Oil Crosscurrents

There are numerous crosscurrents effecting the crude oil markets.  From President Trumps tweet “Oil prices are too high, OPEC is at it again. Not good!” to opposition among OPEC members against higher output ahead of the June 22 OPEC meeting in Vienna. 

Supply disruptions from Venezuela and Iran could take 1.5 million barrels off the market by year end.

While pipeline constraints in the Permian Basin is slowing U.S. production.  The Permian pipeline capacity is said to be 3.1 million barrels per day (bpd).  The EIA estimates that production this month will reach 3.277 million bpd.  The IEA has warned that a “supply gap” could emerge should OPEC continue to pump at its current levels.

There are indications that both Saudi Arabia and Russia have recently increased oil production.  It is thought that Saudi has increased production between 85,000 and 161,000 barrels per day. Crude has been trading on the weak side of late because OPEC’s top two producers appear to be in favor of increasing production.   Oil analysts are concerned that any increase in production from Saudi Arabia and Russia will shrink global spare capacity from the current 3% to 2%.  If that were to occur, it would be the lowest in over 30 years. 

Until recently, there had been large amounts of oil in inventories, which acted like spare capacity.  Those inventory surpluses have slowly been dwindling down.  If history repeats itself, crude oil may be about to rise, as low spare capacity has coincided with higher and volatile oil prices in the past (see chart below). 

Weekly petroleum data for the week ended June 8, 2018:

• Crude oil inventories - 4.1 million barrels from the prior week
• Gasoline inventories -2.3 million barrels
• Distillate fuel inventories - 2.1 million barrels
• Propane/propylene inventories +3.7 million barrels
• Total commercial petroleum inventories -1.8 million barrels 

The four-week moving average of total products supplied averaged 20.4 million bpd, up 1.7% from the same period a year ago. 

Financial markets are quiet ahead of the Fed’s announcement scheduled for 2 PM today:

• The Dow is currently unchanged at 25, 321
• The 10-Year Treasury is unchanged at 2.95%
• Crude oil is up $0.21, 0.32%, at $66.58.     

Caterpillar (CAT) is still one of our favorite company’s.  The company released its Retail Sales for May as compared to April:

Total Machines
• Asia Pacific +36% versus +33%
• EAME: +16% versus +23%
• Latin America: +% versus +56% 
• North America: +20% versus +25%

• World: +24% versus +28%

Total Energy & Transportation 

• Power Gen +3% versus +3%
• Industrial -12% versus +1% (flat m/m)
• Transportation -40% versus -25%
• Oil and gas +31% versus +43%
• Total +5% versus +14%

While numbers are edging lower, there is still robust demand at CAT.  The company also announced its hiking its dividend from $0.78 t0 $0.86.