Crude concerns make a comeback

Remember when we had supply concerns in oil?

Well it looks like those days are back. Despite high global supplies, demand may now be at the point where it is actually exceeding daily global oil output. Oil prices in Europe have already exceeded $50.00 a barrel on that possibility.

While some of the supply issues that have put us back into a daily global demand deficit may be viewed as temporary, it is a reminder that the global oil production surplus is fleeting, especially against a backdrop of massive cuts in energy investments and falling spare production capacity around the world.

Oil production in the United States continues to fall, which was the main bullish catalyst in yesterday's Energy Information Administrations (EIA) "Weekly Petroleum Status Report." The market shook off early concerns about weaker-than-expected gasoline demand and later refocused on the fact that U.S. oil production fell for the 16th week in a row. That, along with supply disruptions from Canada and Nigeria, caused commercial crude oil inventories to fall by a more than expected 4.2 million barrels from the previous week in a very strong sign that U.S. oil supply may have peaked and will continue to fall.

This came even as we saw disappointing refinery and gasoline demand. Refiners only ran 16.3 million barrels per day during the week, which was down 92,000 barrels per day less than the previous week’s average. Refinery runs disappointed, operating at 89.7% of their operable capacity last week. Gasoline production fell as did demand. That led to gasoline inventories increasing by 2.0 million barrels last week.

Overall, demand is still strong. Based off total product supplied, demand is up by 3.0% from the same period last year. Over the last four weeks, motor gasoline product supplies averaged 9.6 million barrels per day, up by 3.9% from the same period last year. Distillate fuel product supplies averaged 4.1 million barrels per day over the last four weeks, down by 0.9% from the same period last year.

With falling U.S. production and strong demand in India, China, Russia and the United States, we will see global inventories start to fall. The rig counts become bigger at this point to gauge whether or not $50.00 a barrel will be enough to bring rigs back on. While some producers will add rigs, at that level the truth is there will be many rigs that may not come back for years.