Super psyched crude supercycle

The global oil market supercycle that we predicted would happen a few years ago is becoming increasingly clear to the crude oil market. It is hard to ignore what is happening when the data in the United States and around the globe is seeing the seeds of a bull market in energy that will last for years.

Just consider the fact that oil inventories in the United States, the biggest oil consumer, according to the Energy Information Administration (EIA), saw oil supplies fall in the first half on the year for the first time in over a decade. U.S. supply in the first six months of the year fell by six million barrels when we have seen an average increase of 37 million barrels. In fact, the drop would have been more if it were not for the 30 million barrels of oil that was released from the U.S. Strategic Petroleum Reserve. 

That was accentuated by a massive 9.9-million-barrel drop in crude supply, the largest weekly decline since 2016, that put U.S. inventories 4% below the average range for this time of year. That drove oil prices to the highest price levels since November 2014. This came as the United States ran the most amount of oil since 2005 and at the same time exported a record 3 million barrels of oil a day and saw oil imports rise. U.S. crude oil imports averaged 8.4 million barrels per day last week, up by 114,000 barrels per day from the previous week. 

The market is only going to get tighter. The SYNCRUDE oil sands outage is going to cost the market at least 300,000 barrels of oil a day. The isolation of Iran and the threat by the United States to get Iran exports to zero by November, is going to make things even more volatile. You also have Libyan oil disruptions from power struggles and Venezuelan production is falling almost every day. The private sector can’t raise production fast enough as U.S. oil output has remained flat for the last three weeks. 

Gasoline demand soared back to 9.7 million barrels a day and despite trade war fears impacting demand in China and Europe, so far demand seems to be holding up. This rip-roaring sector put oil and gas stocks on pace for their best quarter since the final three months of 2011. Strong demand, a tight market, as well as geopolitical risk factors mean you need to be hedged.

The EIA total motor gasoline inventories increased by 1.2 million barrels last week and are about 6% above the five-year range. Finished gasoline inventories decreased while blending components inventories increased.

Yet, despite the risks to supply, the EIA gas prices at the pump may have peaked out. The EIA says that U.S. regular-grade retail gasoline prices averaged $2.89 per gallon (gal) in June, down from a high of $2.96/gal on May 28. EIA estimates that gasoline prices will remain lower than the May 28 price for the rest of the summer, reaching $2.84/gal in September. Gasoline prices are often higher in summer months when gasoline demand is higher and when federal and state environmental regulations require the use of summer-grade gasoline, which is more expensive to manufacture. Following the summer, EIA expects gasoline prices to decline to $2.68/gal by December.

Since 2000, gasoline prices have reached their yearly peak during or before June on 10 occasions. In some instances where gasoline prices have peaked after the summer, storms or other outages have driven the increase in prices. For example, supply disruptions and refinery outages in the wake of Hurricane Harvey resulted in gasoline prices peaking in September 2017. The EPA announced it handed out a total of 2.25 billion gallons in small refinery waivers to the Renewable Fuel Standard in 2016 and 2017.