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Why This Oil Price Rally Has A Limit

While oil markets are tightening…

Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Gasoline Glut Sends Oil Prices Tumbling

Five hundred and forty-three years after the birth of Copernicus, and all action in the crude complex is revolving around yesterday’s crude inventory report.

While Wednesday’s API report head-faked the market into thinking we could see a draw to crude stocks, the appearance of a 2.1 million barrel build sent crude prices charging lower. It was a 3 million barrel build in gasoline stocks, however, which really gave a bearish reverberation to the report.

Gasoline inventories are now up 37 million barrels, or 16 percent, so far this year to 258.7 million barrels. This is the highest level since weekly records began in 1990, and we have to go back to 1981 on a monthly basis to see the last time inventories breached 258 million. Related: How Far Will The U.S. Go If Turkey Invades Syria?

The chart below illustrates that, prior to this year, gasoline stocks have drawn in only nine of the last twenty-five years, averaging a draw of 2.6 million barrels. So far this February, we are already up 4.3 million barrels. Although EIA data shows a rebound in gasoline demand in recent weeks, it is not enough to take the heat off shrinking storage space. As crack spreads narrow, refiners may well be encouraged to cut production going forward.

(Click to enlarge) Related: The Biggest Natural Gas Discovery Of 2016 Just Got Bigger

Moving on, and Norway is dipping into its sovereign wealth fund to help plug the gap left by falling oil revenues. As the chart below illustrates, after sixteen years of inflows into its $810 billion wealth fund, Norway is expecting a budget deficit of $10 billion. It will be dipping into its coffers to help fill this gap, but it won’t have to sell assets: it can use interest payments and dividends from equity and bond holdings to fill this (hopefully) temporary hole.

(Click to enlarge)

On the economic data front, we have had decent retail sales out of ole Blighty for January (up 5.2 percent YoY, jolly good), while German producer prices were very poor indeed, stoking deflationary fears as they dropped 0.7% in January, down 2.4 percent YoY.

(Click to enlarge)

U.S. CPI, % YoY (source: investing.com) Related: Oil Prices Continue To Rally As U.S. Crude Inventories Shrink

Across to the US, and core inflation was up 0.3 percent, the biggest gain since August 2011, lifted by rents and medical costs. Headline inflation (including food and our dearly beloved energy) was flat in January versus the prior month, but up 1.4 percent on the prior year, lifting us to the highest level since December 2014. Signs of inflationary pressure have given the dollar a boost, and put concrete boots on crude prices into the weekend.

By Matt Smith

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