Why is oil price up today?

[dan_s]

Notes below are from 22V Research (very smart team) received after the markets closed on July 2. with my comments in blue.

We’re getting questions about why oil is up today. This is a flash commentary to provide a quick and timely answer.

In general, crudes worldwide are getting pulled higher by stronger refinery runs to meet strengthening demand for cheaply priced oil products (widening cracks). Intra-year world liquids demand is increasing by a large quantity (+2 million b/d) from the start of 2Q into the 4Q. < IEA has been under-estimating demand (once again).

For NYM WTI Cushing specifically, WTI Cushing is advancing because Cushing crude oil stocks have drawn to the minimum levels required by physics to maintain smooth operations through pipes and tanks. < This is proof that U.S. oil production is now on decline.

This tightening is happening because the “substitution, not addition” effect that is the economic result of the OPEC production policy is killing U.S. marginal capex on oil production. Consequently, fewer than planned crude oil barrels are now flowing from the Midcontinent into the Cushing hub. At the same time, the displacement of higher cost U.S. oil-directed capex by lower cost OPEC supply means $68 is still formidable resistance for the WTI market price, unless breach is endorsed by higher product demand or lower than pledged OPEC crude supply.

We already knew all this is true but got fresh confirmation today in: (1) the EIA’s weekly U.S. oil stats (Jun 27), and (2) the Dallas Fed 2Q energy survey results for 136 oil and gas producing firms (Jun 18-26).

Cushing crude stocks are now reported at 20.731 million barrels, or 26.6% of local storage capacity. In the past 20 years, this ratio has never fallen below 25.7%, by our calculations. Instead, to maintain operational integrity, prompt cash crude oil prices must rise to discover the level required to equilibrate the market through (a) called crude oil supply and (b) curbed crude oil demand. The easiest way to track this economic phenomenon is through prompt NYM time spreads (specifically, M1-M2). See first chart below, which we showed in our Jun 19 video with data through Jun 13. We haven’t had time yet to update with today’s data. But you can eyeball the (26%, $1.50) coordinate on the chart to get a sense of how tight the stocks situation at Cushing has become.

The Dallas Fed data spell out in greater detail the production cuts we could already see in the 50-rig drop in the U.S. oil-directed rig count (Jun 27), as reported by Baker Hughes. See second chart below.

For equity investors, these economics present one clear call to action: own refiners.