Oil bulls are swimming upstream and against the big build upstream in the Gulf Coast. The build eased fears of an impending crude shortfall even as Iranian oil sanctions go into effect full force and geopolitical risk factors in oil-producing nations Venezuela and Libya are ever-present. The big argument for the market is whether the recent surge in oil inventories to 2-year highs reflects a slowdown in demand or is it just the result of transitory supply chain and refinery planned and unplanned outages at work?

My take is that the economy is strong, and the surprise increases are mainly due to transitory factors. We should see record gasoline demand this summer and diesel demand is set to come back. That, of course, does not mean that you can be blindly long. I felt that after the biggest run-up in over a decade and a heavy long speculative position we were ready for a pullback, but in the long term, the oil bull market is still intact.

There was some talk about the fact that Russia came in just above their OPEC quota as an ominous sign that the Russia OPEC partnership was falling apart. Russia’s oil production fell to 11.23 million barrels per day (bpd) in April from 11.3 million bpd in March, above their agreed upon quota. Yet the amount of overproduction was not that much and it’s clear that Russia has made a good faith effort to reign in over-supply. They must do better, and I am sure that Saudi Arabia is going to remind them of that.

Saudi Arabia for their part has done everything in their power and more to try to reduce global oil inventories and get oil prices higher. They continue to over-comply, leading OPEC oil production to a four- year low. OPEC pumped 30.23 million barrels per day (bpd) this month, the survey showed, down 90,000 bpd from March and the lowest OPEC total since 2015, according to a Reuters survey. This comes as Saudi Energy Minister Khalid al-Falih not only said that he would not be in a hurry to replace Iranian crude oil, but that he was ready to consider extending cuts along with Russia past the June OPEC meeting into the end of the year.

But Reuters is reporting that they may have to increase production to meet domestic demand. Reuters reported that “sources said any rise in Saudi output would still be within its output quota in a pact on supply cuts agreed between OPEC and its allies, a group known as OPEC+. Production from the world’s top crude exporter in May is expected to be around 10 million barrels per day (bpd), slightly higher than April but still below its quota under the OPEC-led pact of 10.3 million bpd, industry sources said.”

“Riyadh often lifts output in the hot summer months to fuel oil-fired power plants and meet rising electricity demand, which means exports do not necessarily rise. One of the sources said the May output rise was not related to Washington’s push for more OPEC oil after it ended waivers granted to buyers of Iranian oil. The waivers had allowed them to purchase crude from Iran despite U.S. sanctions. According to Reuters.”

Yet, Iran hit with tough sanctions says that OPEC is going to fall apart especially if other OPEC members go along with President Trump. Bloomberg News reports “the Iranian oil minister warned that OPEC is in danger of collapse as some nations seek to undermine their fellow members, an apparent reference to Saudi Arabia’s pledge to fill the supply gap created by U.S. sanctions on Iranian exports.” "Iran is a member of OPEC for its interests and any threat from member states won’t go unanswered," Bijan Namdar Zanganeh said after a meeting with OPEC Secretary General Mohammad Barkindo in Tehran on Thursday, according to the oil ministry’s Shana news agency.

For oil today, look at the ISM manufacturing number for direction. If it comes out stronger than expected it should calm fears of an impending oil demand slowdown. That comes out after the Monthly jobs report that is expected to be solid. Also, look at the rig counts. Despite U.S. weekly estimates of oil production rising, another drop-in rig counts will change that trend of rising output in the coming months. What you really need to do is prosper.