Crude: More, or less?

February 8, 2017 08:32 AM
Daily Energy Markets Report

Crude oil prices are getting hit on conflicting data that on one hand, the Energy Information Administration (EIA) is showing that global oil inventories are tightening sooner than it previously expected; but on the other hand, blindsided by a weekly report by the American Petroleum Institute (API) that showed U.S. crude supply increased by a stunning 14.4 million barrels. The EIA said that crude production will hit the highest level in 43 years but they are at the same time reducing this years U.S. oil output expectations. Contradictions abound leading to confusion and the biggest 2-day oil selloff of the year.

The EIA, in its Short-Term Energy outlook, said that global oil supply and demand is now expected to be largely in balance during 2017 as the gradual increase in world oil inventories that has occurred over the last few years comes to an end. This is a big change and an acknowledgement that we are going to see, “Improved economic growth in both developed and emerging market countries is expected to contribute to higher global oil demand over the next two years.”

But to contradict that there are some concerns about China’s demand. Despite record oil imports, China’s 2016 oil demand grew at the slowest pace in at least three years, per Reuters. They say that China's implied oil demand growth eased to 2.5 percent in 2016, down from 3.1% in 2015 and 3.8% in 2014, led by a sharp drop in diesel consumption and as gasoline usage eased from double-digit growth. The slowing occurred as the economy expanded by only 6.7% in 2016, the slowest pace in 26 years.

The EIA also reported that, “U.S. crude oil production in 2017 is expected to be about 100,000 barrels per day higher than in 2016, with production rising another 550,000 barrels per day in 2018. Still, at 550,000 barrels a day added, 2018 would still be short of the 1.5 million that OPEC is cutting assuming they continue to comply with the agreement and extend that. That may be a possibility as Bloomberg reports, “In principle, OPEC must cut output in the second half, Iran’s Oil Minister Bijan Namdar Zanganeh said, per the Fars news agency. The issue needs further study before the group can decide, Zanganeh said, after meeting in Tehran with his counterpart from Venezuela, also an OPEC member.”

Of course, today the market must shake off that massive and crazy 14.2-million-barrel crude oil build. Don’t say it’s all shale oil because that would be twice the daily U.S. output but the build is feeding the narrative that shale will replace OPEC cuts. Long term it won’t but when we see massive builds in supply it is hard to make that argument.

MarketWatch points out that the EIA had forecast small annual average supply builds in both 2017 and 2018, but changed it after “significant revisions” to historical data on liquid fuel consumption, which includes crude oil. So, despite the crazy builds, the EIA sees U.S. supplies falling.

The API also reported that Cushing, Okla., oil supply increased by 624,000, gas by 2.9 Million and distillates by 1.37 million barrels. The supply increases are technical damage to the charts and we are hanging by a thread just over support. Bigger picture, the trading range between 50 and 55 a barrel is still valid and we look like we could be testing that. A breech of $50 could drive us down to $46 which to me would be shocking because we believe that the EIA is right, albeit conservative, about demand. 

We predict that demand growth will be at a 10-year high next year and the U.S. oil glut will be a memory. Of course, that is tough to say after that 14.2-million-barrel build. The EIA status report may be a make or break moment for oil. 

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