The Single Most Important Factor In Today’s Oil Markets

In Perilous Times This What To Watch In Oil

Despite the global overhang in oil inventories and reduced production levels from OPEC+ members, American oil production is on the upswing. Falling from a high of 13.1 million bpd in March prior to the pandemic to an average of 12.7 million bpd for the whole first quarter and then to 10 million bpd in May, U.S. oil production actually rose in August to 10.8 million bpd. 

And the market has taken notice. 

The market is still closely watching U.S. inventories of crude oil, gasoline, and distillates. In good times (stable times), it is a useful metric because demand itself is fairly stable. It is a critical metric not just because the U.S. is the largest consumer of crude in the world and therefore a good proxy for following global demand trends, but also because the inventories are far more transparent and regularly reported. However, particularly in turbulent times, a snapshot of crude oil inventories in the U.S. shows only one piece of the puzzle. 

This week, U.S. crude inventories increased, along with a decent draw in gasoline stocks. But that gasoline draw is not necessarily good news when you consider that gasoline production last week was just 8.9 million bpd, which is 600,000 bpd less than the week prior. Low refinery runs were the primary reason for the gasoline draw and for the crude build. Expect continued low refinery runs as maintenance season kicks in--and note that gasoline draws are not necessarily the result of an increase in demand. 

The critical factor today is oil demand, oil demand, oil demand-not inventory or production-and oil watchers should keep their eye squarely on Aramco's pricing moves, which are now signaling a softening of crude demand, as well as Covid-19 news in India and the United States, air travel, and the EIA's Weekly Product Supplied, a finished product metric that can serve as a good substitute for crude demand.