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Inventory Draw And OPEC Rhetoric See Oil Seesaw

Oil tanker front

Crude is sailing in rough seas today, as the combo of an informal OPEC meeting and a surprising weekly inventory report has pushed and prodded prices around thus far. Hark, here are five things to consider in oil markets today:

1) Just a cursory glance at our ClipperData below confirms why there are low expectations of OPEC reaching some sort of agreement. We have spent the last two years, and particularly excruciatingly, much of this year, hearing about the prospect of a production freeze. All the while, output has continued to rise while Saudi, Iran, and Iraq in particular have put more oil exports out into the market.

With the can kicked down the road for two more months (oh good), we now get to endure further murmurs, rumors, rhetoric and jawboning...all the while, Libya and Nigeria try their best to join other cartel members in boosting their production.

(Click to enlarge)

2) Today's weekly EIA inventory report yielded another mixed report; a build to gasoline inventories amid a material drop in throughput was bearish, while a draw to both crude and distillate stocks tilted the report a wee bit bullish.

While the distillate stock drop is to be expected given the start of its seasonal drawdown, the fourth consecutive draw to crude inventories is much more counter seasonal, and can be attributed to lower imports - more than offsetting a drop in refinery runs.

A large draw to PADD1 (East Coast) oil inventories explain away much of drop, falling by 3.3 million barrels, or nearly 20 percent, to 14.2mn bbls. After being 4mn bbls above the five-year high just four weeks ago, now inventories are 2mn bbls below it:

3) ....and another thing re OPEC. Production data, unsurprisingly, reflects the same story as our ClipperData above. The annotated chart below serves to highlight the futility of OPEC meetings in recent history. Given this blueprint, it becomes increasingly difficult to have any expectations of progress. All the while, even if a production freeze was agreed to, there is nothing to say it would be adhered to. What a palava.

(Click to enlarge)

4) The chart below illustrates how energy-focused private equity funds are struggling as much as some OPEC members after the price lull of the last two years. Funds which have raised significant sums of money are finding their assets considerably underwater given the ongoing challenging environment.


131 private equity funds which raised $71.1 billion betwixt 2005 and 2007, now have assets valued at about half this level ($34.5 billion). Funds are asking investors for more time and money, as they try to stay afloat, waiting (hoping and praying) for the energy industry to rebound.

5) ......and another thing re OPEC. The chart below illustrates how Saudi Arabian oil production is seasonal, boosted by the need for oil to meet summer domestic power generation needs. Hence in eight of the last ten years, production has dropped in the fourth quarter, as the Kingdom eases back on the throttle.

It certainly helps them masquerade their slowing production as an indication of their willingness to help balance the market.

(Click to enlarge)

By Matt Smith

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