Supply Slide Drive
Crude oil is back on a supply side drive after the American Petroleum Institute (API) reports an oil supply drop, perhaps signaling that last week’s massive crude oil supply increase was a fluke. This comes after mixed data from OPEC surrounding Saudi Arabian production numbers where the Saudis reported a production increase, perhaps to send a message even though secondary sources reported that their production fell. The conflict broke oil hard as some traders thought that this was the beginning of another production war.
Today the International Energy Agency (IEA) is weighing in, predicting that demand growth for oil will fall .6 million barrels a day last year to 1.4 million barrels a day in 2017, even though this agency has constantly underestimated demand. Yet at the same time they are predicting if OPEC holds the line on production cuts, the market will be in a global supply deficit even with the reemergence of U.S. shale production. On top of that, we have the Federal Reserve Open Market Committee (FOMC) that will try to convey after an expected rate increase, the outlook and conditions for future rate increases. Is it any wonder why oil’s volatility has skyrocket? So, buckle up and keep your hands and feet in the car because oil is going to be an incredible ride.
So, let's start with API data which is the main reason that oil is making a comeback. Last week it was the API that shocked the bulls out of their record long positions after they reported an astounding and shocking 11-million-barrel increase in supply. That number blindsided the market and caused traders to run for the exits and the market has not had an up day since. Then, after the official close, the API reported that crude oil supply this week fell 531,000 barrels. That was shocking to the bears that grabbed control of this market and now they are the ones that are running for cover.
Even as the API reported a 2.06-million-barrel increase in Cushing, Oklahoma, the fact that they also reported a whopping 3.87 drop in gasoline supply and an even bigger 4.07-million-barrel drop in crude supply, it seems that despite last week’s build we are still seeing overall commercial inventories start to drop.
As I have said before, oil needs to close above $50 to negate the downside break out. Today we get the Energy Information Administration (EIA) version and if it confirms the crude drawdown, we have a chance.
The International Energy Agency is telling us that despite recent market weakness and a lot of supply in storage, the world could be in a supply deficit in the first half of 2017. The IEA says that even as supply increased by 48 million barrels in January in the world’s largest consuming nation, if OPEC continues cuts, the supply overhang will start to diminish. Even with shale output rising, the globe will start draining at a rate of 500,000 barrels a day assuming there are no economic shocks to worry about.
That makes the Saudi move to report an increase in oil output to back over 10 million barrels a day as a possible sign by the Saudis to other OPEC and non-OPEC players to comply with cuts to achieve a market balance or go back to a production war that will bring all the oil producer prices down. Why does the market think that is the message? Usually a secondary source is there to monitor whether you are lying and under reporting what you are producing. So why is Saudi Arabia saying they raised production when the secondary sources say they reduced production?
It is Fed day. The Fed will raise rates but will they be signaling more aggressive rate increases in the future? If the Fed comes off as too hawkish, oil will have a hard time reasserting itself back in the $50 to $55-dollar range. If oil fails to close above $50.00, the most likely range will be $44 to $50. At some point, as inventories start to fall, we predict that oil will get back on its upward track and still hit $70 a barrel this year. The question is, have they already bottomed or do we need to test the lower end of the range first. With all of the news that we get today, we may have our answer before the end of trading today.