If you want 11 million reasons to be optimistic about America, you might want to start with counting barrels of crude oil. The Energy Information Administration (EIA) reported that U.S. crude oil production exceeded 11 million barrels a day for the first time in history. Not too many years ago, that would have seemed to have been impossible by many who lacked the imagination and drive of those in the U.S. energy industry. It is indeed an incredible achievement and if it were not for the logistical issues in the Permian basin, the production number would be higher. Notwithstanding, the irony of the situation is that even though this production level blew away expectations and is indeed historic, it still may not be enough to satisfy our raging ravenous oil demand in the short term.
Oil prices reversed course after selling off hard on a shocking 5.836-million-barrel increase in U.S. crude supply. Yet, the comeback in prices was mainly due to extremely strong gasoline and distillate demand plus reports of an unscheduled teleconference meeting with “The Joint Ministerial Monitoring Committee” (JMMC) that was set up with OPEC and Non-OPEC Russia to make sure that there was strong compliance to their oil production cut agreement.
What made this newsworthy was that it was not planned, and Iran was in attendance. Iran wants to make sure that if sanctions are imposed on them by the United States -- and if President Donald Trump gets his way to get Iranian oil exports down to zero by November -- that the other members of the group don’t move to take Iran’s market share. They also want to be able to sell oil at a higher price because they will need more revenue and Iran wants to say that if the Saudis and Russians raise production, it could end the historic OPEC/Non-OPEC pact.
Yet, the JMMC showed unity and that supported prices and touted in a press release that “participating countries in the Declaration of Cooperation have achieved a conformity level of 121% in June 2018. They also said that the committee reaffirmed its intent to strive to achieve an overall conformity level of no less than 100%. Furthermore, the JMMC decided to hold monthly meetings (physically or by teleconference) with the objective of more closely monitoring the market and recommending appropriate response measures. The next teleconference Meeting of the JMMC will take place on August 20th, following the Meeting of the JTC the same day.
Still, overnight oil is weak as the U.S. dollar soars and other commodities get crushed. And even if OPEC is in compliance, we are seeing signs of more oil production. The International Energy Agency reported that Saudi Arabia boosted production sharply last month, raising crude shipments to world markets by 390,000 bpd to 7.6 million bpd. That was the biggest increase since the end of 2016.
Yet, we saw incredible demand for gasoline and those supplies fell by 3.165 million barrels. Distillates also fell by 371,000 barrels. A big drop in refinery runs also led to the increase. While we expect to see more volatility, the long-term outlook still signals a big rally at the end of year. We are fighting outside forces with the rising dollar and fears about the longer-term impact of a trade war. Hedges should be a put on during the weakness and call for longer-term option strategies.