Crude corrects on production pop, but demand side is looming

Oil prices fed into the fears of stock market volatility and now suddenly fears a U.S. production increase. The U.S. dollar is rebounding and oil is on the downside even as we are still heading towards a significant tightening of global oil supply. Fears that this stock market correction could lead to a more substantial blow to global economic growth due to inflation and rising rates are over shadowing the oil supply shock that we are facing down the road. Unless of course the economy crashes, then of course all asset classes will be hurt.

The Energy Information Administration (EIA) reported that U.S. production week over week surged to 10.251 million barrels last week, even as most shale producers that I speak too still believe that the EIA is way overestimating that number, the truth is in the barrels. While crude supplies did rise by 1.9 million barrels according to the EIA, they fell at the Cushing Oklahoma delivery point by 711,000 barrels. If we are indeed producing so much more oil why isn’t it showing up in inventories?  

Last year with U.S. producing less oil, saw supply rise by 13.8 million barrels. In Cushing, the main WTI storage fell to 36.3 million barrels versus 65.3 million barrels last year. U.S. commercial crude oil inventories overall have fallen to 420.3 million and are only in the average range for this time of year.

The answer is that strong global demand, U.S oil exports and over reporting of U.S. oil output is putting us on a dangerous path of a tightening market. You can believe that the United States is producing 10.240 million barrels a day if you want, but when you try to equate that to price you better look at the demand and inventories.

Demand for all oil products is running at a near record of over 20.8 million barrels per day. That is up by 4.8% from the same period last year. Gasoline demand was 8.9 million barrels per day, up by 6.5% from the same period last year. Distillate fuel demand averaged 4.2 million barrels per day over the last four weeks, up by 8.9% from the same period last year. Total motor gasoline inventories increased by 3.4 million barrels last week, and are in the middle of the average range. Both finished gasoline inventories and blending components inventories increased last week. Distillate fuel inventories increased by 3.9 million barrels last week and are in the middle of the average range for this time of year.

Propane/propylene inventories decreased by 4.1 million barrels last week, but are in the middle of the average range. Total commercial petroleum inventories increased by 4.4 million barrels last week.

For so long analysts have concentrated on the supply side of the crude oil market, the demand side may soon be driving the bus.