Key Points:
- Crude Oil inventories decline but Gasoline glut evident.
- Gasoline inventory space under pressure forcing some Diesel supplies afloat.
- WTI outlook remains bearish in the medium term.
The past 24 hours have been relatively positive for crude oil as the embattled commodity has been buoyed by a strong inventory draw of 2.3 million barrels from US crude storage facilities. The fall in inventory largely surprised analysts, who expected a smaller 2.1m/b decrease, and represents the ninth straight week of draws. However, despite an increase in the front month August contract to $44.89 a barrel, questions still remain as to whether any rally is currently sustainable.
Chief amongst the concerns is continuing builds within US gasoline stocks with the last report showing an increase to stockpiles of 911,000 barrels. This result was largely a surprise to markets given that it is currently “Driving Season” within the US and demand was forecast to be robust. In addition, this build-up of refined supplies has led to a lack of gasoline and diesel storage and seen some inventories stored afloat.
In fact, what the gasoline glut is actually telling us is that there is still currently no sustainable level of supply in place as the production glut has now started moving through the supply chain into refined product. In addition, there is also likely a fundamental mismatch between US supply and demand, despite the high demand driving season being upon us.
Obviously, this has had a relatively stark impact on physical prices as storage space has tightened putting downward pressure on gasoline prices. However, even a radical reduction in US crude oil production may take some time to ameliorate the glut of refined product, especially given that we are over half way through the summer driving season. Subsequently, any correction to prices is likely to take time to flow through the supply chain.
Also, the rate of technological advancement within the US Shale Oil industry has largely been a surprise and instead of wilting with depressed prices US producers have found ways to become more efficient. Subsequently US Oil’s production function has very much benefited from growing levels of advancement that has meant they are significantly more able to weather any concerted period of depressed prices.
Ultimately, the fundamental factors from the original decline in crude oil prices largely remain in place and a full rebalancing of supply within global oil markets is still yet to complete. In fact, there is plenty of evidence to suggest that prices will need to decline further to effect enough hurt upon producers to cause some rationalisation on the supply side. In short, the pain isn’t over yet and any rally is likely to be short lived and largely self-defeating.