Let's Shift Oil Focus From Supply to Demand

 | Jul 13, 2017 | 4:58 PM EDT
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The remarkable thing about this week's inventory data from the Energy Information Administration (EIA) is how unremarkable they are. Crude inventories showed a significant draw this week and (ex the barrels in the Strategic Petroleum Reserve) now sit at 495.4 million barrels. The EIA may describe that as "in the upper half of the average range for this time of year," but really, what we are seeing is a normalization in U.S. crude stocks. In fact, that 495.4 million barrel inventory is only 4.2 million barrels higher than the figure for the corresponding week in 2016, a difference of 0.8%. 

America's oil stockpile is no longer on the seemingly inexorable growth path (remember those idiotic, hysterical, "we're going to run out of storage at Cushing" stories of two summers ago?), but we are not exactly burning oil either. Thus, West Texas Intermediate crude prices sit at $46 per barrel as of this writing, less than a dollar below their level of one year ago. 

It's almost as if the wild and woolly world of energy trading has become boring and predictable. Well, we know better than that, don't we? There must be a factor that is going to bring us out of this $42-$52 a barrel trading channel that has prevailed for the past 52 weeks. 

There is one, and despite traders' (and the media's) fascination with every minute detail of supply dynamics (OPEC's adherence to production quotas, Baker Hughes rig counts in the U.S., etc.), the factor that is going to drive the next "move" in oil prices is demand, not supply. 

It's much easier to count each barrel coming out of the ground than it is to measure each drop of gasoline going into your vehicle's fuel tank, so U.S. demand statistics are never as granular or accurate as those focusing on supply. The best analog for demand for crude (after it has been refined) is the EIA's measure of products supplied. This is a data set based on a survey of refiners and a sample of the nation's fuel suppliers and retailers, and it is the closest thing we have to a coincident indicator on fuel demand. 

According to this week's EIA report: "Total products supplied over the last four-week period averaged over 20.7 million barrels per day, up by 2.8% from the same period last year. Over the last four weeks, motor gasoline product supplied averaged over 9.7 million barrels per day, down by 0.3% from the same period last year." 

Solid demand overall is being driven by robust increases in demand for distillates and jet fuel, and motor gasoline supplied is getting closer to showing growth on a year-on-year basis. That's the final frontier and that's what is going to take oil out of its current trading range, in my opinion: an increase in U.S. consumer demand for gasoline. This recovery has been so inconsistent and so much less robust than other periods in U.S. economic history, but this summer I believe we are beginning to see the possibilities of the Trump economy. Unlike Fed Chair Janet Yellen, I do not think 3% annual growth is unattainable in the U.S., and with the Atlanta Fed's GDPNowcast showing a figure of 2.6% growth in U.S. GDP for the second quarter, I believe it's clear that emergence is occurring.

So that makes me bullish on oil futures in the near term and makes me believe the next channel breakout in oil will be to the upside.

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