A quick glance at recent Wall Street Journal headlines or a chart of the S&P 500 seems to reinforce the idea of a current “goldilocks” US economic environment, underpinned by high employment, low inflation, and robust corporate profits. However, for traditional energy equities, today’s situation is far from dream-like. Rather, fears of a world awash with shale oil and ultimately a less effective OPEC weigh on the minds of many oil analysts. This fixation on supply is not uncommon, as previous large oil price movements have been the result of major shifts in factors such as OPEC policy and more efficient production methods. Nevertheless, it neglects the other key driver of prices, demand.

By almost all accounts, recent oil demand has been (and remains) robust. This can be observed in tighter oil inventories with both heavy crude – unsurprising given finally-developing evidence of lower OPEC exports – but unexpectedly with lighter oil grades as well. The latter is despite a spike in US exports and a return of Nigerian and Libyan production in recent months. Of course, summer driving and active refinery runs make this a seasonally strong period for crude demand. Still, recent consumption figures suggest a ramp in demand that has been likely influenced by the “goldilocks” environment mentioned above. Domestically, the EIA reports that y/y oil demand growth in May of 4.3% was at the fastest pace since July 2015. The favorable drivers range from the macro (e.g., higher employment and relatively low pump prices eliciting a substantial rise in vehicle miles traveled) to industry-level influences, such as a stronger-than-usual seasonal uptick being reported by US trucking companies.

But it doesn’t stop with the USA. A vibrant global petrochemical sector has led to a rise in naphtha demand, while healthier oil demand in Europe has been in part credited for stronger diesel crack spreads. Moreover, strength in other commodity prices, such as copper, aluminum, iron ore, steel (all hitting recent highs), suggest solid commodities pull generally from emerging markets. In particular, despite concerns of a bursting of the Chinese debt bubble, demand indications from that country remain favorable. This notion is supported by the Chinese Yuan hitting a ten-month high and Chinese crude imports rising significantly in recent months, in part driven by new import quotas for independent refiners and the buildout of new storage capacity and pipelines. (As a reminder, China is the second-largest global consumer of oil and is rapidly narrowing the gap between it and the US.)

All of this is a reminder that investors should not view supply in isolation. It is important to note that OPEC’s key objective of reducing global oil inventories back to the five-year average (down approximately 250 million barrels, or 8%, in OECD countries from the late 2016 high) implies a significantly larger supply reduction on a days-of-consumption basis. In fact, should OPEC ultimately achieve its plan (we reiterate not to underestimate its resolve given the critical nature of oil revenues to member economies) and assuming continued resilient demand, the result would be the tightest global oil market in terms of inventory days in several years. Thus, despite being more opaque and often challenging to forecast, demand should undoubtedly play a large role in forming expectations for energy investors.