This article was originally published on Nadex.com.
Stocks and commodities continue to fall on fears of slower global economic growth from a burgeoning trade war. Crude oil on the other hand, continues to rise despite the OPEC announcement of a production increase of close to 1 million barrels a day. Since the OPEC meeting started, Thursday of last week, WTI is up +11.6% and up over +15.5% in the last 2 weeks. Even Brent crude, which is where the increased OPEC supply will live, up over +5.5% in the last 2 weeks. The answer to why prices are higher in the midst of increasing supply is in the timing of the OPEC production increase. The rising market is telling us as much about the demand picture as it is about supply.
The Demand Story
The supply story is simple; Venezuelan production is in horrible shape, having registered its biggest monthly oil-production decline in a decade this past May. They are now at 2.37 million barrels a day (bpd) compared to a peak of almost 3.5 million bpd in the ‘80’s and a recent peak of just less than 3 million bpd. Libyan rebels have handed over critical oil seaports to anti-government forces taking another 840,000 bpd off the market and OPEC. In total due to these factors and others, OPEC was at 150% compliance level for their agreed upon production cut. The demand side, however, is mostly represented in estimates and figures after the fact. One metric, however, shows demand level every week and that’s refinery utilization figures. Released as a percentage of total U.S. capacity available, refinery utilization (RU) shows exactly how hard refiners are willing to push to get the refined product out to market. In the last 6 weeks, RU has gone from 91.8% of total capacity to 97.5%. It hasn’t been this high since 1998 when they actually reach 100. This is not an estimate of demand for crude oil and it’s products, this is actual demand, so if OPEC doesn’t produce on the high side, the crude prices will remain…on the high side.
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