While the recent surge to 2-year highs on Brent crude may slow because of a strong dollar. Yet, the expected march to a tax cut deal in the U.S. is bullish for oil. Tax cuts will equate to growth and that is music to oil bull ears. Demand that has already been surging around the globe will grow even more as tax cuts are exactly what the doctor ordered.
Oil demand growth for oil is on track to exceed pre-financial crisis levels signaling that the sick global economy may finally be getting better. And while the oil may fret the surging dollar in the short term, in the big picture that will drive the next move. The U.S. dollar, normally a nemesis for oil bulls, is surging for a couple of reasons.
One is the constantly changing betting odds in the market trying to figure out who will be President Trumps pick to lead the Federal Reserve. It seems that the dovish Fed chair Janet Yellen is out. It is now a two-man race between William Powell and John Taylor. Yesterday most traders believed that William Powel will be the pick but now it seems that the ultimate hawk John Taylor is getting some late minute betting.
John Taylor gave a speech last night where he praised tax cuts and said that the U.S. should be able to achieve growth levels that exceed pre-financial crisis levels. The perception in the market is that if John Taylor gets in, there will be a much faster path to higher interest rates. He sounded more like a Fed Chief.
ECB chief Mario Draghi also helped support the dollar as he singled to the market that quantitative easing could be extended again if necessary, even as the ECB announced plans to trim its monthly asset purchase program as expected. Mario is reminding the market he will do whatever it takes to save the EU economy even if it means that quantitative easing could be brought back if the market does not respond well to the removal of the stimulus. Oil will also respond to the fact that if the EU falters Mario will have their back.
OPEC and Russia are also signaling they will continue to do whatever it takes to drain global oil supply. The Wall Street Journal reported that Saudi Arabia’s energy minister Khalid al-Falih discussed extending the deal earlier this month with Russian and Venezuelan officials during King Salman’s trip to Moscow, the people said. Russian President Vladimir Putin said then that his country was open to extending a production deal with OPEC until the end of 2018. The Journal said that a senior Saudi official said extending the agreement until the end of 2018 would ensure a “smooth” exit from the production cut—meaning the market wouldn’t be jolted by supplies suddenly coming back online. “There are other members that agree that the cut should be extended until the end of next year so that is a likely scenario,” the official said.
Oil is on a tear as prices have risen 11 out of the last 14 trading days. Low prices and the results of capital spending cutbacks are starting to reduce production growth. Low oil prices have also helped spur economic growth and now the momentum of that growth is causing a drain on global oil supply, unlike anything we have ever seen before. To meet that demand U.S. refiners are going to have to refine like they have never refined before. Of course, if anyone can do it, the U.S. refining industry can do it considering what they did in the after the recent surge of hurricanes.
The Energy Information Administration reported that Gulf Coast Refiners are back to Pre-Hurricane levels. The EIA said that gross inputs to petroleum refineries in the U.S. Gulf Coast averaged 8.8 million barrels per day (b/d), or about 324,000 b/d higher than the previous five-year range for mid-October. Gross inputs, also referred to as refinery runs, in the Gulf Coast had been higher than the five-year range for much of 2017 until Hurricane Harvey made landfall in the Houston, Texas, area on August 25.
A little more than half of all U.S. refinery capacity is located in the U.S. Gulf Coast region. Texas, where Harvey made landfall, represents 31% of all U.S. refinery capacity according to data from January 2017. Gulf Coast refineries supply petroleum products to domestic markets in the Gulf Coast, East Coast, and Midwest, as well as to international markets.
Hurricane Harvey’s most significant effect on petroleum markets was the curtailment of some refinery operations in Texas. Refinery operations rely on a supply of crude oil and feedstocks, electricity, workforce availability and safe working conditions, and outlets for production. As a result of Hurricane Harvey, many refineries in the region either reduced runs or temporarily shut down.
For the week ending September 1, 2017, the first WPSR data point after Harvey’s landfall, gross inputs to refineries in the Gulf Coast fell 3.2 million b/d, or 34%, from the previous week. For the week ending September 8, Gulf Coast gross inputs to refineries fell by another 263,000 b/d to 5.9 million b/d, the lowest weekly value since Hurricanes Gustav and Ike disrupted refinery operations in September 2008.