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Oil’s head fake


The resignation this week of the President’s economic advisor, Gary Cohn, in light of the Administration’s proposed tariffs on imported steel and aluminum seems to have sideswiped oil and fuel markets and a big way. More than the equities market correction two weeks ago, the dramatics out of Washington seems to have claimed oil as collateral damage. The fundamentals don’t support this sell-off.

A glance at global and even U.S. demand and supply for oil and petroleum products continues at a torrid pace with the pick-up in oil’s popularity approaching levels not seen in decades and with major storage hubs being drawn down to levels that should prompt oil’s rebound. Yesterday’s EIA (Energy Information Agency) Weekly Petroleum Status Report showed crude storage levels at Cushing, Oklahoma at their lowest levels since 2014, which explained why overall American inventories rose by a less than expected 2.4 million barrel; a small build considering over 12 percent of refinery production is in spring turnaround leading to dramatically lower demand. Indeed, demand for oil products averaged 20.3 million barrels per day, up 3.4% from last year, when demand then was above levels recorded in the same period in 2016. The inability to rebuild oil supply when refineries are running at seasonally low levels is a sobering factor, seemingly missed by a market spooked by reasons that have little to do with oil economics.

Unless the global economy falters, it is the weight of a strengthening world economy and outlook that is likely set to to propel oil prices dramatically and quickly in the next few weeks, a sentiment shared by Exxon Mobil, who’s CEO noted that it’s a solid global economy that’s “really driving demand at levels much higher than recent history.” However, as one of the world’s largest oil companies, Exxon-Mobil’s CEO, Darren Woods, also said that if crude prices crumbled under the weight of the fear of a global trade war to say $40 a barrel, it would have no choice but to pull back from long-term investments into future oil projects, a sign that the world could be left chronically undersupplied.

In a week when U.S. gasoline demand stands 9% above last year, a small increase in diesel consumption of .9% and jet fuel rocketing up 18.3% year over year, the prospect that shale output will begin slowing after 2019 to no more than a 100,000 barrel a day increase by 2023, according to the IEA (International Energy Agency) means fundamentals on oil will soon be out of whack.

A sustained rise in demand, coupled with an eventual decline in the growth of shale output, coinciding with limited investments in the upstream discovery and production of oil can’t be dismissed by short-term market gyrations. As the IEA pointed out, “Upstream investment may be inadequate to avoid a significant squeezing of the global spare capacity cushion by 2023, even as costs have fallen and project efficiency has improved.”

The decline in Mexican, Chinese and Venezuelan output, combined with anti-pipeline activism most notably in Canada, means we may soon see a replay of the $147 a barrel oil last seen over a decade ago.

Don’t fall for the head fake.

Senior Petroleum Analyst, Canada

Dan is a skilled and noted bilingual (French and English) consumer advocate specializing in energy and current affairs. Known as Canada's “Gas Guru,” he founded to better help motorists anticipate the price of gasoline in advance across Canada. He has over three decades of experience in the petroleum industry, as a parliamentarian and an analyst.