Oil prices crashed along with global financial markets on Friday following the British vote on Thursday to exit the European Union (typically referred to as "Brexit"), which is widely expected to precipitate a period of political instability in Europe. Conservative British Prime Minister David Cameron, who had campaigned for remaining in the EU, submitted his resignation; British Labor Party leader Jeremy Corbyn also faces a no-confidence vote, as both major parties had campaigned to remain in the EU. In response to the British vote, populist parties on the left and right across Europe are calling for referendums in their own countries, with speculation that France, the Netherlands, Austria, Finland and Hungary might also vote to leave the EU, effectively rebalkanizing the continent. Although markets in the US and Britain recovered to end down less than 4%, it was European markets that were hit the hardest, with German and French indexes down 7% and 8% respectively and markets in the southern tier of European countries down more than 10%. However, since it isn't our purpose here to discuss European markets or politics, we'll refer you to Brexit: What Happens Now? from the BBC for a discussion of what steps the British might take next, and to Brexit: Pulling the Signal Out of the Noise from Yves Smith at Naked Capitalism, who entertains possibilities outside of the most obvious, and who also includes exit polling results. Yves includes graphics from "Lord Ashcroft Polls - How the United Kingdom voted on Thursday... and why" which are better viewed on the original site, where there are also several more graphics detailing the demographics and the politics of the British vote. For our purposes, we'll start with a look at how oil prices reacted to this political upheaval..
The above graph comes from FXCM, a mostly foreign exchange (forex) online trading website, and it shows the prices that US WTI crude exchanged at through their online exchange, every hour, 24 hours a day, from 2PM Monday till the end of the week. Since they're providing the trading service, the prices shown aren't to the penny the same as those we’d see at the NYMEX, but they track them pretty closely (otherwise traders would play one exchange against the other), and they also trade oil after the regular exchanges are closed. In this candlestick style graph, there's a red or green bar for every hour over this period, and each bar shows the price of oil at the start and end of the hour indicated. When the price of oil went down in a given hour, the bar is red, and when the price closed higher at the end of the hour, the bar is green. Note that most of these red and green "candlesticks" also have light grey "wicks" on either end, which represent the range of prices outside of the beginning and ending price that oil traded at over that one hour period. Thus we can see that oil prices rose as high as $50.50 a barrel on Wednesday morning, and topped $50 a barrel again late Thursday, before the first results from the British voting came in. Then, as the vote results became clear, oil prices then fell more than 6% over the next 6 hours, trading below $47 a barrel for a short period before buying resumed, which pushed the price back up to $48. Oil then traded in a range between $47.30 to $48.40 a barrel the rest of Friday, and ended the period shown here at $47.58 a barrel (this graph is from Friday midnight, thus including after hours online trading; officially, oil closed the week at $47.64 a barrel on the NY Mercantile Exchange)
It's important to recognize that there was no fundamental change in the supply of or the demand for oil and its products that drove that price change, or a similar drop in the price of the international benchmark Brent oil over the same period. Those with cars in Great Britain and Europe will be driving them next week as they were the week before this vote, and European industries consuming petrochemicals will continue to operate. It may even take a year or two before the political ramifications of Thursday's vote are sorted out, much less begin to affect the economies in those countries. With this crash as a backdrop, however, the coming week will likely be telling us a tale about the ultimate trajectory of oil prices for the months to come. If oil prices stay at these levels or even drift lower, it will be a pretty strong indication that the $50 a barrel level will be the limiting top price for some time to come, However, if oil prices recover from these losses and push back over $50 a barrel again, then they've beaten the panic that caused this week's price crash, and might well move higher the rest of the summer, even as US drilling activity resumes.
The Latest Oil Stats from the EIA
This week's oil data from the US Energy Information Administration indicated another drop in our production of crude oil, a spike in our oil imports, an increase in refining to near seasonally normal levels, and record levels of both gasoline production and gasoline consumption. However, the crude oil fudge factor included on the weekly U.S. Petroleum Balance Sheet (line 13) was a minus 253,000 barrels per day, which means that 253,000 barrels of oil per day that we appeared to have produced or imported last week did not show up in the final consumption or inventory figures. That follows an adjustment of +335,000 barrels per day during the prior week, a swing of 588,000 barrels per day from the last report, which is certainly enough to call into question most of the weekly changes we'll review today.
In the stat which varies the least, and is hence probably the most accurate estimate, the EIA reported that our field production of crude oil fell by 39,000 barrels per day, from an average of 8,716,000 barrels per day during the week ending June 10th to an average of 8,677,000 barrels per day during the week ending June 17th. That was our lowest weekly oil output since the 1st week of September 2014, and 9.7% lower than the 9,604,000 barrels we produced during the week ending June 19th last year, which was close to the record 9,610,000 barrel per day oil production that we saw during the week ending June 5th of 2015. Our oil production has now been down 19 out of the last 21 weeks and is 542,000 barrels per day lower than we were producing at the beginning of this year.
