While global markets are worried about EU tapering and the possibility off a hard Brexit, oil seems oblivious to those threats as the US oil glut is receding at a historic pace. The American Petroleum Institute (API) reported that US crude oil inventories fell by 7.6 million barrels. If confirmed by the Energy Information Administration (EIA), that would be the 5th weekly drawdown in inventory in a row. Crude oil inventories have fallen on average almost 6 million barrels over the past 5 weeks, which on an annualized rate, would be close to 59% decline in overall stockpiles. The US oil market is tightening ahead of what should be a cut in Saudi Arabian and Russian production.
Cushing, Oklahoma oil stocks did rise 435,000 barrels off of what previously was a 10-month low. But Hurricane Matthew is barreling towards Florida, disrupting shipping lanes into the Gulf of Mexico and eventually into the East Coast disrupting shipments into New York Harbor. So it would be very unlikely that we will see oil inventories rebound quickly and we would expect with the strength in US demand, we should see larger drawdowns in inventory in the coming weeks. The US oil glut is dissipating at one of the fastest rates on record and is even questioning the faith of the oil market’s most hardened bulls.
The API did report a surprise 2.87-million-barrel increase in gasoline supply but that may be needed as Hurricane Matthew will reduce imports and production at Caribbean refineries. Interesting factoid in gas, Bloomberg News reported that Chinese gasoline will reach the U.S. East Coast for the first time in nine years as a surge in New York prices helps ease a glut in Asia. Distillate inventories fell by 1.3 million barrels as strong demand by farmers as they harvest their record breaking crop continue to influence the market. Oil traders will also focus on US oil production which fell last week despite the increase in oil rigs. A drop this week in output would be seen as bullish.
Other commodities markets worried about Hurricane Matthew will be cotton, which is very susceptible to damage as the boles are open. Orange juice could see its historically low crop fall even lower if Hurricane Matthew goes near and over Florida.
Natural gas is getting a boost on more seasonal forecasts but must be on guard from demand destruction related to Hurricane Matthew. Yet breaks are limited because we are also seeing drops in US natural gas production. With exports rising and demand expected to hit records, this market is poised to become very bullish if we see a normal weather pattern set in.
For both oil and gas, we maintain our long-term bullish view. The structural changes in the industry because of the price collapses last year, are starting to rear its ugly or bullish head. The headwinds are fears about growth which the IMF said yesterday would be lackluster. It lowered the US forecast. But for oil traders, they like the fact that they upgraded China and India which would increase oil demand expectations. The EU is starting to “taper” its bond purchases and the market is fearing a taper tantrum. Yet oil held up as the dollar and gold surged on Brexit fears, giving us an idea of the markets underlying strength. Long term, traders' patience and perseverance are starting to payoff and if we see any stability in global markets, we could see a big energy run.