Hedge funds blowing up Deficits Don’t Matter
Deficits don’t matter. No, I am not talking about budget deficits, but oil supply deficits. Despite mounting evidence that we are moving into a supply deficit in the near year, fear and hedge fund blow ups have the oil market blissfully unaware.
In the latest report by the (IEA) released today, the global oil market could move into deficit sooner than expected thanks to OPEC’s output agreement with Russia and Canada’s decision to cut supply, said the International Energy Agency according to Reuters.
The Paris-based IEA kept its 2019 forecast for global oil demand growth at 1.4 million barrels per day, unchanged from its projection last month, and said it expected growth of 1.3 million bpd this year. Uncertainty over the global economy stemming from U.S.-China trade tensions could undermine oil consumption next year, as growth in supply gathers pace. “For 2019, our demand growth outlook remains at 1.4 million bpd even though oil prices have fallen back considerably since the early October peak," the IEA said.
Yet the oil market is still out of touch with fundamentals as historic shifts in volatility and increasing erratic geopolitical events has the market forcing liquation to the detriment of the oil producers globally and in the U.S. The crazy swings in the oil price will hamper investment and lead to situations where we could become significantly undersupplied in the near year.
Yet the oil market can’t look beyond the next few hours as every rally is met with selling by hedge-funds trying to hang on for dear life. Bloomberg News reported that due to the historic volatility an estimated 174 hedge funds were liquidated in the third quarter. “Some of the biggest names have been caught up in the melee. Jon Jacobson’s $12.1 billion Highfields Capital Management LLC is returning client money after two decades, joining other well-known operators including Richard Perry’s namesake company, Eric Mindich’s Eton Park Capital Management LP and John Griffin’s Blue Ridge Capital LLC, which have all exited the industry over the past two years. Leon Cooperman, meanwhile, plans to convert his firm into a family office at the end of the year.”
Yet despite the turmoil in the futures and equity market the physical market for oil is only going to get tighter and at some point, prices are going to have to reflect that. Even as yesterday’s Energy Information Administration (EIA) seemed to disappoint on headline numbers (mainly because it was not quite as bullish as the American Petroleum Institute version) we did see overall petroleum use in the U.S. come within a whisper of all-time high demand. The EIA reported that total demand on the U.S. system increased to 27.021 million barrels a day just short of the July record of 27.068 million barrels per day.
The EIA reported that U.S. commercial decreased by 1.2 million barrels from the previous week. Not as big as the almost 11 million barrel draw from API. A drop in U.S. exports and a bigger than expected increase in Cushing, Oklahoma in part explains the defiance. Still the discrepancies from reporting agencies is only adding to the market volatility.
The EIA also reported that gasoline inventories increased by 2.1 million barrels last week and are about 3% above the five-year average for this time of year. Finished gasoline and blending components inventories both increased last week. Distillate fuel inventories decreased by 1.5 million barrels last week and are about 8% below the five-year average for this time of year. Propane/propylene inventories decreased by 3.2 million barrels last week and are about 5% below the five-year average for this time of year. Total commercial petroleum inventories decreased last week by 6.0 million barrels last week.
Demand is strong. The EIA says that motor gasoline product supplied averaged 9.1 million barrels per day, down by 0.1% from the same period last year. Distillate fuel product supplied averaged 4.1 million barrels per day over the past four weeks, up by 1.8% from the same period last year. Jet fuel product supplied was up 3.0% compared with the same four-week period last year. So right now, fear is outweighing reality. Yet we may pay the price for that fear now with less investment, less production and ultimately higher prices.