While oil prices flirted with $50 a barrel because of the November crude oil expiration yesterday, today oil is running hot on a weak dollar and UK inflation data. The proclaiming by Fed Chair Janet Yellen that the economy could run hot for a while is a signal that oil prices should continue to run higher. Even as the Fed embarks on its first interest rate adjustment in a year in December, the proclamation by the Fed chair that the economy could run oil to our $60 a barrel target.
You see if the economy is to be allowed to run hot with a bit of inflation, the dollar trade might not be as bullish because Yellen’s hot talk means the market will test a barrage of interest rate cuts even as oil prices start to move to my year end target of $60 plus a barrel. One of the headwinds for the barrel of oil has been the strong dollar which may be less of a threat if the Fed can convince the market that the expected December interest rate increase is a one and done for a while and not the start of sharp increases in rates.
If the dollar then becomes less of an issue, then oil can focus on a market that is back in balance between supply and demand. Even with the expected increases of supply from non-reliable suppliers like Nigeria and Libya, it is clear that barring any economic catastrophe, the global oil market is on a path to a global daily supply deficit.
Even with the increase in shale rigs they are needed to offset shale production declines in North Dakota that has seen its production drop due to a lack of investment and the fact that North Dakota is more expensive than shale plays in say Texas. North Dakota oil production fell 4.7% in August falling below the one-million-barrel-a-day mark for the first since 2014.
Of course oil in the short term still has to get through shoulder season where demand drops and refineries go into maintenance. We saw that cause an increase in supply last week, ending 6 weeks of crude supply declines.
The American Petroleum Institute (API) releases their report on supply after the close and it should show a slight increase in crude supply again as refinery maintenance and lost supply from Hurricane Matthew may be found. Bloomberg is reporting that in their survey oil inventories are expected to increase by 2.1 million barrels. They say refinery utilization +0.25 to 85.8%.
