2024-01-30 02:00:00 ET
Summary
- Refining profit margins, the shape of the oil futures curve, and patterns in US oil inventories are indicators of oil market supply and demand balances.
- Crack spreads and the shape of the futures curve suggest oil demand is holding up well in the US right now.
- Concerns about a glut of US shale oil production are overblown, and there are downside risks to US production from falling drilling and completion activity.
- The counter-seasonal fall in US oil inventories suggests the IEA's bearish outlook for loosening supply and demand balances isn't playing out.
- The US Oil Fund rates a buy with a target in the mid-$80s.
There’s no perfect gauge of supply and demand conditions in the global oil market.
However, a handful of indicators can help give us a read on oil market balances, and the likely path of prices. That list includes refining profit margins, the shape of the oil futures curve, patterns in US oil inventories and speculative commitments in the crude oil futures market.
In this article I’ll examine these four simple-yet-powerful indicators and explain why they support a case for a tightening oil supply and demand balance and a rally in crude oil, and the US Oil Fund ( USO ) ETF in early 2024.
I’ll also explain why I believe concerns about a glut of US shale oil production and weakening oil demand are overblown.
Let’s start with this:
Crack Spreads
Petroleum refining is essentially a manufacturing business.
Like all manufacturers, refiners buy raw materials – the most important being crude oil – and create products using those raw materials, in this case that’s diesel, heating oil, gasoline, jet fuel and other refined products.
So, a pure-play refiner does not benefit from rising oil prices in isolation – refiners buy crude oil as feedstock for their operations, so rising oil prices represent rising costs.
Rather, refiners profit from the spread between the cost of oil for their facilities and the value of refined products they produce – rising oil prices aren’t bullish for profitability unless they’re accompanied by rising gasoline and diesel prices....
Read the full article on Seeking Alpha
For further details see:
USO: The US Oil Fund, 4 Reasons To Buy Crude