Oil Is Asymmetrically Positioned To The Upside

EIA’s oil storage report today was bullish. The crude draw was slightly less than we had expected due to lower-than-expected refinery throughput, but the implied U.S. oil demand figures were far better than we had hoped.

EIA pegged U.S. implied oil demand this week at 21.235 million b/d or higher y-o-y by 771k b/d.

More importantly, in my view, is the implied demand from the big 3.

As you can clearly see by now, this year is not like last year. We are starting to see demand separate itself from the trend we saw in 2022, and the inflection point (demand diverging) is precisely what we have been pointing to going into H2 2023.

Now breaking down U.S. implied oil demand into its respective segments, we can clearly see a few outstanding winners.

Jet fuel, other oils, and gasoline demand are notable outperformers.

With refinery throughput at ~16 million b/d today, we are going to keep seeing product storage draw unless throughput moves higher. While crude side will show less of a draw as a result, the product tightness is what will keep a nice tailwind on oil prices.

Looking at the big 3 product storage, we are going to start seeing a material divergence in the next few weeks if throughput doesn’t move higher. If U.S. oil demand continues to improve like we think it will, then this bodes well for prices.

And judging by the elevated 3-2-1 crack spread, we think the product tightness we are seeing will continue.

U.S. oil production starting to peak…

With U.S. oil demand now firing on all cylinders and Saudi’s voluntary cut kicking in, wouldn’t it be ironic if U.S. shale oil production peaked for the year?

Well, that’s precisely what we are seeing. Since hitting ~12.7 million b/d in March, U.S. implied oil production has fallen back to ~12.55 million b/d. In April, EIA 914 pinned U.S. oil production around ~12.6 million b/d. Since then, we have not seen a noticeable pick-up in U.S. oil production.

Historically speaking, U.S. oil production, if it was to grow, has always trended higher throughout Q3. If our prediction is correct that U.S. oil production has peaked for the year, then our real-time proxy indicator should validate that over the next few weeks.

Again, this is important for oil market balances because if there’s no meaningful change in Q3, then it’s unlikely we see higher volumes into Q4, which implies an even larger deficit.

The end of SPR…

Lastly, we have one more SPR release before we can say goodbye to SPR releases for a while.

While oil bulls and bears will argue just how influential the SPR release has been, the fact is that without the SPR release, U.S. commercial crude inventories would’ve hit tank bottom.

And if you chart it with the big 3 product storage, you get a similar view of what really went on.

Over the next few weeks, we are going to see crude draws increase in size due to elevated crude exports and flat imports. And without any more SPR releases, the market will just see how fast commercial crude inventories fall.

Conclusion

U.S. oil demand is starting to fire on all cylinders, U.S. shale oil production is peaking, speculator positioning is close to record bearish, and SPR release is ending. The oil market setup going forward is going to be asymmetrically positioned to the upside.

We like what we are seeing from both a fundamental and technical perspective.