Oil prices are well supported by fundamentals

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Aside from the energy specialist and oil traders, few people continuously follow the implicit equilibrium of the oil market. At HFI Research and thanks to the partnership with Open Square Capital, we followed him like a hawk. And for clarity, here are the “implied balances” of each energy forecasting agency:

  • Energy aspects +0.6 million bpd
  • IEA +0.6 million bpd
  • OPEC +0.5 million b/d
  • EIA -0.1 million bpd

Apart from the EIA, which updates the model from the implied demand balances of the weekly oil storage reports, the other 3 show a surplus in the first quarter.

Well, there’s no surplus here, as shown by the US total liquids, including SPR:

Storage room


Since the end of the year, we have seen a decline in storage of approximately 53 million barrels. This is an average of -0.95 million bpd. And that’s just the United States alone. Including the other OECD countries, the drawdown is on track to be closer to -2 million bpd, and that does not include non-OECD countries!

So while oil prices have rallied recently due to geopolitical turmoil in Russia/Ukraine, the rally has been justified by fundamentals. We are tight and will only get tighter as demand continues to surprise on the upside.

Now, if we look at the engine of the deficit, it’s the blistering demand that we always see.



Again, we’ve said it way too many times, but demand is the most important variable this year, not supply. The OECD, in particular, is the only variable that matters, because that’s where everyone is underestimating demand. Since US oil demand is reported on a weekly basis, we can see how incredibly high demand is right now. As long as we stay on this trend, the oil market deficit is a certainty.

Now, oil fundamentals aside, the recent news that the US will be releasing an additional 30 million barrels of SPR is not going to upset anyone at this point.

US Crude Storage


Here is a chart of US crude storage with SPR. The more we deplete the SPR, the more we have to replenish it later at higher prices. Traders know this and will be happy to take those barrels from the US government.

Overall, oil market fundamentals support the recent rally in oil prices. Geopolitics is simply creating more chaos than we would like, but fundamentals continue to trend higher.

Steve R. Hansen