March madness started early in crude oil as prices fell on relatively light volume and focused on bearish news about ignoring bullish news at its own peril. Traders sold oil off on a report that showed an increase in supply in Cushing, Okla., but it is about time. The Nymex Storage hub has seen supply fall at a record pace in recent weeks, and seeing that we are deep into refinery maintenance we should start to see the supply recover.
Yet, they ignored a report about global oil inventory tightening. According to a report, OECD oil inventories for the first time in 3.5 years have fallen below normal because of a massive inventory draw of 46 million barrels in February which is six times the normal draw rate. The global oil balance remains in a sharp deficit despite gains in U.S. production. Oil bears have been bearish on hopes of rising shale production but what we are finding that light shale oil is not what refiners want.
A must read in the Financial Times reports that, “In the oil market, not all barrels are created equal. By the end of this year, the U.S. oil industry will be pumping 11m barrels a day of crude, the highest in its history and more than either Russia or Saudi Arabia. These barrels, boosted by the shale revolution and increasingly exported, are critical for keeping the market well supplied as a fast-growing global economy lifts demand for diesel, jet fuel and petrochemicals. But in the industry, debate is growing, some would say concern, over just how well-suited the shale oil coming out of the United States is for meeting this rising demand.
“The issue, critics say, is that U.S. shale is far lighter — having been released through narrow fissures in rocks by hydraulic fracturing — than gloopy tarry crudes most people think of when they picture a barrel of oil. This has potentially huge implications because refiners, who turn crude into usable products, have spent decades investing in plants capable of processing far heavier oils that were once expected to dominate supply. The lighter shale barrels, some say, are just not as good for making the products — especially diesel, jet fuel and other so-called middle distillates — that the world increasingly needs.”
They warn of a potential crunch in years to come caused not by an outright shortage of crude, but by refiners scrambling to compete for more conventional barrels as U.S. shale is found wanting. This is another reason why we have warned not to put too much trust in shale. Shale oil is giving bears a false sense of security while we are seeing the demand for diesel rise and supply stay below normal. So, when we talk about global inventory we must remember that some of those lighter grades may not get used. It may give us an overinflated view of oil storage, meaning that supply is tighter than many thinks.
Global oil inventories have plummeted in recent months and with the upcoming summer driving season ahead of it we are facing much higer prices at the pump this summer. There will be pressure on U.S. refiners to crank out product and that is going to keep the demand for crude oil very strong. Diesel supply is tight and global demand rising and that should set the stage for our big traditional spring rally.
Winter is giving natural gas a boost yet at the first sign of spring we should sell off hard. Of course, that is assuming that Spring ever comes.