The Bulls Awaken, Oil Market Tightens

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. 

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