In the battle of giants, we are but mere ants hoping to side with the right giant. One wrong step and oops, see ya later.
As I have written over the past month, the oil market is at a precarious turning point. One flawed assumption I had going into the “timing” part of the oil trade was that we needed elevated crude oil prices in August and September leading into the midterm elections. I don’t think that’s necessarily true. I think the timing is closer to September/October.
It appears the economic pressure is first unfolding in product inventory, which can be best illustrated in these three charts:
Gasoline
Distillate
Big 4 (US crude with SPR, gasoline, distillate, and jet fuel)
Now, what you will notice in the gasoline chart is that we are at an all-time low for this time of the year. That’s a big no no.
Why?
Refineries perform seasonal maintenance from mid-September into early November. This semi-annual maintenance gets the refinery ready for the winter demand months and, more importantly, keeps the refinery running smoothly to keep unforeseen operational issues at bay.
But with the strong refining margins refineries are enjoying today, most are choosing to delay maintenance, which will be an issue during the winter months. And this is where it gets alarming.
Gasoline storage is already too low for comfort. Driving demand does not meaningfully taper off for another 2.5 to 3 months, which means that if refineries don’t operate at 17+ million b/d, we will have localized shortages. Now, one thing to consider is that the US could just choke off gasoline exports, but the rest of the world, suffering from the same gasoline/distillate shortage issue, will just bid prices up and push exports higher.
In layman’s terms, if demand isn’t curtailed or gasoline exports don’t drop, we’ll have no cushion a month into the midterms.
For distillate, the situation is worse.