By Barani Krishnan
Investing.com - Another week of waiting has ended in vain for oil bulls, with no signs of when the hot summer demand for fuels will emerge.
Oil prices tumbled 4% on Wednesday, extending their recent downtrend, after the U.S. Energy Information Administration again reported an unseasonable weekly build in crude inventories that defied market expectations for a drawdown amid the peak summer driving period.
U.S. West Texas Intermediate settled down $2.12, or 4%, at $51.15 per barrel. WTI has lost about 20% since the end of April, returning to a bear market. For the year, it remains up 13%.
Brent, the U.K.-traded global benchmark for oil, fell below the key $60 per barrel support, trading down $2.41, or 4%, at $59.88 by 3:00 PM ET (19:00 GMT). Brent is down around 18% since the end of April, but is still up 12% in 2019.
“Today’s inventory numbers are telling a familiar story,” said Tariq Zahir, founder of the oil-focused Tyche Capital Advisors fund in New York. “We are seeing a trend develop where consistent builds are taking place when draws are expected.”
The EIA said in its weekly dataset that crude oil inventories rose by 2.21 million barrels during the week to June 7, adding to the previous week’s surge of 6.77 million barrels. The market had forecast a crude stockpile draw of 480,000 million barrels last week.
The crude-inventory rise came despite refinery runs at around 93% of capacity last week, nearing the season norm of 95% and above.
While runs rose, the EIA data showed that crude imports have also been heavy at more than 7 million barrels the past two weeks, as refiners appeared to take advantage of the market’s recent decline to lock in cheaper supply. The trouble is they weren’t making enough gasoline to offset the higher imports, as refining margins had also been weakened by the market’s drop. All these have added to overall crude stockpiles, most notably at the Cushing, Okla., storage hub for WTI. Cushing saw a 2-million-barrel swell last week.
Crude inventories aside, the EIA also reported that gasoline stockpiles increased by 760,000 barrels last week, almost in line with expectations for a gain of 740,000. The one positive number was a draw of 1 million barrels in distillate inventories versus forecasts for a build of 1.14 million. But even with that, total petroleum inventories surged by 9.3 million barrels from the week earlier.
This week’s market declines have come as a blow to oil bulls who had expected the rhetoric of production cuts by OPEC and its allies, including Russia, to shore up prices. The OPEC+ alliance of oil producers are to meet in Vienna on June 26 to either roll forward or add to their December agreement to remove at least 1.2 million barrels per day from the market.
“With U.S. production basically negating the supply cuts from OPEC, we feel, over the next few days and weeks to come, energy prices will remain soft,” Zahir said. “Any rallies we see should either be used to reduce longs or enter into short positions.”
Weighing further on the market are fears that demand for energy will slow as the U.S.-China trade war threatens to push the world to the brink of recession.
Over and above that, a more worrying proposition for oil bulls is the possibility of a truce between the Trump administration and Tehran that could put Iranian oil back on the market. Iran’s oil exports are about a million barrels below capacity now because of U.S. sanctions.
Japanese Prime Minister Shinzo Abe, Trump’s chosen emissary for a peace deal with Iran, will be in Tehran until Friday for talks with President Hassan Rouhani and the Islamic Republic’s Supreme Leader Ayatollah Seyyed Ali Khamenei.
If the Iranians decide to hold talks, the president might even decide to suspend the sanctions as a goodwill gesture for the negotiations to begin. Few things could be more bearish for oil.