Let's Not Fool Ourselves Here, The Oil Market Tightness Is Getting Thinner
EIA's oil storage report today was not bearish or bullish, but on a relative basis, and compared to historical reports, this report was bearish.
There's an important distinction I'm making here. When you look at a bull market, you need to compare the derivative of the variable changes. For example, if crude was drawing at ~1 million b/d and accelerates to ~1.25 million b/d, this is not only relatively more bullish but absolute bullish and suggest positive fundamental momentum. However, if we go from -1 million b/d to -0.5 million b/d, on an absolute basis, we are still trending bullish, but we are now moving bearish on a relative basis.
This is precisely what's happening in the oil market today. The deficit that we saw in Q1 is not persisting into Q2 and we suspect there are three reasons why this is happening:
Russia is not losing any supplies. As we've documented many times already, Russia isn't losing any production. Crude exports are still averaging ~4.6 million b/d which is ~100k b/d higher than March. I honestly don't care what energy consultants or sell-side are saying about Russian oil production. If exports don't decrease, then everything else is bogus.
Elevated petroleum product prices are hammering at demand. The US implied oil demand has now remained weak for 3-months. At this point and following the start of driving season, we have yet to see signs that this is a temporary blip. As a result, demand destruction is real and already happening.
Strong USD is hammering emerging market demand. This will translate into lower oil demand growth this year. Combine this with Fed rate hikes and other macro forces, and the headwind on oil demand is strong.