While the oil market looks ahead to Doha, there are signs that demand for oil is exceeding expectations.
We are at a point where we should see U.S. oil production continue to fall. Recent data from the United States and China continues to suggest that low prices may be feeding an oil demand boom. Not only did U.S. refiners refine at a very strong record pace last week, leading to surprise decrease in crude supply, we also saw a record for Chinese crude imports in February.
According to Chinese preliminary data, China’s crude oil imports increased by almost 25% from last year. China imported 31.8 million metric tons of crude oil, which is the equivalent of almost 8 million barrels a day. That is more than China has ever imported before and raises questions about the so-called "demand drop" that we were supposed to see and was priced in earlier in the year. With China importing a record amount of oil and U.S. refiners running pace, the question is whether or not this will be enough to get the market in balance.
We know that in the U.S. the oil rig situation is getting desperate. Bakers Hughes reported that U.S. rigs targeting oil fell by 8 rigs. That put the U.S. oil rig count at 354 which is the lowest number since the early nineties. With oil output falling to 9 million barrels a day, it will take a big increase in oil imports into the U.S. to stop a second week of falling supply.
Oil production fell last week by 14,000 barrels a day to 9.01 million, the lowest since November 2014. It was the 10th time in the past 11 weeks that U.S. output dropped. More than likely we will see U.S. oil production fall below 9 million barrels a day this week and get a back to back drop in oil supply.
Oil and RBOB gasoline also saw support from products as a fire at a refinery helped fuel a rally. Gasoline futures in particular soared on reports of a fire at Lyondell Basell Industries NV’s refinery along the Houston shipping channel. The refinery could be shut for a month.
This comes as retail gas prices have already been on the rise. Trilby Lundberg, the "Princess of Petroleum," reports that the average price of a gallon of gasoline in the United States gained 8 cents in the past three weeks. The highly respected Lundberg Survey puts regular-grade gasoline climbed to around $2.10 a gallon in the Friday survey from $2.02 a gallon on March 18. Lundberg puts the lowest average retail price for gasoline in Tulsa, Okla. at $1.67 per gallon, and the highest was in Los Angeles at $2.80 a gallon.
Natural gas rigs did actually increase last week by one rig. Still, there are worries about the sustainability of U.S. natural gas output. In fact, for the first time since December 2014, speculators held a net-long position in four gas contracts. The U.S. Commodity Futures Trading Commission data for the week ending April 5 show long positions climbed 0.9%, while shorts slid 4.7%.
The shift in sentiment in natural gas and crude oil by funds is probably a realization that we are finally seeing the market get in balance. With billions of dollars of projects canceled and demand rising, it looks like the bottom of the cycle is here. This is a historic time and the market is acting like bottoms we’ve seen in other down cycles.
This could present a multi-year bull market in the making. With the Fed stoking inflation and central bankers around the globe trying to stimulate economies, demand for oil and gas should only increase. Position now for the long haul.