The most recent report on the U.S. oil market offers a mix of data, providing ammunition for both oil bulls and bears alike. One can find whatever they want in the data. Looking for signs that the oil market is moving towards balance? There’s a strong inventory decline for you. Worried that the market is still woefully oversupplied? Yep, there is also data to back up that conclusion – another week of strong production increases.
Casual market watchers can be forgiven for being confused by the varying perspectives on the same data release. For example, two headlines from the same news outlet, The Wall Street Journal, highlight how interpretations of the health of the oil market can vary depending on the focus. Following the release of the EIA data, the WSJ reported: “Oil Rises on Bigger-Than-Expected Inventory Decline.” But early the next morning, another WSJ article reads: “Oil Struggles After Rise in U.S. Output.”
Both are true, of course, and sentiment in this confusing oil market seems to shift by the hour. Indeed, the EIA reported a decline in crude oil inventories by 4.8 million barrels for the week ending on July 14, the third consecutive week of a substantial drawdown. At the end of last month, the strong drawdown could have been seen as an aberration, a one-off decline that wouldn’t mean much if inventories increased in subsequent weeks. But three consecutive weeks of declines is starting to look like a real trend, providing stronger confidence that the oil market is finally starting to tighten.
OPEC has made oil inventories the key metric upon which its production cuts should be judged. Bringing inventories back into the five-year average range has been the goal, and that has thus far proven to be stubbornly out of reach. But things are starting to head in the right direction.
Of course, oil bears could have latched onto the production data from the EIA report, which was not as promising for oil prices. Total U.S. oil production increased for yet another week, according to the most recent data, this time by 32,000 bpd. That puts overall U.S. production at 9.429 million barrels per day (mb/d), the highest level in two years. It is also not far off from the all-time production record of just over 9.6 mb/d reached in the first half of 2015.
In other words, the shale drilling rebound is still going strong, even if the gains in the rig count have started to slow. Production is still rising, and because 2017 drilling plans probably won’t change much even with the recent dip in oil prices, production should continue to rise. Also, because a number of drillers have locked in their future production with hedges, some companies are less sensitive to short-term movements in prices. There are plenty of reasons to think that the U.S. oil industry will break the all-time production record in the not so distant future.
That is all bad news for oil prices. Rising output from Libya and Nigeria is undermining the OPEC deal and U.S. shale production is also dragging down the oil market.
However, there was another piece of bullish news in the data that bolsters the case of a tightening market. Inventories of gasoline, not just crude, are also down sharply. The glut of gasoline, particularly in early 2016, has put a ton of downward pressure on crude oil prices. But the significant drawdowns since June have suddenly put U.S. gasoline stocks back within the five-year average range.
In other words, one could argue there is no longer a situation of oversupply for gasoline. That comes despite record levels of processing from refiners, and relatively flat demand. But a lot of gasoline has been exported, clearing the excess and bringing stocks back to normal levels.
There is one more data point to consider, one that is certainly less publicized but nonetheless offers further evidence of a balancing market. Reuters reports that crude inventories in Saudi Arabia are down much more severely than in the U.S., a sign that the market outside the U.S. has been tightening for some time. Saudi Arabia’s oil inventories peaked in late 2015, and have continued to decline sharply each month. As Reuters sums it up: “the persistent draw in domestic stocks likely explains why Saudi officials sound confident when they say the global oil market is rebalancing.” U.S. data is much more transparent and routinely discussed, but as the Saudi data shows, there is much more going on in the oil market than just U.S. storage.
There are a lot of variables to consider, and oil traders move up and down on a daily basis depending on what appears to dominate the zeitgeist. But this week, at least, the market chose to focus on falling inventories, particularly in the U.S. WTI jumped into the upper-$40s per barrel and Brent crude broke through the $50-per-barrel threshold during midday trading on Thursday, the first time it has done so in nearly two months.
By Nick Cunningham of Oilprice.com
