CEO Bob Dudley, the chief executive of BP, has said that the global oil market is pretty much in balance and new data from the Energy Information Administration (EIA) pretty much backs that up. In the eagerly anticipated “Short Term Energy Outlook” the EIA reported world oil (liquids) production output for September was 96.47 million barrels per day while demand was 96.39 million barrels a day. That is a global supply surplus of 80,000 barrels a day which is a rounding error in the big picture. So assuming any minor outages around the world, we could be in a supply defect as we move forward. The key for the oil market is that there has been this perception that we are massively oversupplied and dramatically adding to a global oil glut, but recent data seems to suggest that the market has achieved a new balance.
Even after the EIA in their weekly data showed supply broke its 5-week string of oil market drawdowns with a 4.7 million barrel increase, it came against a backdrop of a weekly drop in U.S. oil production and a drop in the Cushing, Oklahoma delivery point. In fact, if you look in the lower 48 states, crude oil production fell below the 8 million barrel per day level for the first time since June of 2014. Most of that was in Bakken with the Wall Street Journal reporting that North Dakota oil production dropped 4.7% in August falling below the one-million-barrel-a-day mark for the first time since March of 2014, when output came to 977,178 barrels a day.
Oil also saw support because traders realized that the crude build was helped by seasonal refinery maintenance at a time when U.S. product demand is running above the five-year average. That led to a 1.91 million barrel drop in gasoline supply as well as a 3.75 million barrel drop in distillate supply. The data suggest even stronger demand when we come out on the maintenance season giving the market reasons to rally.
The EIA is warning of higher heating bills this winter as well and in their data showed a marked decline in U.S. natural gas production. U.S. total utility scale electricity generation from natural gas will average 35% this year and the share from coal will average 30%. Last year both fuels supplied about 33% of total U.S. electricity generation. In 2017, natural gas and coal forecast to generate about 34 % and 31% of electricity, respectively, as natural gas prices are forecast to increase. Electricity generation from natural gas will average 35% this year and the share from coal will average 30%. Not to mention that the weekly natural gas number came in at a well below average injection of 73 bcfs which is why natural gas prices hit the highest level since December 2014.
We continue to maintain our bullish outlook and it is clear the fundamentals are coming in line like we predicted. With OPEC and non-OPEC in line and U.S. production having to get in catch up mode, the bottom of the cycle looks solid. We still have risk to sell off if we see another financial crash or crisis but even so the bottom is looking more solid.
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