Many are saying that U.S. oil prices are falling due to the projections for rising U.S. production. Predictions by the IEA and the EIA about a surge in oil suggest that U.S. oil production, which supposedly stands above 10 million barrels a day, will soon exceed 11 million barrels a day. Yet, the truth is that if demand growth stays at the rate we are currently at, then we will need that additional oil to meet global demand. Still, worries about global growth in recent days surrounding the stock market correction are causing some to think an oil demand slowdown is in store. They fear that rising interest rates and inflation will slow down growth in a globe that is now consuming more oil than at any time in history.
The truth is that rising rates are a sign of a healthy economy, and while the stocks may signal trouble down the road the reality is that this is just a correction in one of the strongest runs in stock market history. Tax reform will inspire businesses to expand and grow. This will lead to demand exceeding expectations even in this rising rate environment.
Another concern on the supply side is not oil production but a major potential release from the Strategic Petroleum Reserve, in fact, the biggest Non-Emergency release in history. With record U.S. oil production, the U.S. government feels that they do not need to save oil for a rainy day. Reports say that the plan will allow the sale of 100 million barrels of oil through 2027 to raise money to balance the budget. This would reduce oil in the reserve to 303 million barrels, a reduction of 45%. That is down from 695 million barrels before the Obama Administration and Congress agreed to sell 590 million barrels for the reserve, oil that kept U.S. oil supplies higher in the beginning of 2017 and prices lower than they should have been. So this is another factor! Still, I think the market will be able to gobble up that extra supply and it should cause some concern for producers that may want to make sure they are profitable before they bring on more supply.
It seems anytime I leave the office for a few days the world always seems to fall apart. Yet, I can tell after listening to great speakers like Larry Kudlow, Sam Stovall and Edward Yardeni, who have seen these corrections before, it was clear that message was that this correction soon will pass and we will look back in a few months or years and realize that this was the great buying opportunity for many.