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June 11, 2019: Oil is having its worst economic situation since 2008

Oil Pump

There are many fears of an economic downturn for oil. Oil has entered a bear market (a market in which prices are falling, encouraging selling). The supply and demand situation is beginning to look more negative. The EIA (Energy Information Administration) has weekly petroleum status reports. Here is some information from the summary of weekly petroleum data for the week ending May 31, 2019. U.S. crude oil refinery inputs averaged 16.9 million barrels per day. This was 171,000 barrels more than the previous week’s average. Refineries operated at 91.8% of their operable capacity. Gasoline production increased, averaging 10.0 million barrels per day. Distillate fuel production increased, averaging 5.4 million barrels per day. U.S. crude oil imports averaged 7.9 million barrels per day, up by 1,065,000 barrels per day from the previous week. At 483.3 million barrels, U.S. crude oil inventories are about 6% above the five year average for this time of year. Total commercial petroleum inventories increased last week by 22.4 million barrels last week. Total products supplied over the last four-week period averaged 20.0 million barrels per day, down by 0.6% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 9.4 million barrels per day, down by 1.3% from the same period last year. Distillate fuel product supplied averaged 3.9 million barrels per day over the past four weeks, down by 0.8% from the same period last year. Jet fuel product supplied was up 2.0% compared with the same four-week period last year.

The EIA report was weak, showing a strong build in crude oil (+6.8 million barrels), gasoline (+3.2 million barrels) and distillates (+4.6 million barrels). The combined builds across many different products gave something unexpected to the market. Sometimes, these figures offset each other. For example, if refiners are running very hard, they tend to build up gasoline stocks, but they use up crude oil in the process, so crude inventories decline even as gasoline stocks rise. This time there was no such thing. Increases across the board led to a decline in oil prices.

Oil is extremely bear market. There hasn’t been such a negative four-week run since 2008, the measurers of bull-bear markets say. Oil market is heading in a really bearish direction and the last time things looked this bad was during the financial crisis. Oil prices are now around USD 10 per barrel. This is too low. Demand is starting to weaken. Weakness is mostly confined to distillates (i.e., weaker activity in manufacturing and agriculture), with consumption in May dropping 9 percent, year-on-year. While gasoline demand has held up, it is still off 1.7 percent from a year ago. There are issues with supply conditions due to declines in Venezuela, Iran, potentially Libya and temporary outages from Russia. An economic downturn would undercut demand, leading to a supply/demand mismatch. The pending US tariffs on Mexico, should they go forward, would create a worse situation. Fears of an escalating trade war have shattered confidence. The supply position, while currently tight, could also flip from a bullish outlook to a bearish one.

A recent Libyan oilfield fire adds to oil outages in Iran and Venezuela. The Sarir oilfield in Libya decreased in oil production by 30,000 bpd since June 9 when a fire broke out in a power generator. The oilfield is Libya’s largest with proven reserves of 4.8 billion barrels. Current oil production at the oil field is around 155,000 bpd.