The Oil Market's Looking Alright

Summary

• In this piece, I decided to look at some recent oil-related data to see how the market, as a whole, is looking in the US
• Some datapoints are far from great and need improving, but some pieces look nice for oil bulls
• Add to this the fact that inventory changes appear bullish compared to the past, and I don't mind this space

Oil prices have continued to gyrate recently but have at least ticked up a bit after some positive news broke that inventories in the US took a sizable move lower. As an investor in this space and somebody who follows the data rather closely, I figured it would be interesting to dig into the numbers and give my thoughts about why the evidence continues to point toward a mostly bullish picture that investors in oil-related companies and ETFs should appreciate.

Inventories fell nicely

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According to the EIA (Energy Information Administration), crude stocks during the past week have taken a meaningful step lower. If their estimates are accurate, crude inventories for the week came in at 495.4 million barrels. This represents a decrease of 7.5 million barrels from the 502.9 million seen a week ago. It should be mentioned that, although this drop was worse than the 8.1 million barrel decline estimated by the API (American Petroleum Institute), it was more than triple the 2.45 million barrels that analysts forecasted would come off the market. In the graph above, you can see the trend that stocks have taken over the past 52 weeks and, in the graph below, you can see the same graph but zoomed-in on so that you can more easily see weekly fluctuations.

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Fortunately, though, crude stocks weren't the only area to improve. Take, for instance, motor gasoline stocks, which fell by 1.6 million barrels down to 235.7 million barrels. Residual fuel stocks fell even more, to the tune of 1.8 million barrels down to 34.9 million, and kerosene-type jet fuel inventories dropped 0.7 million barrels to 40.3 million. The lowest decline, it seems, came from fuel ethanol stocks, which contracted by a modest 0.4 million barrels to 21.2 million.

It should be said, however, that not everything during the week was great. Distillate fuel stocks surged by 3.2 million barrels to 153.6 million barrels and propane/propylene stocks jumped 1.6 million barrels to 62.2 million. The largest increase, though, came from the "Other" category of petroleum product stocks, which grew by 3.3 million barrels, rising from 288.4 million barrels to 291.7 million. Despite these increases, though, the sum of crude and petroleum product stocks for the week dropped by 3.9 million barrels from 1.3388 billion barrels down to 1.3349 billion barrels. This excludes the fact that the SPR (Strategic Petroleum Reserve) saw inventories fall by 3.1 million barrels as well.

Production continues growing but demand is firming

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One negative reported by the EIA relates to domestic oil production in the US. According to the EIA's estimates, the nation produced 9.397 million barrels, which is 59 thousand barrels per day (or 413 thousand barrels for the week) above the 9.338 million barrels per day produced a week earlier. While this is a rather large move higher, it should be mentioned that most of this increase, 34 thousand barrels per day worth, came from Alaska, which is something I informed my readers of last week. In the graph above, you can see the trend that inventories have taken over the past 52 weeks and, in the graph below, you can see the same graph but zoomed-in on so that you can more easily see weekly fluctuations.

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While production continued its ascent, some demand figures were encouraging. For the week, motor gasoline demand averaged 9.786 million barrels per day, which was above the 9.671 million barrels per day seen the same week last year. The four-week average figure for it is still lower than last year, down 0.3% at 9.711 million barrels per day compared to last year's 9.738 million barrels per day, but the uptick in weekly data is encouraging. Meanwhile, the four-week average figure for distillate fuel demand has remained robust, averaging 4.092 million barrels per day, an increase of 8.8% compared to the 3.760 million barrels per day seen in 2016.

Only modest increases in the rig count

One interesting piece of news that came out during the week relates to the rig count. According to Baker Hughes, a GE Company (BHGE), the oil rig count in the US barely budged, rising just 2 units to 765 in operation. Though this is still far higher than the 357 units in operation the same time last year, it's nice to see a more modest uptick instead of a larger one. Meanwhile, in Canada, the same thing happened. The oil rig count there increased just 1 unit to 106 in operation, though this is still meaningfully above the 44 in operation last year.

Some nice data for oil bulls

One thing I have noticed in recent weeks has been that the amount of oil in Cushing has been falling at a nice clip. Out of the past 13 weeks, for instance, 12 of those has seen the amount of oil stored in Cushing decrease. During this timeframe, the period during which Cushing oil peaked, we have seen 11.86 million barrels vanish from inventories. For the full year, we have also seen a similar relationship.

