U.S. oil inventories continued to streak lower for a record-breaking 10 weeks in a row even as U.S. oil production is approaching record levels. Demand for oil remains outstanding even as refiners start the long descent into seasonal maintenance. Now, a weak dollar environment and more talk from Davos from the major oil players are driving oil ever higher.
Saudi Oil Minister Khalid al-Falih is warning the marketplace about it having “too much focus” on U.S. shale production and Russian Energy Minister Alexander Novak pointing out that “U.S. shale oil only meets 6% of current demand, and even if it doubles by 2021 as projected, it'll only meet an additional 2-3% of demand. We should not be afraid of shale oil production in general” (finally, someone who can do the math).
The Saudi Oil Minister also slammed the International Energy Agency(IEA), an agency I have been critical of. SA news reports that Saudi Energy Minister Khalid Al-Falih accused the body of overhyping the impact of U.S. shale growth on the oil market. "I was not disputing the amazing revolution of shale. [But] in the overall global supply-demand picture it’s not going to wreck the train. That's the core job of the IEA, not to take it out of context." This comes as the geopolitical backdrop becomes more challenging with talk of drug cartels hijacking Mexico’s refining industry and President Trump’s warning to Turkey to take it easy on their U.S. backed Kurds in Syria or risk a confrontation with U.S. troops.
The oil draws keep coming. As reported by Reuters, crude inventories fell 1.1 million barrels in the week to Jan. 19, compared with analyst expectations for a decrease of 1.6 million barrels, according to the Energy Information Administration (EIA). That put U.S. supply at 411.6 million barrels, lowest since February 2015, and the string of drawdowns that began late November represents a record, according to EIA figures dating to 1982. Crude stocks at the Cushing, Oklahoma, delivery hub for U.S. crude futures fell by 3.2 million barrels to 39.2 million, their lowest since January 2015, the EIA said.
Reuters reported that the steady drawdown in U.S. stocks comes even as production increased again, this time to 9.9 million barrels per day, not far from the all-time U.S. record of 10.04 million bpd set in 1970, and as refining runs declined. Refinery crude runs fell 392,000 bpd, EIA data showed. Refinery utilization rates fell by 2.1 percentage points to 90.9 percent of total capacity.
Yet, even with that U.S. production and dropping oil runs the demand side of the equation is sucking down those oil supplies. Gasoline and distillate demand has been strong, with motor gasoline product supplied over the past four weeks rising 5.4% from the year-ago period, and distillate fuels seeing a 15.3 percent increase from a year ago. That is in part because it is cold but also because the U.S. manufacturing and trucking sectors are sizzling.
The Wall Street Journal, in a must-read, reported that nationwide truck shortage is forcing thousands of shippers into a tough choice: postpone all but the most important deliveries, or pay dearly to jump to the front of the line. Several factors have converged to overwhelm the trucking market. Freight volumes in December hit near-record levels for that time of year, on the back of a strengthening economy. Retailers are replenishing stocks after one of the strongest holiday sales seasons in recent years. Manufacturers are also shipping more cargo. In December, industrial production had the largest year-over-year gain since 2010, according to the Federal Reserve.
It’s about demand and more demand that is driving oil. It also supplies disruption fears. Reuters is reporting that “Mexico’s drug cartels, now hooked on fuel, cripple the country’s refineries”. Drug gangs pressure refinery workers to tap the lifeblood of Mexico’s oil industry. One former worker fled the country. One former gang member helps authorities understand the racket. In a must read Reuters is reporting that between 2011 and 2016, the number of unauthorized taps discovered on Mexico’s fuel lines nearly quintupled, according to a recent report by the federal auditor. Repair costs surged almost tenfold, to 1.77 billion pesos ($95 million).
Reuters reports that U.S. President Donald Trump urged Turkey on Wednesday to curtail its military operation in Syria and warned it not to bring U.S. and Turkish forces into conflict, but a Turkish source said a White House readout did not accurately reflect the conversation.