The Barrels Come Home To Roost

The chickens have come home to roost in the oil market. Or maybe its barrels, whatever. All this selling in recent weeks on talk of slowing demand because of turmoil in global markets seemed to make sense except someone forgot to tell oil consumers about it. Instead of a slowdown in oil demand, it appears to be flourishing as buyers look to sop up every barrel of oil they can get their hands on. The American Petroleum Institute (API) reported that U.S. Crude supply fell by 10.18 million barrels in the latest week as U.S. exports most likely surged to near record levels and U.S. refiners are kicking into high gear. What is scarier is that the big weekly draw in U.S. oil inventory may be the first of many as OPEC, Russian, Alberta production cuts and outages in Libya could remove 1.8 million barrels of oil a day from the global market.

This is not good as it is an inverse of the situation we had when oil was near $77 a barrel. Back then oil was rising because we were fearful that we could not replace Iranian barrels lost to sanctions. Then, President Trump granted waivers to Iranian buyers and then we thought we suddenly had a glut. After the waivers, oil prices could not get a bid and the thought then was that it was because the price action might be signaling a slowdown in demand. Surely the trade would slow Chinese oil demand and the weak economic data coming out of Europe would surely show a marked drop in demand. The U.S. would also cave and demand would plummet.

The problem is that did not happen. Chinese oil imports soared to a record. The slowdown in demand in Europe and the U.S. was not nearly recognizable and in part seasonally related.  Yet, now you have OPEC making substantial cuts to offset a drop-in demand that is not happening. Sort of like when they raised production to offset the loss of Iranian barrels that did not get lost. Now with potential progress in U.S. China trade talks, it looks like we are going to have an undersupplied market going into the new year. President Trump will have to get ready to start tweeting again in the near year. The oil products did not fare much better in the API, as gasoline inventories fell by a much larger than expected 2.484 million barrels. Distillates were up by only 712,000 barrels, which is not going to make a lot of difference in the year over year supply deficit.

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