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In the graph above, I plotted out the past five years worth of Cushing storage from the start of the year through this past week's data. It may not be easy to break apart each individual year in the graph so, below, I posted the difference in storage in Cushing between the start of the year and the end of the year. What you see here is that, of the past five years, this year has seen the largest decline, which has totaled 9.95 million barrels. The one exception was the 20.45 million barrel decline in 2014. Overall, though, this kind of drop compared to 2013, 2015, and 2016, is positive in and of itself.

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Of course, Cushing is just one piece of the pie. A small piece, but an important one. For the purpose of being comprehensive, I created the graph below. In it, instead of looking at the change in Cushing stocks, I looked at the change in the sum of crude and petroleum product stocks. So far this year, inventories, likely due to seasonal fluctuations, have risen 13.01 million barrels. This, unlike in the case of Cushing, is negative for oil bulls, but we need to put the data in proper context.

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What I mean by this is that, although inventories have risen so far this year on the whole, the uptick is far, far smaller than in the four years leading up to this. In 2015, during the same period of time, rising global oil production sent inventories soaring 123.60 million barrels. However, even if we look at 2013, a year in which the glut was not yet in existence, stocks of crude plus petroleum product stocks grew by 31.82 million barrels, and the four-year average ending in 2016 was for a build of 73.19 million barrels.

This data all seems to point toward a scenario where, taking seasonality into effect, the oil picture in the US isn't all that bad. Sure, inventories are still high and need to come down quite a bit in order for the market to return to balance, but this data points toward a scenario where this may be happening as we speak on a seasonal basis. If so, then once global demand picks up in the third quarter, we could be sitting in a pretty nice spot.

Takeaway

Based on the data provided, it's clear to me that not everything is looking great (especially production) but the overall picture facing the US oil market continues to improve. In the weeks to come, I believe there's a good chance of continued stock draws and, if so, it wouldn't be unreasonable to anticipate an increase in energy prices and the prices of stocks tied to energy.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Comments

[heung]

daniel,
I watched in details from you on the oil demand and supply. you had in your KMI update mentioned confidence that Oil price to surpass 53 ( or 60 as said). Next monday will have the Opec meeting, Consensus are there is no cut or cap ( ?) for opec. Friday morning, it was suggested SA pumps more than expected oil in july, thursday afternoon, it was reported that SA will lowered its output by 900K. The news are so confused and mixed. What is your take on that??

[User 47325342]

Randy - Electric car forecast as requested:

Bloomberg’s report forecasts that electric vehicles will account for more than half of all new light-duty vehicle sales globally by 2040, up significantly from their 2016 forecast. They believe this would displace 8 million barrels per day of transport fuels by 2040 which is a big number.

Volvo to make only electric cars after 2019
http://bit.ly/2vv9CH5

France Plans to End Sales of Gas and Diesel Cars by 2040
http://nyti.ms/2uQCf1e

All Cars In Norway Will Be 100% Electric By 2025
http://bit.ly/2vvsFRz

India to sell only electric cars by 2030
http://cnnmon.ie/2sAALdt

China: 12% Electric Cars By 2020
http://bit.ly/2vvJPi8

[Randy W]

Thanks for putting all of this in a clear, concise form. Looks like things are slowly getting better. Love to hear your input on the electric car forecasts...

[waqas111]

I agree with u Dan and as per U :
" I believe there's a good chance of continued stock draws and, if so, it wouldn't be unreasonable to anticipate an increase in energy prices and the prices of stocks tied to energy"

True and may go on like this for probably 2 more weeks until OPEC's July report and then you will c more production increases from opec king pin and his cronies as i predicted CORRECTLY the June OPEC production rises by some members. Unfortunately for the bulls the uptick in OPEC production will continue for 2 more months until August of this year and then the US driving season will come to an end. Sorry !

I am not an uber-bearish and don't intend to see price dropping to $30 or $40. However i am satisfied with $50 and that's it !! Any further increase will remind me of Nicelback's song "This means war" with the bulls.

[belakov]

thanks daniel for your articles ! what do you think about LGCY ?

[AlexanderWilhelm]

LGCY has a chance with all the geopolitical risk currently