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Blowups (of All Kinds) Are Not What Oil Needs

Blowups (of All Kinds) Are Not What Oil Needs

(Bloomberg Opinion) -- The oil market avoided one set of explosions overnight but woke up to another Friday morning. President Donald Trump’s 11th-hour pullback from launching airstrikes against Iran in retaliation for a downed drone avoided further escalation there – for now. In the early hours, however, explosions ripped through the Philadelphia Energy Solutions refinery, the largest such facility on the East Coast.

As a big supplier of fuel into New York Harbor, the blaze at the refinery had a predictable effect on gasoline prices in particular, with cracking margins surging by $2 a barrel:

Blowups (of All Kinds) Are Not What Oil Needs

Gasoline has been both a drag and a source of hope for refiners (and the broader oil market) so far this year. Benchmark margins plummeted in late 2018 and bottomed out below $5 a barrel in early 2019, the lowest level since 2010, inflicting severe damage on first-quarter earnings for oil majors. Yet margins rebounded as the traditional seasonal summer upswing approached. And on Wednesday, the Energy Information Administration released weekly figures showing a surprise drop in inventory and demand running 2% higher, year on year, over the past four weeks.

It’s unclear at this point exactly how much damage has been done to the Philadelphia refinery, but video footage of a giant fireball rising into the air suggests it could be significant. An extended disruption in the heart of the biggest pool of gasoline demand in the U.S. – and during the peak season for consumption – should bolster margins, all else equal.

In the oil market, though, rarely is all else equal. While U.S. gasoline stocks are now slightly below average, the story everywhere else has been one of excess barrels seeking a home. European refiners may now find the traditional Transatlantic outlet to the East Coast opens a bit wider if the Philadelphia refinery stays offline for a while. They need it to, especially as pressure builds from Asia, where excess production from an expanding refinery industry has caused gasoline margins in Singapore to collapse.

The oil market writ large has a demand problem, as forecasters such as the International Energy Agency have begun to acknowledge. Even the hope offered by the EIA’s estimate of increasing U.S. gasoline demand over the past four weeks should be set in context. Taking that figure as a proxy for June as a whole, it would imply consumption through the first half of the year having risen all of 0.4%. Taking a further step back, looking at the growth in trailing 12-month demand, it is clear that it stalled out last fall after a couple of years of crash-induced low prices juicing consumption:

Blowups (of All Kinds) Are Not What Oil Needs

There are two types of price increases in oil, led by either stronger demand or disrupted supply. Producers can benefit from either, but the former is far better for them.

Lurking behind all of this, of course, is that near-miss with Iran. Trump said Friday morning he called off the airstrikes because they wouldn’t have been a “proportionate” response. At this point, it is anyone’s guess as to what that means. The president may have been sending a signal to Iran short of actual bombing; there may have been a last-minute problem with the operation; or we could be seeing another manifestation of a tug-of-war within the administration between hawks and doves. The president himself seems caught between a desire to squeeze Iran hard and an impulse to draw the U.S. back from international entanglements.

In that sense, while the president’s words calmed crude oil Friday morning, I am of the persuasion that it is actually not terribly reassuring to be in a situation where airstrikes are called off at the very last moment. That tends to make me focus on how close they were, not the fact they didn’t ultimately happen. For oil markets that should be concerned about demand, the last “bull” argument they need is a knocked-out refinery and a hot summer in the Persian Gulf.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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