many other indicators point to an overall contraction. Still, that figure should be treated with a large grain of salt, as it is not the EIA’s most reliable metric. Weekly figures tend to be less accurate than forthcoming monthly data, which usually captures a clearer picture of the state of play.
The draw on inventories is largely attributable to the demand from downstream. Refineries are running at their highest levels in several months, providing a further boost to oil prices. Gasoline consumption is rocketing towards a ten-year high for the season.
But there is a lot of hesitation in the oil markets. After two solid months of price gains between March and May, prices have hit a plateau and have even pulled back a bit. Global supplies are still elevated, and while demand is rising, it is not accelerating fast enough to significantly relieve the glut. It appears it will take some more time for things to balance out.
Meanwhile, the cost to use oil tankers is shooting through the roof as more are being called upon to ship and store oil. Chartering an oil tanker now costs 57 percent higher than it has in recent weeks. On May 20, tanker rates hit $83,412 per day, up from just $52,987 at the beginning of the month.
Part of the reason for the huge jump in daily tanker rates is because more oil is being exported from OPEC countries. Saudi Arabia is producing at its highest level in more than three decades. Iraq is poised to see a record high level for oil exports in the coming weeks, as it plans to boost oil exports to 3.75 million barrels per day in June. The massive increase in oil exports from Iraq, in particular, is a huge development for oil markets. As the world is dealing with a supply overhang, Iraq is pouring an additional three-quarters of a million barrels per day into the global pool of oil.
Another reason for high tanker rates is the ongoing use of ships to store oil. With oil prices expected to rise in the future, oil traders are parking their crude on ships, waiting for prices to bounce upwards. There are an estimated 20 million barrels floating somewhere out there in the oceans.
Although oil trade is surging, the movement of LNG around the world is growing even faster. Cheniere Energy (NYSE: LNG) is nearing completion of its export terminal on the US Gulf Coast, with first shipment expected to depart in December. The FT reportsthat with the US and other nations entering the LNG business, LNG is on the brink of surpassing iron ore as the second most valuable commodity traded in the world (after oil). The surge in natural gas production in the US – and the corresponding crash in prices – is one major reason for the rising levels of trade. But the wave of liquefaction plants coming online now is another.
With LNG becoming a much more globally traded commodity, the method of pricing will have to change. Up until now, LNG has been traded on contracts linked to the price of oil rather than the gas itself. That was a quirk of history, dating back to a time when there was not enough supply of LNG to justify a spot market. With much more supply coming online, the market will have much more liquidity (excuse the pun), allowing LNG to gradually shift towards spot prices detached from the price of oil. That, in turn, will allow trade to further flourish, opening up lower cost LNG to countries in Asia where demand for the liquid fuel is high. Perhaps Royal Dutch Shell’s (NYSE: RDS.A) bet on BG Group (NYSE: BG) – whose portfolio is heavily weighted towards LNG – made some sense after all.
The US is gearing up to export LNG, but the fight over crude oil exports is still raging. With a glut of oil sloshing around the midsection of the country, US producers are pushing Congress to end the ban on exports. Facing low prices, lifting the ban would open up new markets for them, likely pushing up the price of a barrel of crude by a few dollars. Despite a lot of sympathy in Congress, the issue is highly controversial. Members of Congress are afraid of the blowback if gasoline prices happened to rise after lifting the ban. The outcome is uncertain. Bank of America recently predicted a 50 percent chance that the ban is scrapped within the next two years.
Tensions heated up in the South China Sea this week with a war of words between the US and China. Top American officials including Secretary of Defense Ash Carter denounced China’s island-building in disputed territory. “There should be no mistake: The United States will fly, sail and operate wherever international law allows, as we do all around the world,” Carter said as he embarked on a trip to the Pacific. Chinesecommentary responded by arguing that the US was injecting itself into a regional issue that it was not party to. China also decried the hegemonic aspirations of US involvement in Asia. Tensions flared when a US aircraft flew over the islands and the Chinese military sent warnings, to which the US replied that it was flying in international airspace. No doubt the US would have a stronger legal leg to stand on if it actually passed the UN Convention on the Law of the Sea, a treaty that Congress has thus far failed to approve.
