In the U.S. overall petroleum inventories continue to fall as the petroleum oversupply drain game has begun. Not only did we see the API report an 840,000 barrel drop in crude oil inventory but also a 1.8 million barrel drop in distillate inventory offsetting a surprise 1,347-million-barrel increase in gasoline inventory caused another drop in overall U.S. liquid supply.

This is just the beginning of the U.S. oil inventory drain game if you are to believe OPEC Secretary-General Mohammad Barkindo who said that all crude producers, both from OPEC and non-OPEC nations, are committed to getting global inventories down below the five-year average. Dow Jones reported that compliance data in March are higher than the levels achieved in February and that OPEC is, “optimistic the policy measures have already placed us on the path of recovery and collective action will continue to prove effective.” Now despite this proclamation, the rate of the crude oil drain has been disappointing. Some of that is due to rising U.S. oil production but also because of U.S. Strategic Petroleum Reserve (SPR) sales and traders draining storage as they find less incentive to play the storage game and have brought a lot of oil back onto the market.

But OPEC resolve will start to show up in the weeks ahead. The focus on the increases in U.S. oil output is nice but if you look at the picture behind a back drop of dwindling product inventories worldwide, you will start to realize that despite U.S. production increases we are headed for a tighter market. The Energy Information Administration said that in May U.S. shale oil production hit 5.2 million barrels a day, the highest since November 2015. While shale oil will fill part of that void in the global oil market, it will not replace rising demand and OPEC cuts. 

Consider if you will, the report that Saudi Arabia cut oil exports to 6.95 million barrels a day, the lowest since May 2015. That is a reduction of 750,000 barrels of oil a day from January and the lowest since 2015 or pre-OPEC price war. Russia is also doing its part by cutting oil production by 2.2% according to the Dep. Minister Molodtsov. Bloomberg reported that Russia’s current crude production is around 1.5m tons/day, 2.16% lower than October, deputy energy minister Molodtsov told reporters in Moscow. That puts Russia within a hair’s breadth of full compliance to oil production cuts.

Even Iran is now getting on board with cuts. Kuwait says that Iran is in compliance and that they will be allowed to keep the same quota as the cuts are extended. Bloomberg wrote, “Iran could increase its output under the deal as the nation rebuilds from international sanctions that crippled its energy industry." Since sanctions were eased in January 2016, Iran’s oil production has climbed 35 percent, according to data compiled by Bloomberg. "It has stabilized this year, gaining less than 2 percent, the data show. Iran pumped just shy of its 3.8 million barrels a day allowed under the deal in the first quarter, according to the International Energy Agency.”

Demand should be strong as well as the IMF raised its forecast for global growth to 3.5 percent this year, up 0.1 percentage point from January. The IMF did say that expansion will pick up to 3.6 percent in 2018, unchanged from the projection three months ago. The upward momentum in the global economy would suggest that oil demand should also come in somewhat higher than recent forecasts. The IEA lowered oil demand growth forecast for 2017 by 40,000 barrels per day last week to a demand growth of 1.3 million barrels a day but may have to revise that upward if the IMF is correct.

We have said that we are on the road to market balance. Soon others will be telling you the same thing because the numbers over time can’t lie. You will also be hearing from folks that said they predicted it but of course it was well after it started to become obvious. Still the market has to get some momentum to get out of this range and it may help is the U.S. bonds quit screaming and the dollar stabilizes.

Natural gas is still hanging in despite being in the heart of the shoulder season. Andrew Weissman of ECB analytics says that the May natural gas contract has closed within a narrow 9.3¢ range since April 7th. Further range-bound trading remains the most likely option, but bears may have a slight edge given near-term fundamentals. The natural gas storage surplus vs. the five-year average is projected to fall only slightly from April 1st to mid-May despite 110 Bcf (2.4 Bcf/d) of below-normal weather-driven demand—evidence of the strength in the underlying weather-adjusted supply/demand balance. Looking forward, if current forecasts for hotter-than-normal summer weather hold, increased demand could ignite the natural gas market, sharply reducing the storage surplus and sending NYMEX futures higher. Although WDT’s most-likely summer forecast has trended in a less bullish direction, it still retains 132 CDDs and 98 Bcf of above-normal demand from May to September. Electricity futures settled into more range-bound trading patterns in response to bearish April weather forecasts.