At the same time, our imports of crude oil jumped by 817,000 barrels per day to average 8,439,000 barrels per day during the week ending June 17th, up from the average of 7,622,000 barrels per day we were importing during the week ending June 10th. That topped this year's previous high of 8,384,000 barrels per day that we imported during the week ending March 18th and was the most oil we've imported in any week since the week ending December 7th of 2012. While this week's imports were 24.7% more than the 6,765,000 barrels of oil per day we imported during the week ending June 19th a year ago, oil imports are notoriously volatile week to week, so the EIA's weekly Petroleum Status Report (62 pp pdf) reports imports as a 4 week moving average. That metric showed that the 4 week average of our imports has now risen to the 7.9 million barrel per day level, which is 13.6% above the same four-week period last year.
Meanwhile, U.S. refineries’ crude oil usage averaged 16,505,000 barrels of per day barrels during the week ending June 17th, which was 188,000 barrels per day more than the 16,317,000 barrels of crude per day they processed during the week ending June 10th, as the US refinery utilization rate rose to 91.3% during the week, from 90.2% of capacity the prior week. This week's crude usage was just a small fraction lower than the 16,532,000 barrels per day US refineries used during the week ending June 19th last year, when US refineries were operating at 94.0% of capacity.
With more oil being refined, our refinery production of gasoline rose by 582,000 barrels per day, as gasoline output averaged 10,289,000 barrels per day during the week ending June 17th, which was up from the average of 9,707,000 barrels per day of gasoline produced during the week ending June 10th and a new all time weekly high for US gasoline production. That was also 3.6% more than the 9,934,000 barrels of gasoline per day we were producing during the same week last year. However, our refinery output of distillate fuels (diesel fuel and heat oil) slipped at the same time, falling by 28,000 barrels per day to 4,956,000 barrels per day during the week ending June 17th. That was also 14,000 barrels per day below our distillates production of 4,970,000 barrels per day during the week ending June 19th of last year, when distillates inventories were quite a bit tighter than today..
With the record output of gasoline, our gasoline inventories rose by 627,000 barrels to 237,631,000 barrels as of June 17th, the second small increase in the past 3 weeks, at a time of year when our gasoline supplies are usually being used up. That was even as the amount of gasoline supplied to US markets rose by 53,000 barrels per day to 9,815,000 barrels per day, 1.7% higher than the 9,655,000 barrel per day consumption during the week ending June 19th last year, and a new record for US gasoline consumption. Also adding to gasoline inventories was a 129,000 barrel per day jump in our gasoline imports to 876,000 barrels per day, which were still lower than the 896,000 barrels of gasoline we imported during the same week a year earlier. As a result, this week's gasoline inventories were 8.8% higher than the 218,494,000 barrels of gasoline that we had stored on June 19th last year, and 10.5% higher than the 214,977,000 barrels of gasoline we had stored on June 20th of 2014. Thus our gasoline supplies are still categorized by the EIA as "well above the upper limit of the average range" for this time of year..
At the same time, our distillate fuel inventories also rose by a nominal 151,000 barrels to end the week at 152,314,000 barrels, as distillates were added to storage on the east and west coasts and withdrawn elsewhere. Since our distillate inventories have been well above normal since the El Nino winter reduced US heat oil consumption, our distillate inventories are still 12.5% higher than the 135,428,000 barrels of distillates we had stored at the same weekend last year, and 26.3% higher than our distillates supplies as of June 20th 2014, and thus they're also characterized as "well above the upper limit of the average range" for this time of year.
Finally, even with the disappearance of 253,000 barrels per day in this week's EIA data, that big spike in imports limited our withdrawal of oil from our stocks of crude oil in storage to 917,000 barrels, under a million for the 2nd week in a row, at a time of year when are stored supplies of oil are usually being used up twice as fast. Thus our oil inventory level of 531,543,000 barrels on June 17th was 14.6% higher than the 462,993,000 barrels of oil we had stored as of June 19th, 2015, and 36.7% higher than the 388,090,000 barrels of oil we had stored on June 20th of 2014. With our oil inventories continuing that much higher than the seasonal records we set every week in 2015, it goes without saying that our crude oil supplies are also "well above the upper limit of the average range" for this time of year..."
(Note: the above was excerpted from my weekly synopsis at Focus on Fracking)
I think much of this is shear panic versus real impact. Brexit.