There is growing evidence that not only is the global oil market back in balance, but there is a strong possibility that global demand is already outstripping daily oil output. Another big drop in US oil inventory, the 6th in 7 weeks and a 6.7 GDP reading in China adds more weight to the global oil supply versus daily production argument. The conversation in oil will start to change from the talk of glut to the talk of shrinking global supply.

Extraordinary cutbacks in global energy cap-ex spending is starting to show up as the American Petroleum Institute (API) reports a 3.8-million-barrel drawdown in oil supply. We are seeing US oil supply tighten very quickly. API reported US crude oil inventories fell by 3.8 million barrels last week which makes 6 out of 7 from last week’s averaging over a five million barrel drop per week. Plunging oil imports which API says fell by 533.000 barrels a day suggests that oil supply is not out there or it is going elsewhere!

Asia has been a ravenous buyer of oil and that could explain some of the drop but with big players like Saudi Arabia and BP saying that we are in balance, it may be based upon the numbers that are in deficit. Reuters reported that Saudi Arabian Energy Minister Khalid al-Falih said on Wednesday that oil markets were at the end of a considerable downturn as fundamentals were improving and supply and demand were rebalancing. "Market forces are clearly working after a testing period of sub-$30 oil prices. Oil demand is expanding at a healthy rate despite slower global growth.” He is right.

Global consumption of oil and other liquid hydrocarbons is on track to hit 95.33 million barrels per day in 2016 and 96.67 million barrels per day next year. We know that China demand continues to stay strong and despite a recent drop in India oil demand, the growth prospect for India demand growth remains very strong.

US demand is outstanding and the talk that Janet Yellen will allow the US inflation rate to run hot will mean that the Fed is not fearful that a pop in oil prices will derail the economy but  may help it as it will bring US oil workers back and maybe create a little wage pressure in an economy where most people believe they are being under paid and under employed.

US demand for distillates remains strong as evidenced by another big drop in supply. The API reported that distillate supply fell by a much larger than anticipated 2.7 million barrels. Gasoline rose a modest 929,000 barrels. If the Energy Information Administration (EIA) confirms the data, the conversation in the oil market will start to change. We will stop talking about a glut and start wondering when we have to start inventing again to meet long term demand.

Natural gas is hanging in there but is there a new significant upside risk to prices? Andrew Weissman of EBW AnalyticsGroup is warning that there is an enormous potential upside natural gas price risk that could arise if Appalachian pipeline takeaway projects are delayed, due to the consequence of recently finalized Council of Environmental Quality guidance put through by the Obama Administration. Green groups are threatening the project that could reduce supply by 3 bcf a day. That supply will be need as production around the country is falling and the lack of pipeline space is going to make it hard to get the gas where it is needed.

For both oil and gas we maintain as we have all year that our long term bullish outlook is intact. The reduction of production in oil and gas as well as rising demand reinforces the argument I have made time and time again that we are at the bottom of a historic bust cycle in oil and gas. While that position was unpopular and I was in the minority, it is panning out as predicted. The production and demand are backing me up and unless we see a major economic pullback, we continue to buy breaks and put on long term bullish strategies.