The word “gradual" was all the markets had to hear. The Fed as expected, raised interest rates but signaled rate increases in the future would come at a gradual pace. That assurance was enough to cause the stock market to soar and the dollar to pull back and added momentum to oil that received some friendly data from The Energy Information Administration (EIA). That means that gradually the oil glut should start to disappear.
Crude oil traders that were slammed last week after last week’s crazy increase in oil stocks started to reverse course after the EIA reported a 237,000-barrel decrease in weekly supply. That was the first withdraw in supply this year though the API had reported a drop previously. That drop, small as it was, is significant because it does signal that supply has started to top out. That gave oil the biggest one-day rally since January.
This came as U.S. crude imports plummeted, leading to a fall in Gulf Coast oil supply. It seems clear we are finally starting to feel the effect from a drop-in OPEC production even as U.S. production increased by 21,000 barrels a day to 9.11 million barrels a day the fourth week in a row. That helped supply increase in Cushing, Okla., by 2.13 million barrels but was offset by the big drop in imports. Yes, the OPEC cuts are real and a cut of 1.5 million barrels a day will without a doubt reduce our crude oil glut.
To steal a word from the Fed, the drawdown in supply will be gradual and start to gain momentum as refiners start to come out of maintenance ahead of the summer driving season. Refiners are not in a hurry as refinery utilization declined last week to 85.1% from 85.9%. We should see that number start to creep up but maybe gradually.
Globally the world is going to look to the United States as an alternative source for oil and product exports that are at record highs. The drop-in oil products suggest that the glut of products will ease as well. Gasoline supplies fell by 3.06 million barrels to 246.3 million, the lowest level since January. Inventories of distillate fuel slipped 4.23 million to 157.3 million.
Still from a technical perspective, the oil market still has some work to do. The Fed statement that suggests that rates will be at 3% by the end of 2018 should not be an impediment to oil demand growth. Today, the April crude oil options expire and we should pick up a half a dollar on the roll over. We need to see oil close above $50 to negate the downside break out but if the dollar continues to drop, the oil bulls will have a shot.