In the U.S. overall petroleum inventories continue to fall as the petroleum oversupply drain game has begun. Not only did we see the API report an 840,000 barrel drop in crude oil inventory but also a 1.8 million barrel drop in distillate inventory offsetting a surprise 1,347-million-barrel increase in gasoline inventory caused another drop in overall U.S. liquid supply.

This is just the beginning of the U.S. oil inventory drain game if you are to believe OPEC Secretary-General Mohammad Barkindo who said that all crude producers, both from OPEC and non-OPEC nations, are committed to getting global inventories down below the five-year average. Dow Jones reported that compliance data in March are higher than the levels achieved in February and that OPEC is, “optimistic the policy measures have already placed us on the path of recovery and collective action will continue to prove effective.” Now despite this proclamation, the rate of the crude oil drain has been disappointing. Some of that is due to rising U.S. oil production but also because of U.S. Strategic Petroleum Reserve (SPR) sales and traders draining storage as they find less incentive to play the storage game and have brought a lot of oil back onto the market.

But OPEC resolve will start to show up in the weeks ahead. The focus on the increases in U.S. oil output is nice but if you look at the picture behind a back drop of dwindling product inventories worldwide, you will start to realize that despite U.S. production increases we are headed for a tighter market. The Energy Information Administration said that in May U.S. shale oil production hit 5.2 million barrels a day, the highest since November 2015. While shale oil will fill part of that void in the global oil market, it will not replace rising demand and OPEC cuts. 

Consider if you will, the report that Saudi Arabia cut oil exports to 6.95 million barrels a day, the lowest since May 2015. That is a reduction of 750,000 barrels of oil a day from January and the lowest since 2015 or pre-OPEC price war. Russia is also doing its part by cutting oil production by 2.2% according to the Dep. Minister Molodtsov. Bloomberg reported that Russia’s current crude production is around 1.5m tons/day, 2.16% lower than October, deputy energy minister Molodtsov told reporters in Moscow. That puts Russia within a hair’s breadth of full compliance to oil production cuts.