September Squeeze

September squeeze as the September futures contract outpaces the back months. The run into today’s contract expiration reflects the fact that U.S. refineries are running at a record pace and that last week’s crude oil build was not enough to satisfy the ravenous crude eating refineries. Yet, with the Trump administration’s promising more oil from the U.S. Strategic Petroleum Reserve (SPR), and with the promise of shoulder season just right around the corner, the fears of a tight oil market are being played out in the September expiration. The back months have a false sense of security that the SPR release is going to make enough of a difference.

Short sellers may want to lean from the September squeeze that demand for oil from refiners is at record highs and despite the China trade war fears and Turkish sanction fears. The oil market is going to have a tough challenge to replace lost Iranian crude oil exports, after sanctions go in November even with the SPR release. The U.S. Energy Department’s Office of Fossil Energy, on Monday, announced a notice a sale of 11 million barrels of sour crude oil. The sour crude oil market is tight as U.S. refiners have too much sweet and not enough sour. The move did weigh more on the back end of the curve, but really was not a surprise as it was part of previously announced sales that are expected to draw down reserves by a total of 25 million barrels over three consecutive years, beginning this year. Bids for the 11 million barrels of crude must be received no later than Aug. 28, with delivery to take place in October and November, the government agency said.

The dollar, which had been supported by trade war fears, and flight to quality buying that was providing a headwind for oil, is now retreating on comments by President Trump to wealthy donors that he thought that Fed Chairman Jerome Powell was a low interest rate guy. The dollar on top of that has been supporting by quality buying as emerging market fears. Any break in the dollar could support prices and slow down the big surge in U.S. oil imports that have gone up in part because of the strong dollar.