Market Insights / Commentary

Following the money in energy, Part 3

By David Russell

Last week we explored strong price action in the energy sector and the up-and-coming subset of liquid natural gas. Today we’ll survey broader conditions in the space because something of a perfect storm may be developing for the bulls.

Simply put, demand is rising and supply is flat or falling. A quick compilation is below.

Supply: Energy Department data shows a steady decline in U.S. oil inventories since last February. All of a sudden we’re back to levels from April 2015!1

Demand: Tanker intelligence firm ClipperData says China reported record amounts of oil in November.2

Supply: OPEC is keeping a lid on production — unlike in previous years. Cartel leader Saudi Arabia is especially motivated to boost crude prices because it’s selling shares in the state oil company.

Demand: Measures of the global economy are the healthiest in at least a decade. That’s seldom bad news for a cyclical commodity like oil.

Supply: Industry consultant Rystad Energy says 2017 saw the least discoveries of new crude deposits since at least the 1940s.3

Demand: China’s natural-gas consumption rose 19 percent through the end of November.4 And, guess who’s stepping in to meet that appetite? U.S. shale, that’s who…5

Supply: Consultancy Wood Mckenzie says heavyweights like Exxon Mobil (XOM) are cutting exploration and production budgets despite rising prices.6

Demand: Hedge-fund traders, perhaps the most important buyers, are placing long bets in the futures market.7

In summary, traders may have forgotten about energy following a three-year bear market, but all of a sudden some bullish stars seem to be lining up for the sector.


1. U.S. Energy Information Administration: Weekly U.S. Ending Stocks of Crude Oil and Petroleum Products.

2. CNBC.com: Oil-hungry China imported record levels of US crude in November. 12/8/17.

3. Business Insider: Oil discoveries are at an all-time low — and the clock is ticking. 12/23/17.

4. Xinhua: Natural gas consumption surges in China. 12/18/17.

5. Bloomberg: U.S. Gas Sales to China Boom as Buyers Seek to Avoid Pinch. 12/26/17.

6. Reuters: Quest for new oil discoveries still on back burner. 1/4/18.

7. Bloomberg: Hedge Funds Eye Oil’s Year-End ‘High Note’ After Bumpy 2017. 12/15/17.

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