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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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The “Weakest” EIA Report In Years

Oil barrels

The EIA just published one of the “weakest” weekly oil reports in years, which suggests troubled waters ahead for the global oil market.

The timing of the report is not ideal, coming amidst a currency crisis in Turkey, which has raised fears of financial contagion in other emerging markets. The strength of the dollar is putting a long list of currencies under pressure, vexing policymakers around the world. Some countries, such as Argentina, are aggressively hiking interest rates to defend their currencies (although the peso continues to fall). Others, such as Turkey, are resisting any rate hikes at all, which is clearly not a solution to capital flight and a sharp devaluation.

It is too early to tell whether or not the sudden crisis will be confined to Turkey or if it will mushroom into an emerging market conflagration that sends emerging markets – and perhaps even the global economy as a whole – into a tailspin.

These currency troubles could severely undercut global oil demand. Not only are crude oil prices close to multi-year highs, but the strength of the dollar and the relative weakness of a variety of currencies in the developing world, combine for a toxic brew to demand. Oil prices are up some 6 or 7 percent on the year, but in Turkey, imported oil is now 60 percent more expensive – the result of the meltdown in the lira.

While the specific percentages might vary from country to country, much of the world is experiencing painful increases in fuel because so many currencies are being trampled by the strength of the dollar.

The early signs of trouble to the oil market are starting to materialize. The EIA’s weekly report showed a massive 6.8-million-barrel increase in crude oil inventories.

Investment bank Standard Chartered puts out a “bull-bear index” each week, which incorporates the latest weekly data from the EIA. The index tends to seesaw back and forth, depending on whether or not inventories fell, whether production rose or fell, etc. The bank says that this past week the index was at “-100,” or the “weakest over the past five years.” Related: Trade War May Push China To Russian Energy

“The index tells you all you need to know, but the main detail is that total commercial inventories rose a thumping 17.53 million barrels against the five-year average,” Emily Ashford and Paul Horsnell wrote in the Standard Chartered report. “Crude oil inventories rose 6.81mb in absolute terms and 9.66mb against the five-year average, with the increase in refinery runs to a record-high of 17.98mb/d being the only bullish component of the whole crude balance equation. Cushing crude inventories rose for the first time in three months. Implied demand was lower [week-on-week] for every product except gasoline.”

Not everyone was so pessimistic. Commerzbank chalked much of the poor numbers up to a surge in imports, which may not last. “A countermovement is likely this week at least,” Commerzbank wrote in a note.

Other signs of trouble are appearing on the horizon. Reuters argues that the recent increase in distillate stocks is a red flag for the health of the global economy. Distillates, such as road diesel, marine fuels and jet fuel, reflect activity in the industrial sectors and global trade levels. As opposed to gasoline, which is a reflection of passenger vehicle activity, distillates offer a leading indicator that tracks shifts in industrial activity. Related: WTI Set For Longest Weekly Losing Streak Since 2015

Distillate stocks were drawing down quickly at the start of 2018, at a time when the global economy was strong and oil demand was growing at a blistering 1.8-million-barrel-per-day rate year-on-year. This summer, however, distillate inventories began to rise. Reuters notes that European gasoil futures were recently in a state of backwardation, but have flipped to contango. The shape of the futures curve suggests that the market is not as tight as it was a few months ago, which, in turn, is an indication that global trade and broad economic activity is slowing.

The escalating U.S.-China trade war combined with the unfolding emerging market currency turmoil could put a serious dent in global oil demand for the rest of this year and into 2019. Oil demand in Asia is already starting to slow.


“The growth story is now more or less a U.S. growth story. The rest of the world isn't playing along any longer,” said Saxo Bank commodities strategist Ole Hansen. Brent oil futures are hovering just above the 200-day moving average, which forms a bit of a resistance preventing oil prices from crashing lower. The flip side of that is that if Brent does drop below that threshold, sellers could push prices much lower.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • MIchael Parisi on August 19 2018 said:
    Thank you Nick for the information. I wonder if the global economic stall is a real trend or if it is a temporary ripple effect.
  • Seaman on August 20 2018 said:
    Wasn't it you who wrote just a few days ago about 90$ per barrel in the near future?
  • Frank Morris on August 20 2018 said:
    You've certainly highlighted some of the bearish variables in the oil equation, but I always appreciate when writers put their angle in a broader context. You're right in that there are substantial risks to global oil demand, but frankly none of them are necessarily structural from a long-term perspective. Tariffs, currency crises, etc. - all can be resolved with the right set of policy decisions by the right people. On the other hand, the bullish variables - underinvestment in oil, Iranian barrels coming offline, etc. are less likely to be resolved soon. Of course, I can't write that I know the bearish issues will be resolved soon, but to write a doom-and-gloom article about how they are baked into the oil trade is a bit premature in my opinion.

    I'll take the bearishness of your article as a contrarian signal that the extremely oversold oil conditions are now bottoming out. Just a few weeks ago the oil trade, according to writers, CNBC commentators, etc., was extremely healthy, with all signs looking bullish. That so many have so quickly completely abdicated their intermediate-term investment thesis and dropped many of the structural issues of the oil market from their commentary is fascinating, if not insightful.

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