Oil Supply: Below Average

You can talk all you want about rising U.S. oil production, but the fact is that U.S. oil supply is below average. The Energy Information Agency, in its weekly report, said that U.S. commercial crude oil inventories fell by 2.6 million barrels to 428.3 million barrels, which the EIA says are the lower half of the average range for this time of year. This is happening even as U.S. oil production reportedly increased to 10.047 million barrels of oil a day. So, in other words, the bearish argument that shale oil production would keep a cap on oil prices is being proven to be incorrect. The oil glut is gone.

The main reason that it is not happening is very strong U.S. and Global oil demand. U.S. refiners responding to rip-roaring demand rushed out of maintenance and raised U.S. refinery runs to near 91.7% of their capacity which is incredible for this time of year. Even with the jump in runs we still saw gasoline inventories fall 1.7 million barrels and distillates by 2 million barrels.

Low prices have cured low prices, sparking a demand boom in oil that has overcome the biggest oil glut in history and now signals an undersupplied market in the very near future.

The EIA showed that strong demand, reporting that total products supplied over the last four-week period averaged 20.5 million barrels per day, up by 4.9% from the same period last year. Over the last four weeks, motor gasoline product supplied averaged about 9.3 million barrels per day, up by 1.9% from the same period last year. Distillate fuel product supplied averaged 3.9 million barrels per day over the last four weeks, down by 4.5% from the same period last year. Jet fuel product supplied is up 4.8% compared to the same four-week period last year.

Strong demand globally and changing oil market dynamics also showed that U.S. imports were down by 500,000 barrels per day (bpd) to an average 7.08 million bpd last week and a rise in exports by 86,000 bpd to an average 1.57 million bpd.

Hedgers need to be hedged because there is significant upside risk in prices. We may see some pullbacks but use that opportunity to lock in prices.