Wake Up Call
The Energy Information Administration (EIA) gave the energy world a wake-up call after reporting that U.S. commercial crude oil inventories plunged by 9.6 million barrels in yesterday’s weekly status report. A drop that put U.S. supplies 2% below the average for this time of year, but also raises the real possibility that the U.S. oil market is going to be undersupplied faster than people might think. While some of the drawdown in supply may have been caused by weather issues down in Houston and we may see a bit of a rebound in supply next week, the truth of the matter is that demand for oil and products is coming in ahead of expectations and supply is being drained as OPEC +1 cuts are taking their toll, and for the first time in over 50 year U.S. imports of oil from Venezuela have fallen to zero because of U.S. sanctions. This is critical as U.S. refiners covet heavy Venezuelan and Saudi crude oil to get the right mix of products and that is going to become even more difficult as the weeks wear on, even as U.S. domestic oil production ticks up to 12.1 million barrels of oil per day.
The other story in this report is strong demand. Demand that will probably get even stronger after the Fed signaled to the market that there will be no interest-rate increases this year and that they will take their time winding down the balance sheet. They did lower their growth forecast but that is not in line with what we are seeing in the EIA report. U.S. refinery activity unexpectedly increased to 88.9% of capacity as refiners ran 16.2 million barrels per day of crude, which was up by 178,000 barrels per day more than the previous week’s average. Yet U.S. drivers drove like it was the Fourth of July, as demand hit 9.276 million barrels a day last week, total motor gasoline inventories decreased by 4.6 million barrels. Distillate demand also popped causing a 4.1- million- barrel drop in distillate. Distillate demand averaged 4.2 million barrels per day over the past four weeks, up by 8.2% from the same period last year. Strong demand helped cause a 12.6 million barrels drop in overall commercial inventories. U.S. oil exports hit 3.4Mbpd, just shy of the record.
So, you can justify and try to minimize the numbers but what you can’t do is not wake up to the fact that they could be heading toward a squeeze. The trend of supply will fall and the trend for demand will continue to rise. Yes, oil dipped on China trade war rhetoric coming from both the Chinese side and the U.S. side, yet the underlying themes of strong demand and tightening supply will not change. With the U.S. being patient on rates, China stimulating their economy and the EU extending QE, it is clear to me that demand growth is going to surge to over 2 million barrels a day this year. OPEC, even if they raise output in June, will be too late and U.S. shale will bounce back but not until we see more downward projections for its 2019 and 2020 production estimates.
We are also seeing this reflected in the industrial metals. Palladium, that we have talked about before, is hitting record after record as there is a shortage of the metal. Platinum and copper, that have been held back by U.S.-China trade worries, are now breaking out. While zinc took a tumble on a mine opening with the Fed in patient mode, they should continue to rock.