Oil prices are testing key support levels as they try to balance supply versus demand and demand expectations. Supply seems to be speaking for itself as combined, all U.S. crude oil and refined product stocks are at 2.08 billion barrels, an all-time high. But demand is near all-time highs as well. The American Petroleum Institute reported record June gasoline consumption in the U.S. The API, according to Bloomberg News, said that demand for gasoline rose 2.7 percent from a year earlier to 9.64 million barrels a day. As far as all fuels, demand climbed 2.8 per cent which is the highest total U.S. oil demand since 2007 before the start of the “Great Recession.” This comes as U.S. production has fallen by over a million barrels a day from a year earlier. 

Global demand is also hitting records in many places. In Saudi Arabia we have seen demand for power drive down oil inventories. The Wall Street Journal reported that Saudi Arabia drew its storage levels down in May to the lowest level since August, 2014. The country’s crude inventories fell 12% since October to 289 million barrels in the longest sustained drawdown in 15 years.

The Financial Times reports that, “India’s economy is expected to grow 7.5 per cent this year and is forecast to overtake Japan as the largest oil consumer after the U.S. and China.” Its demand growth — key for companies looking to invest — will this year outstrip China’s for the first time since Beijing embarked on more than a decade of resource-devouring expansion. The FT points out that India’s 1.3bn population still lags behind other emerging market powerhouses in oil consumption per capita, giving it room for rapid growth.

In India there are only 25 cars for every 1,000 people, data from energy consultancy FGE show, compared with 110 in China. Plastic consumption is 12kg per capita a year, compared with more than 10 times that amount in Europe.

So the demand growth should develop to the current glut of supply, assuming the economy stays afloat. You see the thin line between and an oversupplied market and an undersupplied market is really the tightest it’s been in many years. That’s why economic expectations are so important. That’s why I warned that if the UK left the Eurozone it could impact demand and now there is evidence that it has. Markit reported that UK private sector activity fell at its sharpest rate since the height of the financial crisis in 2009 in the aftermath of the Brexit vote. Yet because crude oil already anticipated that slowdown, we may actually find some support from the increased odds of an interest rate cut in the UK that won’t be able to ignore this sharp slowdown in growth.

So my point is that while we are well supplied it is being offset by strong demand so the rest of the equation comes down to market expectations for the economy. We are going to be facing seasonal weakness but that may be offset by more stimulus. That is why oil reacts to an old interview from Bank of Japan Governor Haruhiko Kuroda ruling out the idea of using “helicopter money” or someone at the Fed feeding a line to the Wall Street Journal that a September interest rate hike is on the table. It is all about demand expectations. If they are high, then the glut looks smaller. If they are low, the glut looks overwhelming. For WTO the key support is $44.00.

The Wall Street Journal reported that the U.S. Energy Information Administration said natural gas stockpiles grew by 34 billion cubic feet last week, compared with the 38 bcf expected by forecasters surveyed by The Wall Street Journal. The report is a widely watched indicator of supply and demand. A smaller-than-expected addition to storage likely indicates more modest supply or stronger demand than expected.

Natural gas for August delivery settled up 3.4 cents, or 1.3%, at $2.692 per million British thermal units on the New York Mercantile Exchange. The day’s gains, though not substantial, were enough to beat those of seven of the eight winning sessions this month, as higher prices and bloated stockpiles have stifled a rally that made gas one of the best performing assets of the second quarter. “I’m frankly surprised that we had such a subdued reaction to reasonably large miss on storage,” said Teri Viswanath, managing director, natural gas, at PIRA in New York. It “suggests that the market is becoming less certain about rebalancing this season.” Despite the tempered optimism, it was clear some market participants were betting the relatively small storage addition will help “bleed off” the surplus left in storage from the winter, said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. 

After natural gas prices rose strong earlier, they spent most of July in retreat on fears that power demand might not be coming through as much as expected. Those fears may have been overblown, said Phil Flynn, senior market analyst at the Price Futures Group in Chicago. “They [other analysts] were underestimating the heat and production numbers that are struggling to stay above demand right now,” Mr. Flynn said. “I think people are going to be surprised at how tight the inventory numbers are going to be in a couple weeks.” However, $3/mmBtu might still be the price cap on a new rally, he added. A glut leftover from tepid heating demand during the warm winter left a record amount of gas in storage to start the spring, and many analysts expect that could keep stockpiles challenging a record high going into next winter. The EIA’s report put inventories as of July 15 at 3.3 trillion cubic feet, 17% above levels from a year ago and 21% above the five-year average for the same week. 


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