Oil Heating Up

Oil prices are heating up ahead of the summer driving season as global demand expectations for oil are rising while global oil production is falling. Just when you thought it was safe to go to the gas pump, we get a report that China’s stimulus is starting to kick in just as U.S. weekly oil production numbers get downgraded and the U.S. rig count falls. The possibility of a supply squeeze is rising and so is the price of oil.

Even without a trade deal with the U.S. and with weak economic data, Chinese oil demand has stayed near all-time highs. That should continue and get even stronger after a private reading of China's manufacturing industry for the month of March, published Sunday, hit 50.8 into expansion territory and the highest reading in eight months. That surge in activity probably means that China is starting to see benefits from the issuing of 1.1 trillion dollars off the book’s stimulus and the 2.15 trillion yuan of bonds, up 800 billion yuan from last year, to fund infrastructure projects and boost confidence in rural areas. That means, of course, a big surge in Chinese energy demand that will only get stronger after they secure a trade deal with the U.S.

It may be harder to meet that surge in oil demand as the U.S. looks to put tougher sanctions on Iran, Venezuelan oil is off the market, and U.S. production is not as strong as originally reported. Reuters reported that “Washington has instructed oil trading houses and refiners to further cut dealings with Venezuela or face sanctions themselves, sources told Reuters, and has urged Malaysia and Singapore to be vigilant for illicit Iranian crude in its waterways.”      

U.S. oil production fell in January for the first time in 6 months as the US oil rig count fell again to the lowest level in over a year.

The Energy Information Administration (EIA), as reported by Oil Price, showed that January oil production for the United States averaged 11.871 million bpd for January—down from 11.961 million bpd in the month prior. The last decrease in oil production came in May 2018, when production fell to 10.464 million bpd from 10.475 million bpd in April 2018. We predicted that we would see this number fall and it will probably fall even more.

The Baker Hughes rig count is showing that U.S. production is still in contraction zone as U.S. rigs drilling for crude fell by 8 and those drilling for gas fell by 2. Even if oil prices rise it will take some time to ramp up, as many companies are still cutting spending.

Reuters reported that hedge funds and other money managers raised their net long U.S. crude futures and options positions to 243,209 in the week to March 26, the U.S. Commodity Futures Trading Commission said. Probably profit-taking after the best quarter in a decade. They will likely be looking to get back in.