Morning Market Overview

Oil prices ended last week higher capping a strong weekly gain. The complex has been in rally mode since hitting a short-term bottom in the middle of December of 2017. The short answer for the rally is a significant change in the overall market sentiment. All the main catalysts that normally impact the price direction of oil prices have been supportive over the last three months or so.

How long the support remains is still the main question in the market and the main risk going forward. On the positive side the fundamentals continue to improve. On the US front total combined stocks of crude oil and refined products have been in a destocking pattern since the middle of February of 2017.

For the week ending January 12 total US combined stocks are now lower by 140 million bbls compared to Feb 2017 and are just around 54 million bbl above the five-year average level for the same week. Recall OPEC’s objective is to push global stocks back to the five-year average by cutting production. The US is well on the way to meeting that objective. Global stocks are also declining in most major locations of the world adding further support to OPEC’s strategy. On the supply side US production is in an uptrend with rigs jumping higher last week. This is a negative for OPEC and its non-OPEC partners to the production cutting accord. However, about 70 percent of the 2017 Y-O-Y increase in US production has been offset by a strong reduction in Venezuelan production due to the unstable economic and political situation in Venezuela.

US production is easily being absorbed in a market with rising demand and production cuts by the remaining members of OPEC and others. Overall supply remains curtailed even with growth in US production and enough of a curtailment to keep global inventories in a destocking pattern. Further supporting the upward trend in oil prices is the stronger than expected growth of the global economy. Both the developed world countries (like the US, Europe, Japan, etc.) and developing world economies with China leading the way are all experiencing a strong growth pattern in their respective economies.

Economic growth is directly related to growth in oil consumption (different correlations for developing versus developed world countries). Oil consumption growth is quickly absorbing curtailed global supply helping to maintain global oil inventories in a broad destocking pattern.