Oil prices hit a four-month high on bullish data from the Energy Information Administration (EIA), strong global and U.S. demand and the fact that oil products are at a multi-year low (see chart below). That situation is not going to improve after Hurricane Maria dealt a devastating blow to Puerto Rico and St Croix, wiping out small refineries and oil product storage tanks. But the threat to the rally is the Fed pronouncement that they want to raise interest rates in December, giving strength to the dollar and a downgrade to the Chinese credit rating, which will potentially raise future demand concerns. Yet talk that OPEC and non-OPEC may cut back on more production give oil bulls a slight edge even though the market fails to officially break-out, staying below that upper Bollinger band resistance.
Oil product declines were the big story from yesterday. The EIA reported supplies of product overall fell to the lowest level since 2011. A 5.69 million barrel drop in distillate supplies, the biggest drop since 2011, was a major concern as fall grain harvest and winter is just around the corner. This came as even as oil refiners ran the most barrels of oil through the refineries since 2008. The October future rose to the highest closing level since July 2015.
Gasoline supply also took a hit, falling by 2.13 million barrels as gas demand held up better than expected. This contrast though with distillate stocks means that the long ultra-low sulfur diesel vs. short RBOB gasoline should continue to work.
Even the larger than expected 5.42 million barrel increase build in oil supply wasn’t enough to break oil because the number included a big release from the Strategic Petroleum Reserve that will be needed to rebuild supply of products that overall are at what could be considered dangerously low levels. This offset the fact that U.S. oil production increased again this week by an impressive 157,000 barrels a day. This comes on a news report that oil traders are emptying one of the world’s largest crude storage facilities, located near the southernmost tip of Africa, as the physical market tightens amid booming demand and OPEC production cuts.