Well it seems like the supply disruptions happening around the globe are finally taking a toll on the market. Last week WTI crude gained nearly 3%, even with intra-week increased stockpiles of crude at Cushing and a stronger than expected U.S. dollar index. So far this morning we are seeing much of the same. Oil, RBOB, and HO prices are all on the move higher as repercussions of the Canadian wildfires and Nigerian turmoil begin to show. Up $1.38, $.0324, and $.0343 respectively, reduced global supply may finally bring re-balance to the market. Long-time bearish Goldman Sachs, who for the majority of 2016 has insisted that crude would go as low as $20/bbl., is now anticipating $50 bbl. According to Reuters, "The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected," Goldman said.
However, with an increase in the price of oil there will be an increase in production. Cause and effect. Let’s just look domestically: Since crude prices began to fall in 2015 we have seen roughly 60 U.S. oil and natural gas companies file for bankruptcy. Additionally, according to Baker Hughes there are nearly 1300 fewer oil rigs online than there were at the peak in late 2014. When and if the price of crude breaks $50/bbl, many rigs will come back online and numerous companies can and will operate, thus production will increase and the short-term “hypothetical” deficit will be over. The world will never run in a perfect equilibrium. There will either be a supply glut and prices will fall, or there will be a supply deficit and prices will rise. Yes, a market can be re-balancing, but it is naive to believe it will ever be balanced. Welcome to the world of commodity markets.
Looking at the current headlines, it is easy to see why this market is on the rise this morning and I’d be willing to say it will continue to strengthen as the week goes on. Roughly 1 million barrels per day of production is still down because of the Canadian wildfires. Last week’s EIA data showed a very unexpected 3.4 million barrel draw in crude inventories in the U.S. Nigerian production is encroaching on a 22-year low as the “Niger Delta Avengers” have carried out a series of pipeline bombings, crippling an economy already in crisis and adding to the global supply disruption. U.S. production has been falling roughly 55,000 bbl/day as rig counts continue to fall.
Locally, NY Harbor gasoline prices severely reacted to the EIA data of a 2.2 million bbl draw. NYH CBOB gained roughly 11 cents on the week while RBOB gained 9.2 cents. Chicago CBOB absolute prices also gained in response to the data and were up almost 13 cents on the week. Even more locally, we may see gasoline prices on the rise next week and the week after as the Buckeye Pipeline will be shut down for maintenance for several days.