Tough to know where the oil markets will go from one week to the next, but today was a nice move.  The EIA followed the bullish API report Tuesday afternoon, somewhat backing another crude draw from inventories.  We continue to hear about the never-ending oil glut but continue to get varying accounts of how many of those barrels are entering storage. The EIA report was very bullish.  It may be the signal of a change in the supply and demand dynamic, but most believe a balance won’t occur until next year. 

S&P Global Ratings recently raised its average WTI price/bbl for the rest of the year to $42.50 from $40.  This does little for much of US unconventional production which needs a much higher number to increase production.  S&P Global Ratings recently stated, "The current oversupply of oil appears unlikely to persist into the medium or longer term as natural field depletion and a lower number of new field developments have a greater bearing on supply," It believes this oversupply will persist well into next year. More bullish news came from Norway, as an oil service workers strike could impact Europes largest crude-producing region.  We are still awaiting another big OPEC meeting (that likely means nothing), where some members are stating there will be an upcoming freeze. This continues to fail as OPEC members do not trust one another enough to cut production.  In the 80s when the Saudis cut, other OPEC members stole their customers. 

So the freeze would allow them to keep customers, and lead the investing community to believe this will stop OPEC from increasing production.  A freeze is unlikely as Iran and Libya both have stated they would like to increase production, at least back to historical volumes. So even if a freeze happens, it will probably be set with limit of increase. Most OPEC members that could increase production have, expecting to keep those volumes high if a freeze occurs. A freeze is thought of as a non-impact type of deal, that is all words that will do little to balance the market. If the price of oil increases to $50 or $60/bbl, the US and other producers will start adding rigs. OPEC meets in Algeria September 26-28. 

The EIA reported that crude stocks declined by 6.2M bbls last week.  Inventories now sit at 504.6M bbls. This was a surprise as most expected that we would add.  We also saw a decrease in gasoline while distillates increased. Gasoline was down 3.2M bbls.  Distillates increased by 2.2M bbls.  Crude, Gasoline and Distillate inventories are all well above historical averages. Oil prices rallied 3.5% on the news, and this was exasperated by the Fed holding rates. Total commercial petroleum inventories decreased by 6M bbls. The dollar dropped in reaction to the Fed.  Since oil trades in dollars, an inverse correlation is seen.  So a weak dollar means higher oil prices and vice verse. This crude decrease was seen even with the massive Colonial Pipeline being shut down. The CBOE volatility index traded down 17.4%. This may be the best gauge of fear in the market.  This marks the third week in a row where the EIA has seen a drop in inventories. This has been unexpected as we continue to see production surge out of OPEC and Russia. Venezuela recently stated the market was oversupplied by 10%. This means supply is outpacing demand by some 9.5M bpd. 

The EIA report was interesting as crude imports rose by 247,000 bpd. The average of 8.3M bpd is above the 4 week average of 8.1M bpd.  It is 9% higher than the same four weeks last year. Gulf imports were actually down by .5M bpd. This was close to the record low of 2.5M bpd seen in the week of Sept 2^nd. Refinery utilization rates decreased by .9% or 143,000 bpd. Gasoline saw record builds in the gulf coast, while record declines were seen in the east. The Colonial pipeline mentioned earlier, is a key gasoline line from the south to the east.  It has been shut down for nearly two weeks, but opened Wednesday. This caused volumes to swell in the gulf as it was unable to pipe refined product to the east coast. This should normalize soon, but the time frames are uncertain.  Gasoline and Jet fuel demand has been robust. Gasoline demand is up 4.1% over last year.  Jet fuel is up 8.1% over the same time frame.  Total refined product is up 3%, brought down by sluggish demand for distillates. Much of the demand is being stimulated by low prices. The average retail gasoline price in the US was $2.225/gal. It is very possible demand will continue. During this, crude production increased 19,000 bpd.  13,000 bpd were seen in the lower 48.  Much of this production is coming from west Texas. We are seeing breakeven prices as low as $25/bbl out of the Permian Basin. This includes the Delaware in the west and Midland in the east. The best areas have been the Delaware’s Loving and Reeves counties.  In the Midland Basin, Midland and Martin counties continue to outperform. We continue to see a shift, where Permian production outpaces the Bakken, Eagle Ford, DJ Basin, and Powder River Basin. As production is lost in those areas, the Permian will continue to replace. There is further pressure to prices coming from new wells in the STACK/SCOOP of Oklahoma. Similar low breakeven prices are being seen there. 

In summary, we saw another bullish report from the EIA. These decreases are puzzling but no doubt due to the robust demand for gasoline. If the glut continues, we will continue to add to inventories. For every barrel added, it will take that much longer to turn oil prices higher when supply/demand are equal. Since shale producers can make money at $40/bbl WTI, it puts added pressure on OPEC. Even the low cost producers are pressured by public subsidies offered to its citizens. This could be thought of as a sort of debt payment to countries like Saudi Arabia and Iran.  Just like shale producers struggle with debt payments that were set at much higher oil prices.  We expect Venezuela to have a crash of sorts that could affect OPEC production substantially. The only issue is how much OPEC will increase production if this occurs. We believe oil prices could tough $55 to $60/bbl this year, but those types of numbers do not seem sustainable.  As of right now, we received another bullish report, but do not think the tide has turned just yet. We seem to want to trade in the $42 to $50 range, so we continue to short at the top and  buy at the bottom. Until a major change is seen in the markets, we continue to believe the oil prices will stay within this range.