Hold Back the barrels and we’ll have a barrel of fun. Hold back the barrels and we will get crude on the run. Zing boom tararrel, the breakout in oil is clear, now when you hold back the barrels the short fall is here.

Oil prices tried to back off after the Energy Information Administration reported that U.S. refiners are getting deep into refinery maintenance and that U.S. crude production hit a record 11.1 million barrels per day. Yet, a report that the U.S. will not tap the U.S. Strategic Petroleum Reserve (SPR) to make up for lost Iranian barrels changed the dynamic. That pushed oil back up to near 4-year highs on Brent crude and 4-month highs on the old reliable WTI. Energy Secretary Rick Perry in an interview said that the Trump Administration is not going to use oil from the SPR mainly because he knows that if they do, it will probably backfire. Perry was quoted as saying that “If you look at the Strategic Petroleum Reserve and you were to introduce it into the market, it has a minor and short-term impact. The numbers I’ve seen do anyway.”

Perry is right. While the oil price will trade higher and the market will become extremely tight without a SPR release, that is a good thing. A release from the SPR will give the market a false sense of security and the demand side of the equation would be slow to adjust to less barrels. The SPR release would cool prices but also cool incentive to bring more barrels onto the market quickly. We have already seen U.S. oil producers try to speed up projects to try to capture the expected increase in price. If the SPR dampers that enthusiasm, the market will become even more structurally under-supplied. Many Shale oil producers are still struggling to make profits and they really do not need more competition from the government when they have a chance to rake in some money. Pioneer, for example, had to lower their guidance yesterday because of at higher day rates on oil rig contracts.

International drilling utilization estimated to be approximately 76% to 80% versus previous guidance of 85% to 87% primarily due to higher than anticipated unpaid standby time and one rig released in mid-September due to a change in an operator's drilling program. This rig is currently being bid to several operators for reactivation in the fourth quarter. They also said that production services revenues are estimated to be down 5% to 7% sequentially versus previous guidance of down 3% to 5%. In addition, gross margin as a percentage of revenue is estimated to be approximately 21% to 23% versus previous guidance of 23% to 25%. Both revenue and gross margin percentages are down due to softer than expected activity in wireline.

So, Rick Perry is going to allow the market to work. He said he expects up to 300,000 barrels per day (bpd) of oil could reach markets if Iraq allows it to flow from the Kurdistan region in the north, Perry said. He also said up to an additional 300,000 bpd could soon come to market from an oilfield in the Neutral Zone that Saudi Arabia and Kuwait share if they come to agreement. Still, from a price standpoint, this is still very bullish. With the Federal Reserve raising the economic growth forecast for this year and next year and the year after, the oil market is going to stay in an upward cycle.  In the short term, the negative demand forecasts, due to refinery maintenance season, is being offset by the fact that there will not be a lot of extra supply when that season ends as Iranian sanctions start.

The EIA did report that maintenance season is in full swing, as U.S. crude oil refinery inputs averaged fell to 16.5 million barrels, a drop of  901,000 barrels per day less than the previous week. Refineries runs operated fell to 90.4% of their operable capacity last week.

Yet, the build in crude oil supply was not as large as one might expect with that kind of slowdown in refining activity. The EIA reported that crude oil inventories increased by only 1.9 million barrels from the previous week. At 396.0 million barrels, U.S. crude oil inventories are about still 2% below the five-year average for this time of year.

Distillate fuel inventories are still very low, and they fell  2.2 million barrels from; last week last week and are about 3% below the five-year average for this time of year. Gasoline inventories, on the other hand, increased by 1.5 million barrels last week and are about 8% above the five-year average for this time of year, as demand fell last week on very bad weather. Gasoline supplies are also built because of refiners trying to get caught up on diesel before winter increasing gas as a byproduct.

On the demand side, over average total products supplied over the last four -week period averaged 20.8 million barrels day, up by 2.6% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 9.5 million barrels per day, up by 0.4% from the same period last year. Distillate fuel product supplied averaged 4.0 million barrels per day over the past four weeks, down by 0.7% from the same period last year. Jet fuel product supplied was up 4.0% compared with the same four -week period last year.

The drop-in runs led to a drop in gasoline to  9.8 million barrels per day the smallest surplus over demand in some time. Distillate fuel production decreased last week, averaging 5.0 million barrels per day. U.S. crude oil imports averaged 7.8 million barrels per day last week, down by 222,000  barrels per day from the previous week. Over the past four weeks, crude oil imports averaged about 7.8 million barrels per day, 9.8% more than the same four -week period last year.

Oils breakout in both WTI and Brent was confirmed. Hedgers should continue to hedge ahead of the sanctions. More oil will be coming in but only if prices remain high. Global spare production capacity is at or near all-time historic lows so there is no margin for error. We maintain our year-end target for WTI at $84 and Brent at $92. Distillate $257 and RBOB GAS $227.