U.S. crude oil inventories dropped for the tenth straight week according to Wednesday’s Weekly Petroleum Status Report of the Energy Information Administration (EIA). What makes this streak interesting is that the decline took place against the backdrop of ever-rising American oil production which, at 9.726 million barrels a day, is quickly approaching the all-time historical level of 10.044 million barrels a day recorded in November 1970.
At 411.6 million barrels in oil inventory, the decrease of 1.1 million barrels in the past week now puts U.S supply back to levels not seen since February 2015, just a few months after OPEC tried to flood the world with crude, causing its collapse in price. The reaction by OPEC to these developments was surprising and revealing. For them, the apparent strategy is now to ignore rising U.S. shale production and concentrate on what is now widely believed to be the attainment of a global balance in oil supply and demand. Their line now appears to be one of accepting the inevitability of rising U.S. crude production along with exports, carried by the rising value in oil, which now seems firmly in the mid $60 a barrel range.
Oil’s rally of more than $12 a barrel compared to this time last year can be traced to strong gasoline and diesel demand which has risen 5.4% and 15.3% respectively from the same period in January 2017. Underpinning these dramatic increases in demand is the unmistakable rebound in domestic U.S. economic activity, which appears to be happening in other major world economies including Europe and Asia. Coinciding with remarkable increases in demand for oil and petroleum products is several noted incidents of supply disruptions, which may appear small, but taken as a whole, could continue to squeeze supplies and, as a result, maintain or place further upward pressure on crude prices. Notably, the collapse of the Venezuelan economy and the shrinking of output, clogged Canadian oil pipeline infrastructure, Mexican drug cartels hampering fuel production and distribution, growing tensions with Turkey and its offensive in Syria, as well as ongoing disturbances in Libya and Nigeria, make a strong case for oil and fuel prices to remain robust and more expensive in 2018.
As we pointed out in our Fuel Price Outlook 2018, published more than 3 weeks ago, total spending on gasoline in the U.S. will rise to more than $25 billion this year, meaning average household spending will rise by $133 this year. By all measures early in this new year, that number may well be exceeded. Don’t expect oil prices to drop anytime soon.