Have You Noticed This New Oil Boom?

by Eric Fry

"A stealth bull market in crude is underway... and it probably has a lot more to go."

That is the exact prediction I made in a recent column... and I'm sticking with it.

Admittedly, it's a "crazy" forecast. Most analysts in the energy sector are expecting the oil price to tread water at best. But I think these analysts may be underestimating the strength of the global demand for crude oil.

As you can see from this week's chart, our own government's Department of Energy (DOE) has been pretty bad at guessing it lately.

Around the world, demand for oil during the last 12 months has been surprisingly strong. Not only has it outstripped supply by an average of 700,000 barrels per day (bpd), but in February, the number swelled to more than 2 million bpd!

During that month, global demand for crude oil and other liquid fuels totaled nearly 101 million bpd, whereas supply fell short of 99 million bpd.

Here in the U.S., an identical trend is unfolding. Demand is so strong that crude oil inventories have been falling sharply for months. According to data from the DOE, the nation's crude inventory has dropped 20% year over year...

The trend is very clear. And yet most experts distrust the strength of this trend. So they continually underestimate demand and overestimate supply.

The chart at the top of this article tells the tale. During the last 12 months, the global production of crude oil has consistently fallen short of the DOE's forecasts. On the other side of the ledger, global demand for crude has consistently exceeded those forecasts.

This robust demand is unlikely to slacken anytime soon. Global economic growth is humming along nicely... as is U.S. economic growth. And the pooh-bahs at the Federal Reserve expect the good times to continue.

The electric vehicle (EV) revolution is another variable that some analysts believe will boost supplies of crude oil.

After all, according to Deloitte Insights, more than half of every barrel of oil becomes fuel for internal combustion engine vehicles. So it makes sense that EVs would reduce net demand for crude.

But that's not a 2018 story... or even a 2019 or 2020 story.

Demand for oil from the auto sector will rise much higher first, before sliding lower eventually. And that's another big reason why the price of oil will likely rise much higher, before drifting lower at some distant point in the future.

Lastly, let's keep in mind that "supply shocks" are also possible. Venezuela's economic crisis is causing the near-collapse of its oil industry - putting more than 1 million bpd at risk.

Then there are the kerfuffles with Russia and Iran. Our government just slapped sanctions on Russia and ordered U.S. divestment from various Russian companies, including Gazprom - one of Russia's largest oil companies.

Could these sanctions lead to a reduced flow of oil from Russia? Perhaps.

We could see a similar outcome in Iran if President Trump follows through on his threats to reintroduce sanctions on the nation's oil production.

The head of oil market research at Société Générale believes the reintroduction of sanctions against Iran would curb the country's oil exports by about half a million bpd.

A half-million barrels here, a half-million barrels there... and pretty soon you've got a full-blown supply shock. I am not predicting these shocks will occur; I'm merely pointing out the possibility that they might.

The oil market possesses plenty of potential to deliver upside surprises. So don't be surprised if the price tag on oil hits triple digits in the year ahead.

Good investing,



Chart of the Week