The American Petroleum Institute (API) reported another massive 5.04 million barrel drop in crude oil supply, stirring talk of oil market rebalancing. Yet an even bigger 9.75 million-barrel increase in gasoline supply is tempering market excitement. This comes as the OPEC Secretary General has positive things to say about OPEC production cuts and a speech by Janet Yellen that says U.S. interest rates will be at 3% by the end of 2019.
U.S. oil production and supply will be key today as The Energy Information Administration (EIA) releases its version of the report. Traders will want shale output to continue to increase as OPEC and non-OPEC production are showing signs of falling. Dow Jones repoeted that Thew International Energy Agency sais that Early indications suggest a deeper OPEC reduction may be under way for January, as Saudi Arabia and its neighbors enforce supply cuts," the IEA said.
The API was very bullish because not only did the over-all supply rise by 5.04 million barrels, we also saw supply fall in Cushing, Oklahoma by 1.01 million barrels. The reduction in supply does suggest that the trend of U.S. crude stockpiles is trending lower and a sign that indeed we are seeing what the Saudi oil minister Khalid al-Falih said that the oil market is starting to get in balance. This comes as U.S. refiner demand for oil hit a record high and one of the reasons we saw the massive build in gasoline supply.
We have seen a trend of sharply rising gas stocks and falling crude supply which is typical at a crude oil market bottom. So while we will see some concern about gasoline supply, there has to be a good reason why the refiners are ramping up. Perhaps expectations that record gasoline demand will continue.
The EIA report will be watched closely to see if last week’s jump in the lower 48 crude output was a fluke or a trend. Oil prices reversed after the EIA said that production from seven major U.S. shale plays will increase by 41,000 barrels a day to 4.748 million barrels a day in February from January, 110% of that is in the Permian Basin. The shale sell-off got some more momentum after the International Energy Agency (IEA) Executive Director Fatih Birol said that oil price gains will trigger a significant up tick in U.S. shale oil output.
He said that oil at $56 to $57 a barrel, would make a lot of shale plays in the United States make perfect sense to produce. This is a change because only last month the IEA said that U.S. production would rise marginally this year and next.
The EIA is famous for underestimating demand at a time when we are seeing production fall in other nations. Oil production in China is falling by a reported 7%, the biggest drop on record and drops in production by non-OPEC African nations is also likely to drop another 100,000 barrels a day this year from the year before to 1.9 million barrels in 2017 according to figures quoted from MarketWatch.
Capital spending cuts are taking its toll on output around the world so the increase in U.S. output might not be bearish because if oil gets to 57 or 60 dollars a barrel, that is a sign that the market will need extra shale supply.
The EIA releases the natural gas report today! Look for a drop of 250 bcf.
Janet Yellen says the economy is getting closer to running on its own. She says that rates will be at 4% by 2018 and that gave the dollar a boost. But after further review, is 4% by the end of 2019 a surprise? Of course her comments may be viewed as political as Donald Trump says the dollar is too strong.
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