That didn’t take long. Last week at this time, we noted that OPEC combined with non-OPEC oil producing countries’ pledge to raise output by about 700,000 barrels a day would fall short of rising global demand, estimated to increase 1.2 to 1.5 million barrels a day. Despite Saudi Arabia’s commitment to begin churning out the most oil it has ever yielded (11 million per day), a big draw in U.S. crude stockpiles confirms that it is far from a balance of supply and demand that would stabilize world prices and reduce volatility. Oil may once again renew its quest to $80.
The rally in energy prices seen a week ago Friday was quickly extinguished by Monday as traders incorrectly placed greater weight on concerns of a looming trade war with the U.S., rather than on fundamentals. By Tuesday, many became aware that the 380,000 barrel a day Syncrude oil sands production facility suffered an electrical problem that effectively closed operations for up to a week. On Wednesday, the U.S. Department of Energy’s Weekly Petroleum Status Report showed a massive multi-year record draw of 9.9 million barrels of crude, pushing stockpiles 6% below the five-year average. The draw came at a time when inventories generally rise and so the draw was particularly ominous, accounting for WTI rallying $7 a barrel in just one week. More interestingly, the $10 a barrel gap between that had existed for the last month between Brent and WTI narrowed substantially to less than $5 on further news that U.S.exports of oil had soared to an unprecedented 3 million barrels a day over the course of the last week. In essence, while American domestic production continues to rise an new markets are found to buy light tight shale oil, stockpiles of oil are in fact dwindling and may continue to be tight amid the heavy summer demand driving season. On that score, the EIA report also noted that domestic gasoline and diesel demand were robust with gasoline clocking in at 9.7 million barrels consumed daily. Apparently, the fact that pump prices stand at a commanding 63 cents a gallon over this time last year, has not dampened driver consumption. Indeed, diesel prices are now at a towering 72 cents a gallon above last year and helped by exports to Latin America, notably Mexico, diesel prices continue to be 35 cents a gallon more expensive, per gallon over gasoline. A rarity for this time of year going back a decade.
Within Canada and the U.S. entering the summer driving period in earnest with long weekend holidays this week, expectations are for sustained higher fuel prices, despite warnings over trade entanglements and promises by OPEC that they will ensure the oil market is adequately supplied. Recalling that gasoline and petroleum products behave more independently of oil at this time of year, hopes for cheaper gas prices appear to be vanishing with the warmer and uncertain weather ahead.