While markets get whipsawed on trade war fears, back in the real economy things are smoking. Not only did we see smoking demand for oil, the preponderance of economic data is signaling even stronger U.S. and global energy demand. Where it counts in jobs and growth, things are looking the best they have in years. The combination of tax cuts and the removal of over regulation by the government is paying real dividends and helping average Americans and is one of the reasons President Trump’s approval ratings have risen to 51% according to the last Rasmussen poll.
For example, ADP reported that the U.S. gained 241,000 jobs in March, much higher than expected and revised upwards last month’s jobs numbers. Oil supplies are signaling strong demand as oil inventories fall when they should be rising. Total demand U.S. system increased 131.000 barrel per day to 25.96 million barrels a day. Total crude demand (refinery and export) set an all-time high at 19.11 million barrels a day as refinery demand increased to 16.9 million barrels a day. Global demand is high as Crude exports set a record high at 2.175 million barrels a day.
Some of that demand is being driven by the U.S manufacturing sector that saw the strongest job creation in three years according to the ADP jobs data. The ISM Non-Manufacturing sector slowed but is still above par at 58.8% growth rates trending near the highs of the decade. So, if trade war fears are overblown, then oil will soar.
Larry Kudlow, the Director of the National Economic Council, helped bring sanity back to the market on Business Network's Varney & Co. when he told Varney there is "absolutely not" a trade war between the U.S. and China. President Trump echoed that thought by saying in a tweet that “We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue.”
Even China, as I wrote yesterday, is playing down the trade war fears and it is likely we will see a negotiated settlement. This comes as we are seeing U.S. oil supplies tighten even as U.S. production rises. The Energy Information Administration (EIA) reported that U.S. oil production will likely hit a record this year, while the supply of oil is falling further below the five-year average.
As for production, the EIA says that U.S. production of crude oil grew 5% in 2017, likely leading to a record 2018 production. Annual average U.S. crude oil production reached 9.3 million barrels per day (b/d) in 2017, an increase of 464,000 b/d from 2016 levels after declining by 551,000 b/d in 2016. In November 2017, monthly U.S. crude oil production reached 10.07 million b/d, the highest monthly level of crude oil production in U.S. history.
Yet, if you look at total commercial stocks last week they fell by 3.9 million barrels. That puts the year over year deficit to 152 million barrels which is just below the 153-million-barrel record deficit seen earlier this year. The drop was led by a 4.6 million barrel counter seasonal drop in crude supply, that puts supply at 425.3 million barrels, which is well below the five-year average.
While we see stocks in Cushing supply increasing by 6.7 million barrels in the last four weeks, supplies are still 11.7 million barrels below where they were in the beginning of the year and still coming off recent historical lows.
We are still seeing strong gas demand this time of year. Total motor gasoline inventories decreased by 1.1 million barrels last week. Distillate fuel inventories increased by 500,000 barrels last week but are in the lower half of the average range for this time of year. While gasoline demand fell week over week, demand averaged over 9.3 million barrels per day, up by 0.4% from the same period last year. Distillate fuel product supplied averaged 4.0 million barrels per day over the last four weeks, down by 4.4% from the same period last year. Some of that demand drop could be because farmers are planting a smaller crop.
The point is that in the big picture based on data and not fear the fundamental outlook for oil is very bullish. Demand is at a record and global supplies are tightening and that raises the risk for upward price spikes. As we have written before it was popular that oil is in a new demand-driven super cycle and the numbers that we are seeing are backing up that big picture scenario. Barring any more market fear headlines, the trend should be higher.