Oil Trying to Stand Tall. The Energy Report 08/13/19

Phil Flynn | Price Blog

Oil prices are trying to stand tall in the face of global economic turmoil. We had tanking treasury yields, the shutdown of the Hong King airport, fears of an Argentinian debt default, federal government spending at a record $3,727,014,000,000 in the first ten months of fiscal 2019 and a deficit of $866,812,000,000.

The oil market was able to withstand mounting economic headwinds as it prepares for what should be a big drop in U.S. crude supply and the fact that Saudi Arabia is already reducing allocations of oil to their customers as they start to lay the groundwork for its public offering of Saudi Aramco. Yes, the Saudis are getting serious about that after they had an analyst earning call and the word that Saudi Aramco will buy a 20% stake in the oil-to-chemicals business of India’s Reliance Industries Ltd., including the 1.24 million barrels-a-day Jamnagar refining complex on the country’s west coast. From what analysts are saying, the call, while showing some impressive numbers, fails to live up to the 2 trillion-dollar valuation the Saudi’s wanted to have.

Liam Denning at Bloomberg writes, “Taking the 12 months through June as a whole, Aramco’s CapEx of about $35 billion left it with free cash flow of about $88 billion, more than enough to fund $72 billion of dividend payments. Putting those on an Exxon-like yield of 5% implies a value of $1.45 trillion. Yet, assuming ordinary dividends are running at $52 billion a year – as the accounts suggest – about $20 billion of that payout is akin to the more discretionary buybacks oil majors use to distribute exceptional income. Aramco’s payout was 99% of earnings in the first half of 2019 versus just 52% a year earlier. That cyclical element should be priced at a discount to ordinary dividends, especially in light of Aramco’s role in Saudi Arabia’s public finances. Price the dividend at 6%, and the value drops to $1.21 trillion; at 7%, a shade higher than the yield for BP and Shell, it falls to $1.03 trillion.” Of course, because it falls far short of that valuation, it puts more pressure on Saudi Arabia to do whatever they can to keep oil prices high.

Read the entire report here.

War Games. The Energy Report 07/31/19

Phil Flynn | Price Blog

Is this real or is it a game? Oil prices got a boost on a report that Russia and Iran were planning war games in the Strait of Hormuz. A very strange game. The only winning move is not to play. Ok, maybe they called them military drills. This came after the U.S. embassy in Berlin formally asked Germany, France and Britain to participate in a mission to secure the Strait of Hormuz and combat recent Iranian aggression, raising the stakes and the potential for a conflict. Did you ever play tic-tac-toe?

Yet what may actually solidify the oil market bottom may be a very bullish American Petroleum Institute (API) and the fact that our friends at the Fed will go ahead and cut interest rates. This move as the economy is still relatively strong will only boost oil demand.

The big draw in U.S. crude supply really hurts the bearish oil case. The API not only reported a much larger than expected 6.024-million-barrel crude draw but a 1.449-million-barrel draw from Cushing Oklahoma and a big 3.135 million barrel drop in gasoline supply. It’s clear that gasoline demand will heat up as the consumer confidence index jumped to 135.7 in July, an 18-year high, from a revised 124.3 in June,  according to the Conference Board.  Distillates were in line falling by about 890,000 barrels.

Read the entire report here.

Jump and Dump. The Energy Report 07/25/19

Phil Flynn | Price Blog

The oil market did a jump, and then a dump as oil traders shrugged off bullish EIA data because it was skewed by tropical storm Barry. Oil prices failed to hold onto gains even after a massive 10.8-million-barrel crude draw, according to the Energy Information Administration (EIA). Crude oil supply has fallen 6 weeks in a row erasing almost all of the 40 million barrels of upward adjustments in previous EIA reports. A very large drop in U.S. oil production, that fell by 700,000 barrels a day to 11.3 million barrels, gave the edge to oil bears as it seemed to suggest that perhaps the draws would not have been as large if we had not seen so much U.S. oil production get shut in.

Yet the bulls might point to a very large 1.3-million-barrel jump in domestic demand. We also saw total demand on the U.S. system, up 2.2 million barrels per day (bpd). Bulls could also point to 3.3 million barrels of U.S. oil export demand suggesting that global demand is still strong despite the 7-year weakness in the European Manufacturing Sector. Of course, on the other hand, there is good old Mario Draghi that more than likely will do whatever it takes.  That should also boost up oil demand.

Read the entire report here.