Another Brick In The Wall

The walls are closing in on the oil bears. Underestimations of current oil demand, as well as overestimation of shale oil production potential, has left the oil market short of supply. While oil bears hope that estimations of lower economic growth going forward will slow demand, the reality is that it will continue to grow. The GDP came in at  4.2%, a number that reflects what we have seen in record U.S. refinery demand. The bears look to a  widening trade deficit that expanded for the third month in a row, climbing to $75.8 billion from $72 billion in July. They think that the gap will cool growth and that along with the Trump Trade War will slow oil growth down to a trickle.

Yet, the naysayers on the U.S. and global demand have dangerously underestimated demand and those underestimations have helped put us in the precarious situation that the oil market is now in. Talk of lower for longer and the pullback in investment has sold the global economy short. Now as we face a showdown with the Iranian regime the ability to replace those lost barrels of oil leaves the global economy in a vulnerable state.

Brent Crude is still leading the way as record U.S. oil production is helping us stay more balanced than the undersupplied Euro and Middle Eastern markets. You can try to tweet more oil out of OPEC but for every barrel the increase output it is one less barrel of spare production capacity. Bloomberg News reports that OPEC’s current spare capacity is relatively thin. The U.S. Energy Information Administration puts it at just 1.4 million barrels a day and estimates that it will drop to 1.2 million by late 2019, one of the lowest levels on record, and like 2008 when oil prices zoomed to $150 a barrel.

We can talk about Iranian sanctions and we can talk about the utter failure of the Venezuelan socialist state, yet it really has been the U.S. economic growth story and a GDP that they said could not happen that has propelled this market higher. Now with Iranian sanctions and with conventional oil sources failing to grow to meet demand the market needs to move higher to meet our moderate oil demand.