The Energy Report 01/11/18

The Oil Glut Is Officially Gone


The oil glut that many said would never go away is officially gone. For the first time since June of 2015 oil supplies are back in the average range and not above average. This is happening as U.S demand is above average, and that in part explains why the supply of oil continues to drain at the fastest pace in history.


The Energy Information Administration reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) fell by 4.9 million barrels from the previous week. That puts supply at 419.5 million barrels down from March 2017 when supply was at 528.7 mb in storage. That is a massive drop in supply as U.S demand soars, U.S imports have fallen and U.S crude exports are at records.


We did see an increase in products but that was pale in comparison to recent demand. The EIA reported that total motor gasoline inventories increased by 4.1 million barrels last week and are near the top of the average range. Finished gasoline inventories were down slightly.


Yet, the demand was the story that has not been told enough. Over the last four weeks, motor gasoline product supplied averaged about   9.1 million barrels per day, up by an impressive 2.5% from the same period last year.


Distillate fuel inventories increased by 4.3 million barrels last week and are in the middle of the average range for this time of year. Distillate fuel product supplied averaged about 3.9 million barrels per day over the last four weeks! That is a big increase year over year.


It’s not just U.S. demand. This demand surge is a global phenomenon. While India’s oil demand may have disappointed by its 2017 demand growth, which was the slowest pace in four years, it was due to a fuel tax the government imposed to slow growth to a modest 2.3 per cent. India imported around 4.2 million barrels per day (bpd) of crude in 2017, according to trade flow data in Thomson Reuters Eikon. Their gas demand increased by 7.4% down from 12% the year before. Still impressive in a normal world.


Yet, just about everywhere else in the globe we are seeing demand exceed expectation. U.S. refiners are rising to the occasion.  U.S. crude oil refinery inputs averaged 17.3 million barrels per day as refineries operated at 95.3% of their operable capacity last week. Close to a record for this time of year.


Global oil discoveries are at the lowest level in over 70 years and the future fallout from over a trillion dollars of capital spending cuts will reduce future supply anywhere from 8 to 11 million barrels of oil a day. Think of the gravity of that. That would be like if Saudi Arabia, or Russia or the U.S. stopped producing oil completely. Just think where prices might be if one of those major producers stopped producing today. Demand growth over that time will challenge producers to meet that demand. Sure we will see some Improvements in technology and rising prices will get us to produce more oil at some point but it may take a major price spike before the markets get the message.


A record draw for natural gas. Natural Gas Intelligence writes  "Net exports, in addition to intensely cold winter weather, pushed total demand to record highs throughout the storage week," PointLogic told clients earlier this week. "Total domestic demand gained just over 20 Bcf/d week-on-week," mostly in the Midwest and East regions.  Stephen Smith Energy Associates updated its weekly estimate Tuesday to show a withdrawal of 316 Bcf, while Kyle Cooper of IAF Advisors predicted a 338 Bcf pull.


"The production numbers are so much higher than a year ago, so the market isn't getting freaked out," Price Futures Group senior analyst Phil Flynn told NGI, pointing to recent data showing about 6-7 Bcf/d production growth year-on-year. If we would have gotten a 330 Bcf withdrawal a year ago, natural gas would have rallied $1.50-2, but over the last year we've opened up a lot of new pipeline capacity, allowing production to rise."


Combine the year-on-year production gains with indications that the weather could warm up after next week's cold, and "that's why the market is feeling pretty sassy right now that $3 is resistance," Flynn said.


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