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Oil Prices: A Question of Balance

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Driven by lower U.S. crude inventories and Saudi Arabia’s pledge to reduce its exports, oil prices moved this week to a surprising 8 week high for both Brent and West Texas Intermediate benchmarks. The two events suggest the expected crash in the commodity’s value may have been premature and that a balance in global supplies may come sooner than anticipated.

With this week’s U.S. inventory draw of more than a million barrels a day last week, down some 60 million barrels since the end of March, factoring in the reclassification of the Strategic Petroleum Reserve (SPR), crude stocks now stand at 7.1% below where they were this time last year. More pointedly, gasoline demand seems to have risen dramatically with a million-barrel decline, breaking through earlier assumptions that it would weaken this summer. In fact, a 229,000 barrel a day bump in average U.S. consumption to 9.82 million b/d puts demand back on track to see a potential record demand summer driving season. Evidence that some shale producers are showing signs of over extension saw U.S oil production fall 19,000 barrels a day with several companies pledging cutbacks to their capital expenditures (CapEx) on further drilling given declining drilling rates and the current market environment of sub $50 oil.

Outside the U.S. oil scene, news in Canada of several large oil companies selling off and moving away from capital intensive, higher cost projects has meant a $36 billion-dollar flight in CapEx there in the past 16 months. Regulatory delays in approving projects and pipelines, coupled with the country’s objectives on climate change targets have made Canada a risky prospect for some of the world’s big players, including Petrobras, which canceled its $35 billion dollar LNG project in British Columbia on Monday.

Despite initial skepticism over the OPEC/NOPEC agreement to cut back oil production, the recent developments globally, taken together, appear to augur well for the much sought after rebalancing of global oil stocks. Indeed, the most recent take by the Energy Information Administration (EIA) pointed out yesterday that “oil product demand growth is exceeding increases in refinery output across most developing regions” helping to explain in part the recent uptick in demand for U.S. petroleum products as the early June glut now appears to have all but vanished.

All eyes on how this turns out at the gas pumps for the final forty days of summer and beyond.

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