Oil Supply To Remain Muted

Investment Thesis

Oil prices have increased substantially in the last six months, but this is just the beginning. After a seasonal swoon in the winter, I expect oil prices to continue upward in 2Q18 into the summer driving season.

Recent Performance

Brent crude oil prices have fluctuated in recent weeks following a substantial rise in the second half of last year:

$65 Was Not Enough To Boost Supply

Despite substantially higher oil prices in recent months, the global oil supply has remained below global oil demand, causing a strong imbalance, which has led to continued inventory draws across the world. The International Energy Agency included the following paragraph in its latest Oil Market Report:

OECD commercial stocks fell in December by 55.6 mb, the steepest drop since February 2011, to reach 2 851 mb. Stocks drew by 154 mb (420 kb/d) during 2017 and ended the year 52 mb above the five-year average. In 4Q17, stocks fell sharply by 1.3 mb/d across the OECD.

Global oil inventories have declined at a fast pace, dragging prices higher, but the global oil production still has not reacted. Today, we received yet another indication of near future constraints in global oil supply:

The above table from Baker Hughes shows that, although the U.S. rig count had surged from the year-ago period, which has led to rising U.S. oil production in 4Q17, the rig count has recently been muted. This trend is also confirmed by the DI Drilling Index, which has been flat throughout the last several weeks:

Furthermore, the Baker Hughes table above shows that the international rig count still remains below 1,000, near all-time lows.

Bottom Line

I keep a close eye on U.S. oil production, because it is expected to be the growth engine of the global oil supply this year.

I do not see it, at least not yet. Despite the fact that the U.S. oil production has increased in the fourth quarter of last year, global inventories plunged. This fact points to a significant imbalance between global oil demand and supply, despite rising domestic oil production.

Without a surge in U.S. oil rig count, which is absent in both sets of data, I do not expect U.S. oil production growth to derail the bull thesis in the coming months. I will continue to keep my finger on the pulse of this data for my followers and subscribers.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.