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Gasoline Glut Could Ruin The Oil Price Party

Gasoline pump

Oil and refined products inventories in the U.S. continue to climb at a worrying pace, raising some red flags for an oil market that was supposed to be on the mend.

Crude oil inventories jumped by a whopping 6.5 million barrels last week, rising to 494.8 million barrels. Oil stocks have now increased every week of 2017, and are now not far off from the 80-year highs reached in 2016.

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It isn’t just crude oil stocks, but gasoline inventories are also rising sharply. Last week gasoline stocks surged by 3.2 million barrels to 257.1 million barrels.

 

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The sudden and sharp increase in both crude oil and refined product stocks is a warning sign for oil traders that have by and large been betting on a tightening market and rising prices. In fact, the gasoline glut has become so acute on the U.S. eastern seaboard that some tankers destined for American ports have been rerouted to Europe, according to Bloomberg. The surge in inventories “will keep demand for voyages into the East Coast low as the market awaits the impact of spring maintenance,” George Los, senior tanker markets analyst at Charles R. Weber Co., told Bloomberg. PADD 1 inventories, a designation for the East Coast, are at an all-time high. “The concern is the PADD1 market,” said Gary Simmons, senior vice president at Valero Energy Corp., according to Bloomberg.

 

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Bloomberg says that a few tankers were diverted away from New York and sailed to the Caribbean, where there are more storage locations. But rerouting tankers away from the U.S. does not solve the problem. Rerouted tankers will just lead to higher inventories elsewhere. The problem seems to be ongoing oversupply problems in the market. Related: Has Big Oil Bought Into The Oil Price Recovery?

In fact, gasoline demand has dropped to its lowest level since 2012, dipping to just 8.2 million barrels per day at the end of January.

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Some of these fluctuations are seasonal. Gasoline inventories could be a bit elevated as refineries churn out as much product as possible ahead of maintenance season in the spring. But as refineries go offline in the coming months, which analysts hope will help clear some of the gasoline inventories, a drop off in refining runs could lead to higher crude oil stocks as refiners lower their purchases.

Meanwhile, U.S. oil production continues to rise. The EIA just released monthly oil production figures for November, the latest month for which reliable data is available, and it shows output up at 8.9 million barrels per day, up almost 400,000 bpd from just a few months earlier.

Interestingly, the gains in output in recent months have largely come from some offshore projects and gains in Alaska. That is to say, the revival in U.S. shale has barely begun to show up in the data, suggesting that future gains in output are likely, particularly with the rig count rising quickly. It won’t be long before the U.S. sees production back above 9 million barrels per day, aiming to return to its peak of 9.7 mb/d reached in April 2015. Related: Saudis Raise March Crude Prices For All Customers

It was already unlikely that prices would rise too far above today’s levels. "I think 63, 65 (dollars a barrel for Brent) I think you might be a little bit ambitious there because the OPEC producers have got this basic issue, they don't want the price to go too low clearly, because their economies wouldn't stand it," Neil Atkinson, head of the oil industry and markets division, at the IEA told CNBC. "But if the price goes too high then that's going to attract a lot of investment in other parts of the world, principally the U.S. shale producers.” As such, Atkinson implies, OPEC wouldn’t let prices get that high.

In any case, weak demand could keep a lid on oil prices in the near-term. Higher levels of demand will return in the spring and summer months, but we could be in for a bit of a cool period for demand growth. On top of that, as I have mentioned before, with hedge funds and money managers piling up record levels of bullish bets on crude, downside risk becomes greater by the day. A few more weeks of rising inventories and sentiment could turn bearish.

One caveat to all of this: If the Trump administration escalates its confrontation with Iran, all predictions go out the window. The revival of a standoff that was resolved two years ago is a major uncertainty for the oil market this year.

By Nick Cunningham of Oilprice.com

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  • Clyde Boyd on February 05 2017 said:
    The country will be flooded with oil when the shacles come off. Too bad for all the oil traders jacking up the price.
  • JHM on February 06 2017 said:
    According to new annual data from EIA, US annual consumption of motor gasoline in 2016 was 8,537 kbpd, down 641 kbpd from prior year. This is a continuation of decline in gasoline consumption from a peak of 9,286 kbpd in 2007. Low gasoline prices do not seem to halt this longer-term decline in demand.

    Annual consumption of distillates is also in secular decline. You may want to do an article on this.
  • JHM on February 06 2017 said:
    Please, disregard stats in prior post. The EIA reporting tool is erroneously reporting incomplete annual data. December data is still missing! I suspect that the EIA will report a slight gain in gasoline consumption once December data becomes available.

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