Big Jump In Oil Inventories Accelerates Crude Price Tailspin, But It's Not The Real Reason To Be Bearish
Nov 2, 2016 @ 03:23 PM
Pipelines run toward oil storage tanks stand at the Enbridge Inc. Cushing storage terminal in Cushing, Oklahoma. Photographer: Daniel Acker/Bloomberg
It’s been a tough week in the crude oil markets, as downward price pressure has hit from multiple directions.
The week began with the failure by OPEC ministers to reach any sort of an agreed-to formula for reducing the Cartel’s overall production back to July 2016 levels, causing the markets to begin to price in an expectation of ultimate failure in that negotiation process. Then on Tuesday, API dropped the second shoe with its report of a 9.3 million barrel build in domestic crude inventories, the largest reported build since March of this year.
Today, the Energy Information Administration (EIA) piled on with its own report of an inventory build of 14.4 million barrels, the largest such number it has ever reported. Unsurprisingly, the WTI index plummeted more than $1.40 in the hours following the report’s release, and was down more than $4 for the week.
What to make of all of this? Here are few things:
Crude prices were bound to begin falling this week, after the informal OPEC meeting over the weekend attracted so much media attention. The markets had previously priced in an expectation of ultimate success for the OPEC process, which has always been little more than a crap shoot. So the price was bound to come back to earth to some extent after the weekend’s talks failed to produce anything tangible.
While bearish, the large build in domestic crude inventory is likely to be a one-off phenomenon. Refinery utilization rates over the last two weeks were at their lowest levels of the year due to scheduled maintenance activities, and those rates will rise from this point through the rest of the year.
The past week also saw the highest level of crude imports recorded since 2012, as domestic production continues to fall. However, as the rig count continues to rise – as it has in all but one week since May - the rate of decrease in domestic production will slow and eventually level off.
So we might see more inventory builds in the coming weeks, but they likely won’t be of the magnitude we’ve seen this week.
However, downward price pressure could continue should it become increasingly obvious that the OPEC process is headed for failure when the ministers hold their formal meeting at the end of November.
Throughout October, ministers from various OPEC countries created bullish signals with optimistic predictions of ultimate success. Russia’s officials also helped encourage upward price movement with several public statements of possibly joining with OPEC in reducing overall production. If public statements in November from these same countries turns negative, then downward price pressure could persist throughout this month.
But this week’s inventory build was most likely seasonal/technical in nature, and unlikely to become an ongoing contributor to a bearish trend.
Nov 2, 2016 @ 03:23 PM
Pipelines run toward oil storage tanks stand at the Enbridge Inc. Cushing storage terminal in Cushing, Oklahoma. Photographer: Daniel Acker/Bloomberg
It’s been a tough week in the crude oil markets, as downward price pressure has hit from multiple directions.
The week began with the failure by OPEC ministers to reach any sort of an agreed-to formula for reducing the Cartel’s overall production back to July 2016 levels, causing the markets to begin to price in an expectation of ultimate failure in that negotiation process. Then on Tuesday, API dropped the second shoe with its report of a 9.3 million barrel build in domestic crude inventories, the largest reported build since March of this year.
Today, the Energy Information Administration (EIA) piled on with its own report of an inventory build of 14.4 million barrels, the largest such number it has ever reported. Unsurprisingly, the WTI index plummeted more than $1.40 in the hours following the report’s release, and was down more than $4 for the week.
What to make of all of this? Here are few things:
Crude prices were bound to begin falling this week, after the informal OPEC meeting over the weekend attracted so much media attention. The markets had previously priced in an expectation of ultimate success for the OPEC process, which has always been little more than a crap shoot. So the price was bound to come back to earth to some extent after the weekend’s talks failed to produce anything tangible.
While bearish, the large build in domestic crude inventory is likely to be a one-off phenomenon. Refinery utilization rates over the last two weeks were at their lowest levels of the year due to scheduled maintenance activities, and those rates will rise from this point through the rest of the year.
The past week also saw the highest level of crude imports recorded since 2012, as domestic production continues to fall. However, as the rig count continues to rise – as it has in all but one week since May - the rate of decrease in domestic production will slow and eventually level off.
So we might see more inventory builds in the coming weeks, but they likely won’t be of the magnitude we’ve seen this week.
However, downward price pressure could continue should it become increasingly obvious that the OPEC process is headed for failure when the ministers hold their formal meeting at the end of November.
Throughout October, ministers from various OPEC countries created bullish signals with optimistic predictions of ultimate success. Russia’s officials also helped encourage upward price movement with several public statements of possibly joining with OPEC in reducing overall production. If public statements in November from these same countries turns negative, then downward price pressure could persist throughout this month.
But this week’s inventory build was most likely seasonal/technical in nature, and unlikely to become an ongoing contributor to a bearish trend.
