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The International Energy Agency increased its forecast of global oil consumption by 120,000 barrels per day earlier today.   The Agency's new projection is for 83.3MM barrels per day in demand, which is down 2.9% y-o-y.  This data point is noteworthy for the fact that this is the first time in 10 months that the IEA has raised their oil demand forecast, so signifies an inflection point in demand even if levels are well below y-o-y levels.

Additionally, earlier in the week IEA's head Nobu Tanaka told Reuters that OECD stock levels for oil were at 63 days, but he expected them to be at 57 days by year end.   It is conventional wisdom that that 50 days of forward cover is very bullish for oil prices, 53 days is bullish, 57 days bearish and 60 days very bearish.  While the projected days coverage is not "bullish" per se, it is directionally positive, especially in conjunction with the demand data point above.

In the United States this week, we also had incrementally positive data from the weekly oil report from the Energy Administration.   U.S. crude stockpiles declined by 4.4 million barrels to 361.6 million barrels last week, which was notably higher than the 700,000-barrel consensus decline forecast.  This was largely attributable to lower imports into the U.S., but once again marginally and directionally bullish.

On May 19th, we wrote in note entitled "Are You Down With O-P-E-C? "Yah You Know Me", the following:

"The price of oil appears to be signaling one of two things:  either demand will at some point in the near future accelerate or that there is a geo-political event on the horizon that will reduce supply."

The river cards are starting to be shown and they seem to be that the supply / demand picture in the future will be tighter than today.  We want to be long of oil when the supply / demand picture is getting tighter, just as we want to be long of companies that will report better than expected fundamentals.

No doubt many investors have a psychological block against buying a commodity, stock, or asset that is up as much oil is year-to-date, but another way to potentially play oil's current resurgence and the potential follow through if the market tightens up like recent data points suggest is via the OIH, which is the etf that track Oil Services companies.

In the chart below, we've tracked West Texas Intermediate versus the OIH over a three year period.  Through that period, as of yesterday, the OIH has returned ~-23% and Oil has returned ~-2%.   The OIH has typically been a laggard versus oil, which makes sense fundamentally as higher oil prices should drive increased services activities and pricing power. 

In the three year time period, the OIH has been ahead of oil by almost 30% (mid 2007) in the return race and trailed by almost 40% (late 2008).  Year-to-date, the OIH is trailing, though a sustained oil price at or above these levels will lead to resurgence of services activity and higher prices for the OIH.  One thing we know for sure, if oil continues on its upward projector, we will hear chants of, "Drill Baby, Drill" once again, and that's good for the companies that do the drilling, the services names.

Daryl G. Jones
Managing Director

Drill Baby, Drill: IEA Report on Energy Demand and the Services Markets - oih