Aside from the energy specialist and oil traders, not that many people follow the implied balance of the oil market on an ongoing basis. At HFI Research and through the partnership with Open Square Capital, we’ve been tracking it like a hawk. And for clarity, here are the “implied balances” by every forecasting energy agency:
- Energy Aspects +0.6 million b/d
- IEA +0.6 million b/d
- OPEC +0.5 million b/d
- EIA -0.1 million b/d
Aside from EIA, which updates the model from the implied demand balances from the weekly oil storage reports, the other 3 are showing a surplus in Q1.
Well, there’s no surplus here as demonstrated from US total liquids including SPR:
Since the end of the year, we’ve seen storage drawdown by ~53 million bbls. This is an average of -0.95 million b/d. And this is just the US alone. Including other OECD countries, the draw is on pace to be closer to -2 million b/d, and that does not include non-OECD!
So while oil prices have rallied lately on the back of geopolitical turmoil in Russia/Ukraine, the rally has been justified via fundamentals. We are tight and only going to get tighter as demand continues to surprise to the upside.
Now looking at the driver of the deficit, it’s been the stellar demand we are still seeing.
Again, we reiterated this far too many times, but demand is the most important variable this year, not supply. OECD, in particular, is the only variable that matters, because that’s where everyone is underestimating demand at. Given that US oil demand is reported on a weekly basis, we can see how staggeringly high demand is at the moment. So long as we remain on this trend, the oil market deficit is a certainty.
Now oil fundamentals aside, the recent news that the US will release another 30 million bbls of SPR isn’t going to phase anyone at this point.
Here’s a chart of US crude storage with SPR. The more we deplete the SPR, the more we have to replenish it down the road at higher prices. Traders know this and will be happy to take those barrels from the US government.
All in all, oil market fundamentals support the recent rally in oil prices. Geopolitics is just creating more chaos than we like, but fundamentals continue to trend bullishly.