Suddenly, the oil market looks a lot tighter. After a stunningly bullish jobs report and hopes rising for a Chinese trade deal, the demand side is looking stronger as production starts to pull back. A report that Chinese Vice Premier Liu He unexpectedly attended the first day of talks is a sign that the Chinese are very serious about securing a trade deal. That along with Federal Reserve Chairman Jerome Powell sticking to the script in Atlanta saying that the Fed could pause in its path to rising rates and offering flexibility in its balance sheet reduction plans.

The “risk on” mood, after the jobs report, gave oil a ride that stalled a bit after a bearish Energy Information Administration (EIA) report that was impacted by bad weather in the Houston Shipping Channel, as well as end of the year tax related shenanigans. The EIA reported that crude oil inventories “remained virtually unchanged from the previous week. At 441.4 million barrels, U.S. crude oil inventories are about 8% above the five- year average for this time of year. Total motor gasoline inventories increased by 6.9 million barrels last week and are about  5% above the five year average for this time of year. Distillate fuel inventories increased by 9.5 million barrels last week and are about 7% below the five-year average for this time of year. Total commercial petroleum inventories increased last week by 14.6 million barrels”.

Yet, with falling production from OPEC, with sharp drops in Saudi exports, and reports of a big pullback in spending in the shale patch, we look like the market’s mood has shifted from irrational pessimism to guarded optimism. On Friday Baker Hughes reported that the U.S. oil rig count fell by 8 to 1,075 last week. That means that the U.S. rig count is starting to slow, confirming reports of a big pull back in energy investment. Last week the Dallas Fed Energy Survey showed that growth in energy sector activity slowed significantly in the fourth quarter. This comes as OPEC production fell by 460,000 bpd from November and the largest month-on-month drop since January 2017. Iran is also way down on exports despite claiming that they have found new customers for their oil. 

The EIA also reported that gasoline prices ended last year lower than where they started.  U.S. regular retail gasoline prices averaged $2.72 per gallon (gal) in 2018, 30 cents/gal (13%) higher than in 2017 and 57 cents/gal higher than in 2016. However, a rapid price decline beginning in October led to U.S. average regular gasoline prices ending the year lower than they began for the first time since 2015. In 5 of the 10 cities for which EIA collects weekly retail price data, gasoline prices exceeded $3.00/gal at least once in 2018. The EIA says that rising crude oil prices and high levels of gasoline demand contributed to rising gasoline prices from January through May. Gasoline prices subsequently remained relatively stable from June through October before falling oil prices, high gasoline inventories, and flattening U.S. gasoline demand helped bring the U.S. average price down by nearly $0.50 per gallon between October and December. The national price for gasoline declined for 12 weeks in a row at the end of 2018, which marked the longest consecutive weekly drop since the 17-week decline from October 2014 through January 2015. Although prices declined across the country, the extent of the decline varied greatly.

Reuters is reporting that U.S. crude oil is starting to trickle back to China with three cargoes slated to arrive next month, but volumes are still a long way off levels prior to the outbreak of trade war. Vessel-tracking data compiled by Refinitiv shows three tankers carrying 3.94 million barrels are in route from the United States to China and will arrive in February. This is up from zero cargoes slated to arrive in January, a mere one in December and zero in both November and October. Prior to the tit-for-tat tariffs being imposed from the middle of last year, crude oil was a success story in the U.S.-China trade relationship as Beijing bought increasing volumes of booming U.S. shale oil production. In the first nine months of this year, China imported about 328,000 barrels per day (bpd) from the United States, representing about 3.6 percent of its total crude imports.