Gasoline demand is rising again in the U.S., helping to drain the exceptionally high levels of refined product inventories. That provides a small bit of bullish evidence for a market running a little low on reasons to feel optimistic about oil prices.
All eyes tend to be on the crude oil inventory figures when the EIA releases its weekly data, and this past week was more of the same: no drawdown in crude stocks, which still remain at all-time highs.
That would normally induce another sell off in oil prices. However, investors overlooked that bearish news because of another more interesting development. Gasoline stocks have declined rather significantly in recent weeks, at a much faster rate than at this point in the 2016 season.
At 239 million barrels, gasoline stocks have dipped back into the five-year average range – still elevated, but no longer at record seasonal highs. A couple more weeks of drawdowns would mean gasoline inventories would no longer appear as bloated as they have been since the beginning of 2016.
That comes even as refinery runs have ticked up in recent weeks as well, which could have provided a fresh round of increases for gasoline inventories. However, the fact that inventories are falling suggests that demand is holding up in the U.S. Moreover, as refineries finish up with maintenance and the summer driving season draws near, higher demand from refiners will start to pull down on crude inventories.
I have written quite a bit about the bearish case for crude oil prices this year, but there are a few signs that, when put together, add up to a reasonable case for higher oil prices.
On top of stronger gasoline demand, the oil market saw a sudden supply outage in Libya this week. The loss of 250,000 bpd from disrupted oil fields due to ongoing security issues took a substantial source of output offline, if only temporarily. Only a few weeks ago Libyan officials said they were aiming to take output above 1 million barrels per day by the end of the summer, but for now, production is down to somewhere around 500,000 bpd, the lowest level in nearly seven months.
“The weekly U.S. oil statistics were bullish,” Tamas Varga, an analyst at PVM Oil Associates Ltd., told Bloomberg in an interview. If OPEC decides to extend its production cuts for another six months and U.S. gasoline inventories continue to fall, then a “bullish cocktail is in the making,” Varga said.
These bullish trends could be overwhelmed by other forces, such as weaker-than-expected Chinese demand, supply growth in the U.S., and above all the failure of OPEC to extend its deal beyond June. If that were to occur, and OPEC brought at least 1.2 million barrels per day back onto the market – or worse, production could go higher if they ramped up to fight for market share – then prices would certainly head down.
The longer-term is less clear, and that is where the case for bullishness is on sounder footing. The IEA has repeatedly warned that a dearth of investment today will lead to a supply shortage towards the end of the decade, as too few projects come online to meet rising demand.
The global oil industry slashed upstream investment by around 25 percent each year for the past two years. 2017 should see a rebound in spending, but only slightly, and a return to the heady spending levels of 2014 is not expected for the foreseeable future.
Even the oil majors are passing up on some otherwise viable long-term projects offshore and instead focusing a growing share of their spending on shale drilling.
Some of the world’s largest oil traders added their voices to the long-term bullish case this week. “We are sowing the seeds for potential instability in the future and more volatility,” Daniel Jaeggi said at the FT Commodities Global Summit in Switzerland on March 29, warning that the industry is too focused on shale projects, to the detriment of long-term supply. By the end of the decade “you won’t be able to satisfy demand with short-cycle barrels.” The IEA has also warned in the past that the best of U.S. shale will start to fizzle by the end of the decade, and the world will once again return to a dependence on the Middle East for new supply.
Other oil traders agree with this theory. “The low-hanging fruit on the short-cycle projects are being used now so I am more in this camp that says we are starting to see potential issues three or four years down the track,” Ben Luckock, co-head of group market risk and former head of crude trading at Trafigura Group Ltd. said at the FT summit.
That may be difficult to envision in 2017 when the market is still trying to find a home for a few hundred million barrels of oil sitting in storage. But the bullish case for crude oil prices is not dead yet. – Nick Cunningham
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