Oil Demand Showing Robust Growth

| About: The United (USO)

Summary

Oil prices have continued to fall recently, even after generally positive data being provided by multiple organizations.

Particularly noteworthy is the fact that supplies are dropping nicely and will trough this year, but analysts expect production to tick higher next year.

The single biggest piece of news that is attractive, in my opinion, is the fact that oil demand has now grown very nicely and I suspect this trend will continue.

Oil prices have continued their descent even after a fresh piece of news came out, courtesy of the IEA (International Energy Agency), that shows the rebalancing process for supply and demand is coming along nicely and demand is soaring. In what follows, I will dig into the data provided by the IEA and give my own thoughts on what it means for companies like Memorial Production Partners (NASDAQ:MEMP), Approach Resources (NASDAQ:AREX), and Legacy Reserves (NASDAQ:LGCY), as well as for those in the United States Oil ETF (NYSEARCA:USO) and other oil-related ETFs.

Supplies are falling... for now

According to the IEA in its monthly oil report, oil production has fallen very hard recently. Based on their own internal estimates, production in May of this year came out to 95.4 million barrels per day, representing a drop of 800 thousand barrels per day compared to April. In addition to being hit by a drop in output from outages in Canada as a result of the Fort McMurray wildfire (which is still burning but is now being held off), production has been hit by a drop in output in Nigeria because of militants attacking pipelines, and has been negatively affected by natural declines in countries like the U.S.

Year-over-year, the picture is also bullish, with global production now standing 590 thousand barrels per day below where it was last year and, unless something changes, my opinion is that this is likely to persist for the foreseeable future. Overall, this has caused the IEA to anticipate a drop in non-OPEC oil production this year of around 900 thousand barrels per day but as outages are eventually resolved, it's probable that production will increase by around 200 thousand barrels per day next year.

Even OPEC is having a tough time seeing output increase. According to the organization, production from the group should have totaled 32.61 million barrels per day in May. If this estimate is correct, it implies a decline of 110 thousand barrels per day due largely to Nigeria. Much of this decline, however, was offset by growing production in key OPEC nations, led largely by Iran, who appears to be on track to see average output this year stand about 700 thousand barrels per day above where it was throughout 2015.

Leading up to May (using their most recent data that ends at the end of April), the IEA believes that OECD inventories of crude plus petroleum products came out to 3.065 billion barrels. This represents a build of 14.4 million barrels month-over-month and also happens to be 222 million barrels above where it was in April of last year. However, as supplies drop and as demand remains high, it's probable, in my opinion, that this number will fall.

Demand is much higher than data suggested previously

In addition to the supply situation improving thanks to both natural declines and supply outages, another positive for the oil market appears to be robust demand. In its report on the issue, the IEA now believes that oil demand growth during the first quarter of this year came out to 1.6 million barrels per day. If this is, indeed, accurate, it implies an increase over the 1.4 million barrels per day estimated by the organization just one month earlier and shows that the global economy (helped by low energy prices) is better off than many have feared.

In addition to seeing much stronger demand for the quarter, the IEA has upped their forecast for global demand increases this year. Now, as opposed to expecting an increase in demand of 1.2 million barrels per day this year, they anticipate an increase of 1.3 million barrels per day, followed by an added 1.3 million barrels per day in demand during 2017. The firm's 2016 estimates are still lower than the 1.45 million barrels per day (up from 1.41 million barrels per day forecasted a month earlier) that the EIA (Energy Information Administration) has claimed will happen, but it's safe to say that future revisions higher are likely.

Takeaway

At this moment, Mr. Market seems to be worried once again about the oil picture. I, too, have found myself in disbelief that we've risen so high, so quickly. Having said that, there is no doubt in my mind that the global oil picture hasn't looked this upbeat in a long while and, although there are certainly improvements that we need to see, this data should be yet one more positive note for long-term oil investors.

Disclosure: I am/we are long AREX, MEMP, LGCY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My LGCY investment is in the form of preferred units, not common ones.