Crude Draws Continue

In the battle between the bulls and the bears, the one trend that remains constant is the trend of falling US crude oil supply. Once again, the crude oil supply drops far exceeded market expectations and according to data from the American Petroleum Institute, fell by 9.2 million barrels last week. That drop in supply is a trend that continues for falling supply is historically unprecedented in terms of actual barrels. The bears argue that this does not matter because US shale production is at a record high and demand will start to drift lower as refiners go into maintenance. They also argue that compliance by OPEC is starting to falter and that it is only a matter of time before cartel members ramp up production as it becomes every man for himself.

Yet at some point the simple math suggests that with rising global demand and falling global supply, the replacing process is under way. The forward curve in the futures market is also suggesting a tighter global supply picture. Better than expected economic data from Europe suggests that demand growth will be better than expected and the drop in China refining demand sets the stage for a lower market this week but might not be a trend but a one off.

John Kemp at Reuters lays out the bullish case. He says that oil demand is growing strong in all the major geographic regions, with the exception of the Middle East and Africa, and global demand is increasing above the long-term average rate. And while The International Energy Agency forecasts that global consumption will grow by 1.5 million barrels per day in 2017 and another 1.4 million barrels per day in 2018, the global production numbers will not keep pace. U.S. oil production (crude and condensates) is predicted to rise by 800,000 bpd in 2017 and another 1.0 million bpd in 2018, according to the U.S. Energy Information Administration and crude production is also increasing from a number of non-OPEC countries, including Canada and Brazil, in most cases as a result of investments approved before oil prices slumped in 2014.

But the pipeline of new non-OPEC non-shale projects is drying up as a result of investments cancelled or postponed since 2014. The oil industry’s spare production capacity is shrinking and set to fall below 1.5 million bpd in 2018, mostly in Saudi Arabia. Global oil inventories remain well above the five-year average, but given the fast growth in consumption, the five-year average is likely to prove too low.

That is the point I was making yesterday. You cannot just look at supply but you must compare it to demand that is much higher that the five-year average.

Still another increase in gasoline stocks which increased by 301,000 barrels, compared with expectations for a 1.1-million-barrel draw gave some buyers pause. That marks the second week in a row that gas stocks came in higher than expected which may signal the top in the summer driving season. Still US gasoline demand is just off a record high and the drop in demand may not be as pronounced as some traders think. Seasonal demand reports earlier in the year had many traders believe falsely that US gasoline demand had died. Yet it appears that the recent spike to record highs destroyed the peak gasoline demand myth. Look at the weekly demand change in today’s Energy Information Adminstrations report to judge whether demand is dying or getting ready for another drive higher as we head into Labor Day.

Distillate demand continues to be strong, reflecting strong demand from manufacturing. The surge in demand reflects good economic demand here and abroad and supply fell by 2.1 million barrels. US exports of product continues to be strong. That should keep refining runs strong as they stay near record highs here in the US.

While Hurricane Gert is not a threat to the US oil supply we have three other tropical disturbances that will impact oil shipping at the very least over the next couple of weeks. The National Hurricane Center reports that a broad area of low pressure located about 1000 miles east of the Lesser Antilles is producing disorganized showers and a few thunderstorms.  This system is moving westward at 15 to 20 mph, and it is expected to cross into the Caribbean Sea on Friday. Environmental conditions are expected to be marginally conducive for slow development of this system during the next few days. * Formation chance through 48 hours...low...20 percent. * Formation chance through 5 days...medium...40 percent.

Showers and thunderstorms continue to show some signs of organization in association with an area of low pressure located about 600 miles west of the Cabo Verde Islands.  Gradual development of this system is possible before upper-level winds become less conducive for development by the weekend. This system is expected to move west-northwestward at 15 to 20 mph during the next several days. *  formation chance through 48 hours...low...30 percent. * Formation chance through 5 days...medium...40 percent.  A tropical wave near the west coast of Africa is producing a large area of disorganized showers and thunderstorms. Environmental conditions appear conducive for gradual development of this wave while it moves westward to west-northwestward at about 15 mph during the next several days. * Formation chance through 48 hours...low...near 0 percent. * Formation chance through 5 days...low...30 percent. And we are still very early in the season.