In the battle between the bulls and the bears, the one trend that remains constant is the trend of falling U.S. crude oil supply. Once again, the crude oil supply drop far exceeded market expectations, and according to data from the American Petroleum Institute, it fell by 9.2 million barrels last week. That drop in supply is a trend that continues for falling supply is historically unprecedented in terms of actual barrels. The bears argue that this does not matter because U.S. shale production is at a record high and demand will start to drift lower as refiners go into maintenance. They also argue that compliance by OPEC is starting to falter and that it is only a matter of time before cartel members ramp up production as it becomes every man for himself. 

Yet, at some point, the simple math suggests that with rising global demand and falling global supply, the replacing process is under way. The forward curve in the futures market is also suggesting a tighter global supply picture. Better than expected economic data from Europe suggests that demand growth will be better than expected and the drop in China refining demand sets the stage for a lower market this week but might not be a trend but a one off. 

John Kemp at Reuters lays out the bullish case. He says that oil demand is growing strong in all the major geographic regions, with the exception of the Middle East and Africa, and global demand is increasing above the long-term average rate. And while The International Energy Agency forecasts that global consumption will grow by 1.5 million barrels per day in 2017 and another 1.4 million barrels per day in 2018, the global production numbers will not keep pace. U.S. oil production (crude and condensates) is predicted to rise by 800,000 bpd in 2017 and another 1.0 million bpd in 2018, according to the U.S. Energy Information Administration; and crude production is also increasing from a number of non-OPEC countries, including Canada and Brazil, in most cases as a result of investments approved before oil prices slumped in 2014.

But the pipeline of new non-OPEC non-shale projects is drying up as a result of investments canceled or postponed since 2014. The oil industry’s spare production capacity is shrinking and set to fall below 1.5 million bpd in 2018, mostly in Saudi Arabia. Global oil inventories remain well above the five-year average, but given the fast growth in consumption, the five-year average is likely to prove too low.

That is the point I was making yesterday. You cannot just look at supply but you must compare it to demand that is much higher than the five-year average.

Still, another increase in gasoline stocks, which increased by 301,000 barrels, compared with expectations for a 1.1-million-barrel draw, gave some buyers pause. That marks the second week in a row that gas stocks came in higher than expected, which may signal the top in the summer driving season. Still, U.S. gasoline demand is just off a record high and the drop in demand may not be as pronounced as some traders think. Seasonal demand reports earlier in the year had many traders believe falsely that U.S. gasoline demand had died.

However, it appears that the recent spike to record highs destroyed the peak gasoline demand myth. Look at the weekly demand change in today’s Energy Information Administration's report to judge whether demand is dying or getting ready for another drive higher as we head into Labor Day.

Distillate demand continues to be strong, reflecting strong demand from manufacturing. The surge in demand reflects good economic demand here and abroad and supply fell by 2.1 million barrels. U.S. exports of the product continue to be strong. That should keep refining runs strong as they stay near record highs here in the United States.