The biggest crude oil draw of the year and drops in gas and distillate supply is signaling that the global oil market is already in balance. The American Petroleum Institute (API) reported that crude oil inventory fell by 1.3 million barrels last week. This came even as supply in Cushing, Oklahoma increased by 300,000 barrels showing a sharp drop in U.S. OPEC imports as the cuts that were not supposed to happen according to some, are now starting to take hold. Gasoline supply also fell yet again, dropping 2.56 million barrels and distillate fell by 2.09 million barrels as well. With seasonal factors kicking in and a tightening global supply, disruptions of production anywhere in the global are going to start to matter.
The oil market’s washout just below $50.00 and now its resurgence back to the highest close in a month, has the bulls back in control. Oil reversed on reports of a problem with production in the North Sea that shut some offshore production. The Buzzard oil field shut down after an unplanned outage, knocking out an estimated 150,000 barrels a day of production. That seems to matter more because Europe is already being impacted by the sharp drop in OPEC output.
While oil has had its ups and downs, we have been saying for over a year that oil is at a generational bottom. While we have seen some crazy moves as the market tries to work off over supply, the adjustments are happening. In a few years in hindsight, it will be easy to look back and see that all the crazy moves and the readjusting of supply as well as the cuts investment, was an obvious long term bottom but it sometimes does not feel that way when you are living it.
If history is a guide, we may start going more in an upward momentum on the moves. With the gasoline market tightening dramatically in recent weeks and refiners ramping up, we should see crude draws really start to accelerate. The crude draws are going to get larger and more frequent and the impact of the OPEC and non-OPEC cuts will be really felt. OPEC and non-OPEC will extend cuts. More than likely players without a quota will agree to one to get a big-time rise. Despite the best effort of shale producers, they will fall short of replacing OPEC cuts and the decline rate of other oil projects. While oil struggled in the first quarter due to the hedge funds getting ahead of themselves and a rising dollar and oil coming out of the Strategic Petroleum Reserve, the reality is that we are on a path to the tightest market we have seen in over a decade.
That should bode well for the Hess IPO. The MLP that is investing in shale at the right place at the right time .
Natural gas was on the attack as Manteca and a record amount of nuclear power plants and some weather challenges have driven this market back to the highs. We have seen strong demand for electricity and that has kept demand for gas strong.